STRATEGIC MANAGEMENT

Project Report

Aviation Industry Analysis and understanding the

Strategy used by SpiceJet

Under the guidance of

Mr. Arun Kumar Tripathy

Submitted by:

Section B, Group 3:

Aayush Sharma 17P061

Amritha Sridhar 17P068

Ayushi Agarwal 17P078

Shiv Bahl 17P107

Shrey Sharma 17P108

Soham Saha 17P111

 ACKNOWLEDGEMENT

We would like to extend our heartfelt thanks and deep sense of gratitude to all those who helped
us in preparing this report directly or indirectly.

We would like to express our sincere thanks to our respected Prof. ARUN K. TRIPATHY, for his
expert guidance and suggestion throughout the project

We would also like to express our thanks to all our friends who helped us in the completion of
report and providing valuable insights in the project.

I am extremely indebted to them for providing us all the support and cooperation.

GROUP 3

SECTION B

PGPM COURSE

1
 CONTENTS

Serial no. Title Page no.

1 Executive Summary 4
2 External Industry Analysis 6
1 Demographic Environment
2 Economic Environment
3 Political and Legal Environment
4 Technical Environment
5 Social Environment
6 Global Environment
7 Industry Environment (Porter’s Five Forces)

3 Internal Analysis 14
1 Background
2 Companies Vision and Mission
3 Strategy for Reversal of Fortunes from 2013 to 2017
4 Value Chain Analysis
5 Key Issues and Opportunities
1 External Environment
2 Internal Environment
4 Finding out the strategic Fit 25
4.1 Shift from low cost to differentiation Strategy
4.2 Is the Shift Viable?

CONCLUSION 27

LIST OF FIGURES

2
Fig No. Figure Page No.

1 Major Airlines in the Aviation Industry 5

1 Distribution of passengers travelling across the world 6
2 Economic Trends of Aviation Industry 7
3 Global Commercial Airline Revenue 8
4 Annual Growth rate of Passenger Traffic 9
5 Global Environment of Airline Industry 10
6 Porter’s Five Forces 10
3.1 Company Performance in the year 2016-17 17
3.2 Value-Chain Analysis 20

LIST OF TABLES

2.1 Political factors affecting the Airline Industry 7

2.2 Bargaining Power of Suppliers 11
2.3 Bargaining Power of Buyers 11
2.4 Barriers to Entry 12
2.5 Threat of Substitutes 12
2.6 Competitive Intensity 13
3.1 Financial Performance of SpiceJet over 2013-17 19
3.2 Criteria of Sustainable Competitive Advantage 24

3
 1. EXECUTIVE SUMMARY
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth,
and then earns little or no money. Think airlines. Here a durable competitive advantage has proven
elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at
Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

The civil aviation industry in India has emerged as one of the fastest growing industries in the country
during the last three years. India is currently considered the third largest domestic civil aviation market in
the world. India is expected to become the world’s largest domestic civil aviation market in the next 10 to
15 years, as per Mr. Jayant Sinha, Union Minister of State for Civil Aviation, Government of India.
According to International Air Transport Association IATA, India will displace the UK for the third place
in 2025.
The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as low-cost
carriers (LCCs), modern airports, Foreign Direct Investment (FDI) in domestic airlines, advanced
information technology (IT) interventions and growing emphasis on regional connectivity.

 By 2020, passenger traffic at Indian airports is expected to increase to 421 million from 264.99
million in 2016-17.
 The number of departures from India increased 20 per cent year-on-year to touch 131 million in
2016, according to the data by the IATA.
 Travel and tourism to contribute US$ 423.7 billion to GDP by 2026.
 The travel and tourism industry is forecast to grow at a CAGR of 6.66 per cent to US$ 423.7
billion in 2026 from US$ 100 billion in 2017
 Spending on business travel is estimated to increase to US$ 39.88 billion in 2026 from US$ 10.26
billion in 2017, while on leisure travel is forecast to rise to US$ 203.5 billion in 2026 from US$
181.65 billion in 2017.

ADVANTAGE OF INDIA

1. Robust Demand:

 Rising working group and widening middle class is expected to boost demand

 India plans to increase the number of airports to 250 by 2030 to cater to growing leisure
and business travel

 Country will become the third largest aviation market in terms of passengers by 2026.

 Freight traffic also likely to go up as trade with the rest of the world increases

2. Opportunities in MRO
 Growth in aviation accentuating demand for MRO facilities
 Expenditure in MRO accounts for 13-15 per cent of total revenues; it is the second-
highest expense after fuel cost

4
  By 2020, the MRO industry is likely to grow over US$ 1.5 billion from US$ 0.5 billion
currently
3. Increasing Investments
 Investments totaling US$ 12.1 billion in the airport sector are to be made during the 12th
Five Year Plan (2012-17); of these, private investments are expected to total US$ 9.3
billion
 Growing private sector participation through the Public - Private Partnership (PPP) route

4. Policy Support
 The government has been encouraging private sector participation
 Foreign investment up to 49 per cent is allowed under automatic route in scheduled air
transport service, regional air transport service and domestic scheduled passenger airline

India is the world’s third-largest and fastest growing air travel market by passenger volume and ninth
largest by market value. India’s domestic air passenger traffic reached 100 million in 2016, behind only
that of USA (719 million), China (436 million) and ahead of Japan (97 million). According to Airbus, the
number of passengers flying in the Indian domestic market is expected to multiply by almost six times in
the next 20 years compared to 1.5 times for domestic USA and almost four times for domestic China

Five major airlines (4 private, 1 public) dominate the Indian market with over 93% market share. These
are Indigo Airlines, SpiceJet, Jet Airways, Air India and Go Air. Of these, Indigo, SpiceJet and Jet
Airways are publicly listed companies, while Go Air belongs to the Wadia business house.

Fig 1.1 Major Airlines in the Aviation Industry

5
 2. EXTERNAL INDUSTRY ANALYSIS
 DEMOGRAPHIC DISTRIBUTION

India is the second-most populous country, its population growing more than 14% over the past decade to
1.3 billion. Even with such a high population, only about 100 million passengers fly on domestic routes in
a year, less than a quarter of the size of air travel in China, which has a similar population. As India is
projected to emerge as the world’s most populous country by 2022, with more than 50% of its population
younger than 25 years old, air travel is likely to increase manifold

Fig 2.1 Distribution of passengers travelling across the world via flights

 ECONOMIC ENVIRONMENT

Burgeoning Middle Class: India’s per capita income at current prices crossed Rs. 100,000 in FY17,
increasing 9.7% Y-o-Y from ~Rs. 94,000 in the previous year. Rising affluence is the biggest driver of
consumer spending in India. The affluent segment is all set to grow from 8% to 16% of the national
population by 2025; the share of strugglers is expected to decline from 31% to 18% during the period;
growth in the country’s middleclass could increase air travel.

Economic growth: India is expected to be one of the fastest-growing major economies in the world over
the next four years, with Real GDP expected to grow at a CAGR of 7.1% from CY14 to CY19, according
to the EIU. Growth in the aviation sector is closely linked with the overall growth of the economy.
Domestic RPK growth on an average was 1.7 times the real GDP growth rate of India from FY10-17.
Over the last 3 years, RPK growth on an average was 2.6 times the real GDP growth rate .

6
 Fig 2.2 Economic Trends of Aviation Industry

 POLITICAL AND LEGAL ENVIRONMENT

Political Environment: There are a number of political factors that are currently affecting the airline
industry.

Table 2.1 Political factors affecting airline industry

Political Factors Reasons

International Trade  Plays a critical role in the growth of the economy.
However, it has not been exploited properly due to
government restrictions
 Not easy to expand into foreign markets even if it appears
lucrative
 Certain provisions have to be met in order to conduct
business, thus hindering air operations and affecting the
entire sector
Tax policy  Vary from one economy or market to another
 If tax policy is high, stretched operational costs and
decreased revenues
 If less, it encourages profitability and business
War, Terrorism. War Outbreaks  Risky to operate in countries ravaged by war
 Disease outbreaks like Ebola and Risk of terrorism also
affects airline industry
 Sometimes politicians make situations look worse than
they are in actual on ground, further curtailing businesses
Competition  Activities of politicians can regulate competition by
formulating laws. E.g.: Deregulation Act of 1978 which
lifted all the limitations in airfares and airline routes thus
increasing competition immensely

Legal Environment: In recent years, the number of lawsuits against airlines from both customers as well
as workers has gone up. Further, the regulators are being stricter with the airlines, which mean that they
are now increasingly wary of their strategies, and actualizing their strategies only after they are fully

7
convinced that they are not violating any laws. The “double whammy” of increased regulation and more
expensive lawsuits apart from the legal system becoming intolerant of delays, safety issues, and other
aspects has only served to heighten the fears among the airlines as each and every move of theirs is being
scrutinized.

 TECHNOLOGICAL ENVIRONMENT

Though it is a fact that the airline industry uses technology extensively in its operations, they are limited
to the aircraft and the operations of the airlines excluding the ticketing and the distribution aspects. Even
the aircrafts are enabled by best in class technology i.e. lighter aircrafts that provide both fuel economy
and speed. However, it also means convenient interiors and a safer journey. In terms of safety too, they
are more reliable and efficient. Whether it is a commercial passenger carrier or a freights carrier,
technology affects profits. As technological changes continue, airlines continue to gain by increased
safety of air travel. Both Boeing and Airbus are focused on the use of innovative technology to make air
travel safer and economic.

This has prompted many experts to call on the airlines to make use of the advances in technology for the
front office and the customer facing functions as well. In other words, the technological changes have to
be adapted to include mobile technologies as far as ticketing, distribution, and customer service are
concerned. Further, social media has to be leveraged by the airlines to ensure that the boarder social and
technological changes do not pass by the airline industry

Fig 2.3 Global Commercial Airline Revenue ($ bill)

 SOCIAL ENVIRONMENT

Airlines create social value just as the other businesses do. There are several industries that profit from the
airlines industry. In particular, it is the hospitality industry globally which depends heavily on transports.
The industry impacts and is impacted by social forces. Airlines companies stimulated the demand for air
travel by reducing prices. They created employment. The result has been an improvement in their social
image. The mutually beneficial relationship between the airlines industry and the society should be seen

8
in this context. However, social trends have a major impact on the aviation industry in other ways too.
People are seeing the industry in a new light. It is now seen as a carrier for the masses. The social
perception of air travel has changed. It is being seen as safer and convenient. Moreover, as the people’s
awareness of technology increased they were drawn towards air travel in larger numbers. The number of
professional travelers also increased. There are a large number of social changes that have proved positive
for the airlines industry.

Not just this, Globalization has resulted in cross border expansion of business that has resulted in
increased travel of CEO’s and business managers. The trend is expected to increase further with time .The
maiden age of air travellers is increasing that means many older people prefer to travel by air due to
different reasons. Thus, there would be number of old passengers who would prefer air travel for shorter
distances for increased comfort.

Fig 2.4 Annual Growth Rate of passenger traffic

 GLOBAL ENVIRONMENT

During 2016-17, majority of the regional airlines such as Air Costa, Air Pegasus and Air Carnival have
halted operations indefinitely due to the issues with aircraft lessors. Despite irregular operations, TruJet is
the only airline expanding its operations in the regional routes. However, one new regional carrier (Zoom
Air) has received licenses and started operations during this period.
In October 2016, the government has unveiled the final regional connectivity Scheme to improve
connectivity to Tier II and III cities. Under this scheme, the airline operating in specific regional routes
will be offered Viability Gap Funding (VGF) to support these routes. However, the routes for Phase-I of
the scheme have been allocated only in March 2017.

 During FY07-17, domestic aircraft movement increased at a CAGR of 5.59 per cent, while
international aircraft movement expanded at 5.39 per cent CAGR over the same period.
 During FY17, the total number of domestic aircraft movement increased to 1.86 million, as
compared to FY16.

9
  India’s domestic and international aircraft movements grew 12.40 per cent y-o-y and 9.30 per cent
y-o-y to 1.22 million and 0.29 million during April-November 2017, respectively.

Fig 2.5 Global Environment of Airline Industry

 INDUSTRY ENVIRONMENT (PORTER’S FIVE FORCES)

10
Fig 2.6 Porter’s Five Forces

11
 1. Bargaining Power of Suppliers- HIGH

SUPPLIERS – Fuel Suppliers, Aircraft Manufacturers, and Skilled Employees

Table 2.2 Bargaining power of Suppliers

Suppliers Industry  Boeing and Airbus forms a duopoly of suppliers of new jetliners. This,
Concentration along with low-cost airlines segment, gives a high bargaining power of
Aircraft Manufacturers
 Relatively few companies supply Aviation fuel, strengthening the fuel
supplier’s power although airlines generally defend against price rises
using hedging strategies
 There is also an acute shortage of pilots which makes the industry
dependent on them

Substitute for Inputs Impossible to find inputs required for airlines to operate- an airline must
have aircraft, a supply of aviation fuel and a sufficient workforce before it
can offer flights. Unlike other sources of transport, airlines have alternative
sources of energy
Switching Cost Bargaining power of aircraft manufacturers owing to switching cost is high.
This is because the airlines must enter into contracts when leasing or buying
aircraft from suppliers. Breaking these costs can often imply a heavy
financial cost
Importance of Quality In an industry where reliability and safety are critical, the quality of the
planes and their maintenance are highly important; this factor leads to high
supplier power
Forward Integration Supplier Power is restricted by the improbability of these suppliers
integrating forwards into the airline business
Dependence on Industry Although manufacturers like Boeing have alternative sources of revenue,
for revenue notably defense aerospace, civil aviation remains very significant part of
their business, thereby restricting their bargaining power to some extent

2. Bargaining Power of Buyers- MEDIUM

Buyers-Primarily individual consumers purchasing flights directly from the airline. Some Business to
business sales to charter companies. Discounters and similar buyers.

Table 2.3 Bargaining Power of Buyers

Price Sensitivity Price sensitivity is high due to growth of online comparison sites, corporate
travel expense policies etc. This strengthens buyer power in the airlines
market
Switching Cost Negligible switching cost which strengthens buyer power. Airlines could use
loyalty schemes such as flyer miles. However, this does not work well in the
low-cost carrier segment and hence few companies offer such programs
Product Differentiation Owing to the cost constraints, not much differentiation possible in the
product offering
Buyer Size The power of buyers, owing to size and volumes, is low because they are
large in number and highly fragmented

12
Backward Integration Where the buyers are individual travellers, there is no opportunity for them
of buyers and Forward to integrate backwards or for the airline to integrate forwards; however
Integration vertical integration is more feasible between airlines and companies such as
travel agents

3. Barriers to Entry – HIGH

Table 2.4 Barriers to Entry

Economies of Scale
Brand Identity
Customer Switching Cost
Capital Requirement
Govt. Policy/ Protection
As an airline gets bigger, the overhead cost per passenger carried declines
as the fixed cost is spread over more passengers. Hence, big airlines enjoy
economies of scale. Smaller airlines tend to merge many of these
departments into a single business unit. Their overheads are much lower
and so their ability to derive unit cost benefits from scale is virtually non-
existent. Hence for new entrants economies of scale are low
Since airline tickets are too expensive, people do not prefer spending
money on firms they do not trust. Hence they tend to choose the airlines
which have well-known names. They also rely on safety factors and flying
experience for the same. Hence brand identity acts as a significant barrier
to new entrants
Customer switching costs are too low between the brands because all the
airlines have almost similar rates
A large amount of capital is spent and without a strong customer base,
there would be little to no profits in the first few years. Also, Existing firms
can and will use their high capital to retaliate against newer firms with
whatever means necessary such as lowering prices and taking a loss.
When firms decide to enter this industry, they have to become licensed
which can take around a year or so. After getting licensed too, they are
regulated by several organizations such as the Federal Aviation
Administration and the Department of Transportation

4. Threat of Substitution- LOW

Table 2.5 Threat of Substitutes

Availability of closeThere are substitutes in the airline industry. Consumers can choose other
substitutes form of transportation such as a car, bus, train, or boat to get to their
destination
Switching Costs In terms of price, switching costs can be high as some means of
transportation can be more costly than a plane ticket. The main cost is
time. Planes are by far the fastest form of transportation available. Airlines
surpass all other forms of transportation when it comes to cost,
convenience, and sometimes service
Substitutes Price Value Cost of substitutes can be considered as a factor when travel is for short
distances. At that point of time, it raises a risk for putting in money and
substitutes appear more viable but then again savings in time makes up for
the risk
5. Competitive Intensity- HIGH

13
 Table 2.6 Competitive Intensity

Number of Competitors The competitive landscape in India has several large companies alongside
smaller competitors. The number of airlines is increasing which increases
the level of competition among airlines
Industry Growth The industry seems to be very stagnant. It seems to be in the mature stage
of the business cycle
Fixed Costs The fixed costs are extremely high in this industry which makes it hard to
leave the industry because they are probably in long term loan agreements
in order to stay in the business. The products involved are also highly
complex which also heightens the competition
Differentiation Each firm has its own brand identity hence the competition is lessened. For
e.g.: JetBlue is known for its amenities and Southwest for its low prices
Switching Costs Switching Costs are low because each market seems to be equally
distributed as each company has its own share of market. Hence, firms
cannot really hold a large percentage of the market

OVERALL INDUSTRY ATTRACTIVENESS- NOT HIGH

In 2016-17, international traffic (Indian and foreign carriers) in India grew around 8.5% to 59 million
passengers. This growth was driven by better economic outlook and rising trade between India and
foreign countries. Further, international traffic carried by Indian carriers increased by 10% y-o-y to 21
million passengers mostly led by Air India and Jet Airways. Air India and Jet Airways contributed around
83% of the international passenger traffic carried by Indian carriers. Improved trade ties between India-
UAE contributed to around one-thirds of the traffic in 2016-17.

Jet Airways' strategy of increasing focus on international operations, post its alliance with Etihad Airways
contributed to increased passenger traffic. Air India's entry into the Star Alliance post July 2014 provided
access to new markets and destinations with other member airlines, thereby increasing passenger traffic

Growth in domestic passenger traffic is expected to slow down to 17-19% on-year in 2017-18 as
compared with an estimated 22% in 2016-17, driven by economic growth, and improved connectivity to
tier 2 and tier 3 cities. Despite rise in fuel, employee costs etc., the airfares are barely expected to increase
at 0-2% owing to the capacity expansion, competition as compared with a decline of about 7% in 2016-
17.
During 2016-17 to 2021-22, CRISIL expects domestic passenger traffic to grow at a CAGR (compound
annual growth rate) of 13-15% as stability in costs and competition intensity are likely to arrest sharp fare
hikes over the long term

14
 3. INTERNAL FIRM ANALYSIS

a. Background

SpiceJet Ltd. (SpiceJet) is a low-cost airline, which offers passenger air transport services and air freight
transportation services to various destinations. The company operates daily flights to domestic and
international destinations. The major services include flight bookings, online check-in, and travel tips. It
provides travel insurance to domestic travellers, discount vouchers, and cash back on online ticket
bookings and shopping. Its fleet consists of aircraft, including the new-generation Boeing 737-800s with
winglets, Boeing 737-900ER, Boeing 737-700ER and Bombardier Q400. The company operates
international offices in, Sri Lanka, Dubai, Dhaka, Kabul, Male, Muscat and Bangkok. SpiceJet is head
quartered in Gurgaon, Haryana, India.

The company reported revenues of (Rupee) INR61,913.6 million for the fiscal year ended March 2017
(FY2017), an increase of 21.7% over FY2016. In FY2017, the company’s operating margin was 6.1%,
compared to an operating margin of 8.3% in FY2016. In FY2017, the company recorded a net margin of
6.9%, compared to a net margin of 8.8% in FY2016.

The company carried 13.59 million passengers in the present financial year. SpiceJet offers services such
as online flight booking, online check-in, and travel tips. SpiceJet classifies its business segments in one
reportable segment: Air Transportation. SpiceJet provides online flight bookings through its proprietary
website and, through this service, travellers can check-in online within 24 hours until four hours prior to
the scheduled departure time. Domestic Travinsure is insurance cover provided by the company to
domestic flight customers, in partnership with TATA AIG General Insurance Company Ltd.

The company also offers a credit card, Spice-Jet SBI Card, in partnership with State Bank of India, which
helps customers book tickets, shop, make utility bill payments, and avail instant cash back, bonus points,
discount vouchers, and other benefits when using the card for airline services payments. It also partners
with HSBC for payments through UPI. It also offers SpiceMAX, a product designed for the customers
who require special comfort and convenient services. Through the service, it offers five rows on the
Boeing with at least 6 inches more legroom. It offers SpiceMAX services one hour prior to departure for
domestic sectors and up to three hours prior for international through its website www.spicejet.com

SpiceJet’s cargo service has the capacity to ferry between 2 tons and 3.5 tons of cargo per flight. The
cargo service is a pan-India Airport-to-Airport product with offices at major SpiceJet destinations such as
Mumbai, Pune, Bengaluru, Delhi, Goa, Guwahati, Hyderabad, Chennai, Coimbatore, Jaipur, Kochi,
Ahmedabad, Agartala, Amritsar, Kolkata, Madurai, and Vishakhapatnam.

The company through its wholly owned subsidiary SpiceJet Merchandise Private Limited, engages in the
business of consumer merchandise and goods such as readymade apparels, electronic items, and
accessories among others through channels including online platform, in flight sale, airport shops, and
retail outlets among others. Through its subsidiary, Spice Jet Technic Private Limited, the company
engages in engineering related service such as repair, maintenance, and overhaul services of aircraft and
its parts.

15
3.2 Vision and Mission Statements

A mission and vision statement of SpiceJet Limited is given below. The following statement has been
taken from the company’s website.

SpiceJet’s mission is to become India’s preferred low-cost airline, delivering the lowest air fares with the
highest consumer value, to price sensitive consumers. We hope to fulfil everyone’s dream of flying!

With India's economic and business growth, the percentage of traveling population is burgeoning. More
and more Indians are traveling for both business and pleasure and everyone needs to save both time and
money. SpiceJet's vision is to address that and ensure that flying is for everyone.

3.3 Strategy for Reversal of Fortunes From 2014 to 2017

SpiceJet Ltd. 2014

SpiceJet Ltd. posted its biggest ever net loss of Rs. 1,003.24 crores for the fiscal year ended March 2013-
14. The loss widened five times from Rs.191.07 crore a year ago. In sum, Kalanithi Maran-owned
SpiceJet lost an average of Rs.2.75 crore every day that it flew in the country with a domestic market
share of nearly 20%.

SpiceJet blamed the loss on the weak rupee and slower economic growth, which has limited growth in
passenger traffic.

“The year ended 31 March 2014 was perhaps the most challenging period in Indian aviation history,”
SpiceJet said in a statement, “The sharp depreciation of the Indian rupee during the quarter ended 30
September 2013 was unprecedented. Given the fact that over 75% of any Indian airline’s cost is
influenced by the dollar, the effects of the exchange rates on a broad spectrum of cost heads were
crippling.”

Coupled with a slowing economy and softening demand in a market where capacity continued to be
added by the industry, SpiceJet is constrained to report an after-tax loss of Rs. 1,003 crore, the airline
said.

The budget airline’s revenue increased 12% to Rs. 6,350.61 crores from a year ago of Rs. 5,699.78 crores.
But expenses increased 24% to Rs. 7,303.68 crores from Rs. 5,893.36 crores earlier. The loss widened
despite a 5% increase in the average air fare to Rs. 4,253 from Rs. 4,052 in the same period.

In the quarter ending March its loss rose to Rs.322 crore from Rs.186 year ago, it said..

Three days after announcing a record loss of Rs. 1,003 crores for the fiscal year ended March, Kalanithi
Maran-owned SpiceJet Ltd has decided to trim its workforce and cut costs across the board to stay in
business. Net loss at SpiceJet, India’s second biggest budget airline, widened five times from Rs.191.07

16
crore in the previous fiscal year. SpiceJet blamed the loss on a weaker rupee and slower economic growth,
which has limited growth in passenger traffic.

The airline on Monday asked each department to prepare a detailed cost cutting plan, according to two
people with knowledge of the matter who declined to be named.

This plan includes reduction of the workforce where required and cost cuts in other formats wherever
possible, said one of the officials. The plan has to be presented this week and needs to executed soon,
possibly over two weeks, the person said.

The extent of the cost cuts is yet to be decided, but they are likely to be steep as the situation was “bleak”,
the same person added.

The cuts could be as much as 25-30% in the case of ground crew, which is considered to be overstaffed,
besides areas like customer relations, the person said. The airline, which has 5,600 employees, nearly
2,000 of them ground staff, has already outsourced catering to a private firm. SpiceJet has asked several
people to leave in the last few months, Mint reported on 3 March.

SpiceJet’s chief operating officer Sanjiv Kapoor said the possibility of a 30% cut in ground staff was
“utter nonsense” but agreed there would be employee reductions.

“Of course, we are reducing costs wherever it makes sense and there is fat or inefficiency,” he said
without specifying any target numbers.

The airline hopes to attract potential investors after cutting costs, said the second person cited above. It
isn’t quite clear how investments would come to an existing airline given that the government has started
licensing new airlines that have no legacy costs, this person said. The government has already issued a
license to AirAsia India.

“Every department will try to outdo the other on cuts to save their own jobs,” this person said.

Fiscal 2013-14 was the worst ever for SpiceJet, which lost an average of Rs.2.75 crore every day that it
flew in the country with a domestic market share of nearly 20%.

The airline’s revenue increased 12% to Rs. 6,350.61 crores from a year ago. But expenses increased even
faster by 24% to Rs. 7,303.68 crores. Its loss in the year was the biggest for any Indian budget carrier
ever. The erstwhile Air Deccan’s annual loss at its peak was around Rs.400-500 crore.

SpiceJet Ltd. 2017

The SpiceJet Ltd stock touched an intraday high of Rs139 on BSE on Wednesday, rising 7.5% over the
previous day’s closing. Investors cheered the airline’s December quarter results, with the company
clocking a net profit of Rs240 crore, exceeding analysts’ estimates. Earnings before tax and exceptional
items increased as much as 68%.

17
It’s worth recalling that the airline’s performance in the December 2016 quarter was adversely affected by
demonetisation, so there’s a favourable base effect. Still, SpiceJet’s load factor was a commendable 94%.
What’s also encouraging is that average fares increased 9% for the December quarter. But do note that in
the year-ago quarter, fares had declined 7%. Nevertheless, fare performance last quarter was better than
expectations.

The upshot: operating revenue increased 27% over the same period last year to Rs2,082 crore. Further, on
the costs excluding fuel, the company managed well. Costs per available seat kilometre (unit cost measure
for airlines) or CASK ex-fuel increased at a slower pace of 3.7%. Fuel CASK increased 17% with crude
oil prices being uncomfortably high. Total CASK thus increased 8% whereas revenue per available seat
kilometre moved up at a slightly faster pace of 9%.

Fig 3.1 Company Performance in the year 2016-17

The SpiceJet stock eventually ended the day about 4% higher. So far this fiscal year, it has outperformed
the S&P BSE 500 index for most of the year. Currently, the stock trades at about 10 times estimated
earnings for fiscal year 2019 (FY19), based on Bloomberg data. That’s doesn’t appear expensive. In
comparison, shares of InterGlobe Aviation Ltd (that runs the IndiGo airline) trade at about 17 times
FY19’s estimated earnings.

But firm crude oil prices are a looming threat in the near future. Against that backdrop, pricing will be a
crucial factor to follow. For the nine-month period ended 31 December, SpiceJet’s fares increased 7%.
Kiran Koteshwar, chief financial officer of the company, expects this to be a sustainable growth from a
near- to medium-term perspective.

The trajectory of its regional operations too will be worth watching. Under the UDAN scheme, SpiceJet
has launched its fourth flight and secured 20 additional routes.

Overall, domestic passenger growth is satisfactory. Around 17% more passengers were carried by
domestic airlines in 2017, according to the Directorate General of Civil Aviation. Unless crude oil prices
throw up nasty surprises adversely impacting profit margins, the SpiceJet stock should get support for an
easy flight.

18
Strategy Leading to Reversal of Fortunes

In 2014, SpiceJet, then headed by Kalanithi Maran, was in a grim situation. In early December, a severe
cash crunch had forced it to delay salaries. And that was only the tip of the iceberg.

The cash crunch itself was the result of the civil aviation regulator’s order that prevented it from taking
bookings more than a month in advance. Until the Directorate General of Civil Aviation’s order, the
airline had been servicing its working capital needs by selling discounted tickets over a year in advance.

Following the Directorate General of Civil Aviation’s move, the state-owned Airports Authority of
India withdrew its credit line to SpiceJet. Now the airline was forced to pay every time its planes took off
from or landed at Airports Authority of India facilities. Things hit rock-bottom on December 17, 2014,
when the firm stopped operations after fuel companies temporarily shut down supplies, citing pending
dues.

In the financial year 2014, SpiceJet recorded an annual loss of Rs 1,003 crores and dues of around Rs
1,600 crores. It was also sitting on a debt of over Rs 1,400 crores, along with over Rs 2,000 crores of
other liabilities.

And just when things seemed hopeless came a change of hands. And, along with it, falling fuel costs and
government support.

Towards the end of 2014, the Narendra Modi government asked banks to lend Rs 600 crores as working
capital debt to SpiceJet. The Directorate General of Civil Aviation was also nudged to lift its ban on
advance bookings.

In January 2015, Ajay Singh, who had co-founded SpiceJet in 2005 before selling his stake to the Marans
five years later, took over the reins again. He bought a 58.5% stake for a meagre Rs 2 per share. And the
turnaround began.

The year 2016 saw SpiceJet’s fuel expenses reduce to between 40% and 50% from the previous
year, reportedly saving it over Rs 1,000 crores. Soon the airline became the world’s top airline stock,
gaining 124% in June 2017, according to Bloomberg.

Current Strategy

Buoyed by robust growth in the Indian aviation market, SpiceJet chief Ajay Singh has said that he aims to
make the airline an international level carrier with long-haul flights in the next one or two years.

The no-frills airline, which has turned around its fortunes under the stewardship of Singh, already flies to
a few international destinations, including Dubai and Singapore.

19
On whether India can have a large airline of international scale and whether SpiceJet can be the one,
Singh said, "There is no question about that and I think we owe it to our country that we carry our own
people and we become a large international carrier."

"Every airline in India should look at those opportunities to fly long haul," Singh, who is the chairman
and managing director of SpiceJet, told PTI in an interview.

On how long it is likely to take to start long-haul flights, the SpiceJet chief said it will not take much time
and "in a year or two most airlines will be looking at flying long haul". Singh also emphasized that India
needs to be connected more directly within as well as outside the country.

Only a handful of airlines, including Singapore-based Scoot and Malaysia's AirAsia X, have attempted
flying low-cost long-haul flights and some of them have been doing good.

Currently, SpiceJet operates an average of 402 flights daily to 51 destinations, including seven
international ones. It has a fleet of 38 Boeing 737NG and 22 Bombardier Q-400s.

"India is the fastest growing aviation market in the world. A growth rate of 20 per cent is unprecedented
and still only 3 per cent Indians are flying so clearly this sector can grow for many years to come
provided the infrastructure keeps pace," Singh said. There is also need for more investment in
infrastructure, he added.

In response to a query on whether the airline would look at acquisitions, Singh said that would depend on
the opportunities even as he added that there is a lot of potential for organic growth as well.

Ruling out plans for roping in any foreign investor, Singh said there was no such move at the moment.

Table 3.1 Financial Performance of SpiceJet over 2013-2017 period

20
3.4 Value Chain Analysis

Value chain analysis, the company is split into primary and support activities. Primary activities are those
that are related with production, while support activities are those that provide the background necessary
for the effectiveness and efficiency of the firm, such as HRM. The primary and secondary activities of the
firm are discussed in detail below

Fig 3.2 Value Chain Analysis

Primary Activities: -

The primary activities of the company include the following: -

Inbound Logistics: -

These are the activities concerned with receiving the materials from suppliers, storing these externally
sourced materials, and handling them within the firm.

 Buying the planes

 Buying the software and other supportive system.

Operations: -

These are the activities related to the production of products and services. This area can be split into more
departments:

 Creating a climate for positive behaviour

 Recruiting right people and offering proper training

Outbound Logistics: -

These are all the activities concerned with distributing the final product and/or service to the customers.

 Ways of boarding the customer

21
Marketing and sales: -

This functional area essentially analyses the needs and wants of customers and is responsible for creating

 awareness among the target audience of the company about the firm’s products and services.
 Advertisement

Service: -

There is a need for services like pre-installation or after-sales service before/after the sale of service.

 Efficiency
 Helpfulness of staff
 Cabin crew in air & ground staff at check-in

Support activities-

The support activities of a company include the following:

Procurement: -

This function is responsible for purchasing the materials that are necessary for the company’s operations.
An efficient procurement department should be able to obtain the highest quality goods at the lowest
prices.

 Fuels & Oil

Human Resource Management:

Human resources are increasingly becoming an important way of attaining sustainable competitive
advantage.

 Recruiting
 Training & Development
 Retention of Employees
 Welfare of Employees

Technology Development

This is an area that is concerned with technological innovation, training and knowledge that is crucial for
most companies today in order to survive.

 Online check-in service

22
  Inflight email system
 Notify
 Airport lounges

Firm Infrastructure

This includes planning and control systems-

 Finance
 Accounting
 Corporate Strategy

3.5 Key Issues &Opportunities

3.5.1 Opportunities and issues in the External Environment: -

This sector is largely affected by the tourism sector as well as the policies of Indian government. Key
factors like the growth of tourism sector; number of passenger is anticipated to increase and increasing
wealth and lifestyle of Indian middle class as key opportunities. Because increase in purchasing power
allows them to travel frequently through airlines.

The Indian airlines industry has recorded immense growth overall in recent years. Forecasts show that
this growth trend is expected to continue in future at a more stable rate. Forecasts on the boom of the
Indian industry in future are based on the relaxing of regulation that was announced by the Indian
government in 2016, which is expected to boost the growth of domestic carriers abroad, while it will also
attract new foreign entrants.

The Indian airlines industry had total revenues of $11,807.5m in 2016, representing a compound annual
growth rate (CAGR) of 20.1% between 2012 and 2016. In comparison, the South Korean and Chinese
industries grew with CAGRs of 11.4% and 10.9% respectively, over the same period, to reach respective
values of $17,330.0m and $77,533.8m in 2016.

The most crucial factor for the growth of the industry in recent years has been the emergence of the
Indian economy which has led to an increased demand for flights based on the rising income of the
population. Industry volume increased with a CAGR of 10.8% between 2012 and 2016, to reach a total of
108,703.4 thousand passengers in 2016. The industry's volume is expected to rise to 190,696.7 thousand
passengers by the end of 2021, representing a CAGR of 11.9% for the 2016-2021 period.

Domestic had the highest volume in the Indian airlines industry in 2016, with total of 86,677.0 thousand
passengers, equivalent to 79.7% of the industry's overall volume. In comparison, International had
22,026.4 thousand passengers in 2016, equating to 20.3% of the industry total.

The performance of the industry is forecast to accelerate, with an anticipated CAGR of 21.4% for the
five-year period 2016 - 2021, which is expected to drive the industry to a value of $31,137.0m by the end
of 2021.

23
3.5.2 Opportunities and issues in the Internal Environment: -

The foremost strength of this company is its promise for the lowest fare at any route where it exists. It is
also important from this prospective that it has grown up its image in the mindset of customers as the
cheapest airline. This company also has the tie-up with India’s leading bank State Bank of India (SBI) for
ticketing. Its management team is also proving as strength for them as they have international experience
of managing low cost airlines.

SpiceJet Limited (SpiceJet) is a low-cost commercial airline in India. Cash position, strong market
position and strong destination network are the company’s main strengths, whereas profitability and
limited liquidity position remain major areas of concern. In the future, intense competition, unforeseen
circumstances and fluctuations in fuel prices may affect its growth. However, growth in Indian airline
traffic, positive outlook for India T&T industry and strategic initiatives are likely to provide growth
opportunities to the company.

Cash Position

The company has witnessed strong growth in cash and equivalents, which in turn helps it to meet its
short-term obligations, without any difficulties. Its cash and equivalents increased from INR1,059 million
in FY2015 to INR2,020.3 million in FY2016, representing an increase of 90.8%. An increase in cash and
equivalents may be attributed to increased value of its short-term asset holdings such as short-term
government bonds, and marketable securities, and strong cash inflow.

Strong Market Position

SpiceJet's strong market position built its brand reputation and helped the company establish itself as a
leading provider of airline services in India. SpiceJet is currently the second largest airline in India in
terms of domestic passenger share, with a load factor almost 10% ahead of the next highest load carrier.
In FY2016, the company’s market share stood at 12% on its domestic operations, after IndiGo. It also
achieved 91% load factor for the same period, with best on-time performance amongst all leading airlines.
In FY2016, the company carried over 13.59 million passengers. Leading market position helps the
company attract a larger customer base and improve its revenue flow.

Strong Destination Network

SpiceJet provides passenger air transport services to 40 destinations in India and seven international
destinations with more than 260 daily flights. The cargo service offered by the company is a pan-India
airport-to-airport product with offices at major SpiceJet destinations such as Mumbai, Pune, Bengaluru,
Delhi, Goa, Guwahati, Hyderabad, Chennai, Coimbatore, Jaipur, Kochi, Ahmedabad, Agartala, Amritsar,
Kolkata, Madurai, and Vishakhapatnam. The strong connection network helps the company capitalize on
any increase in airline traffic in these destinations, which improves its top line performance.

24
 VRIO Framework

Question of Value: Having witnessed a strong growth in cash and equivalents, company has built in an
excellent reputation to establish itself as a leading provider of airline services in India. Thus, not entirely
but yes, company is moving ahead to exploit its opportunities and neutralize its threats, taking into
consideration, the growing airline traffic and positive outlook towards T&T industry.

Question of Rarity: In terms of the brand equity which spice jet has maintained by achieving high levels
of safety records, best in-flight services and aiming at providing “low cost” everyday spicyey fares to
price conscious travellers is what sets them apart. However, rest of the factors in terms of resources and
employee training is something which all the airlines claim to possess. Hence, rarity is moderate to low.

Question of Imitability: The kind of relations the company builds in with customers or its stakeholders
is something which is unique for every company and difficult to imitate and Spicejet for that matter has
been scoring excellent in terms of building networks, whether it is willingness to answer all the customer
queries or keeping stakeholders happy and interested in the company through various expansion policies
and a foresighted planning

Question of Organization: The organization has effectively exploited all its resources and capabilities to
the best of its advantage. It is backed by cutting- edge technology and infrastructure to ensure high
standards in operational efficiency. With thousands of cumulative man hours in the industry, the
management is committed to bring to customers in India all the benefits of the global revolution in the
skies. SpiceJet aims to make travel comfortable, affordable and refreshingly efficient experience for all

Table 3.2 Criteria of Sustainable Competitive Advantage

Resources Valuable Rare Costly to Imitate Exploited by the

organization
Aircraft Yes No No Yes
Human Resources Yes No No Yes
Fuel Yes No No Yes
Brand Equity Yes Yes No Yes
Social Capital Yes No Yes Yes
Brand Awareness Yes No No Yes
Employee Yes No No Yes
Relationship

4. FINDING THE STRATEGIC FIT

4.1 Shift from Low Cost to Differentiation Strategy

Airline is not a category that consumers tend to interact with on a daily basis. Hence, it’s not as real to
their lives as other regular brands that they interact with regularly. The challenge is when you are trying to

25
differentiate with all of these emotional quotients, how do you start making an airline brand more relevant
to a person’s everyday life? There is a need to come up with something as emotional and relevant to start
making inroads into consumers’ minds. Delving further into the consumer psyche we see that the
consumer is the same whether he is travelling by full service carriers or low cost brands or any other
monitor used to describe brands in the category. The consumer expects certain hygiene factors,
irrespective of the price that he has paid for his ticket. These include a certain degree of service and on-
time performance among others. It’s a great time for airline brands to stop talking about price points and
start talking about what makes their experience superior. That’s where our opportunity lies and it’s not
just a communication opportunity, it’s a brand and product differentiation one.

Up until now, Spicejet has flown an approximate 14 million passengers over the last four years, and they
have largely said good things about the kind of airline that they built. Pure word of mouth has been very
good for the airline. People have spoken well about its on-time performance, young and well groomed
staff, and its service features. They regularly get feedback on its website

The Company has been following a low cost strategy uptil now where low cost carriers were the main
targets of the company. But with the increasing number of competitors in the market and most of them
operating on low cost strategy, a need has aroused to make changes in their go to market strategy. Hence,
the company has now decided upon a clear step away from a pricing- led communication strategy to value
led proposition.

As the campaign moves away from price-led tactical campaigns to a long term strategy of creating brand
salience, it would communicate a clear cut differentiator in the minds of consumers

Talking about the evolution of their brand campaign, the company decided to go with a campaign which
defines a clear cut value proposition to the customer.

“We wanted to communicate the fact that you get more when you fly with us. The task was to talk about
what makes SpiceJet an airline worthy of your choice. The scenario that we drew up to the agency was to
say, let us assume that a consumer is on a site that compares various flight options. The consumer makes a
choice based on perceptions, which may be a result of personal experiences or word of mouth. There is
something that plays on his/her mind while making a choice, which goes beyond price points. That’s the
space we would like to occupy.”

The main task at the moment is to build brand salience and positive recall and mass media is going to
play the main part in this. Online is definitely an important part of their strategy (25% of SpiceJet’s
bookings comes directly to them from their website) and there is definitely scope for them to increase
their presence there.

In the absence of a brand campaign in the previous years, what has been working for brand SpiceJet are
expressly these very positive word of mouth experiences. So there is certainly room to do more in the area
of CRM, to engage more with consumers. The company is not too keen on looking at social media in a
big way presently. Social media is an intensely private world and the last thing that we want to do as a
marketer is to go there with a crassly commercial message and create dissonance. There are enough
examples of brands that have done that in the wrong way in social media. While it is certainly important

26
to measure, monitor and respond as brand Spicejet to specifics spoken about the company in online
media, whether positive or negative, it is part of its forward strategy.

4.2 Is the strategic fit viable?

Although the tagline of SpiceJet says “Airline with spice” but whenever a passenger buys a ticket of an
LCC airline, his priorities are set as Cost, Schedule, Connectivity, Punctuality in the same order.
Nevertheless apart from the plan which the company is planning with respect to its communication
strategy, the company can go for below mentioned strategic paths:

1. Conventional Growth through scaling up operations: As the market demand is growing, the
right thing to do would be to go ahead for capacity expansion and capture as much market share
as you can. Although most of the other competitors would also have planned capacity expansion,
therefore, the manager can see into the increased deployment plan of its competitors and redeploy
their own capacity as per their own strengths and exclusive insights. This can turn out to be a
differentiating factor and can yield better results as compared to its competitors.
2. Reorganize operations and aim for organic growth till losses are wiped out: This is a high
growth market with high level of competition. Hence, they have little differentiation to leverage
increase in yields. Here, SpiceJet here has a golden opportunity as it has recently made an alliance
with Bombardier which provides cost efficient and fuel efficient aircrafts. Hence a long term
contract with them can help to significantly reduce costs.
3. Recapitalize and then scale up aggressively: Recapitalizing will bring in strategic investor and
would help in capacity expansion. It will support economy expansion support plan and would
also help improve company reputation amongst the suppliers.

CONCLUSION
A year after it flew back in from the brink and scripted what is being seen as a remarkable turnaround,
SpiceJet has embarked on a brand building exercise. And in the process build itself up as an airline that is
more than just an affordable ride

Strategies for Future Sustenance

27
1. Expansion Plans: SpiceJet started its operations with 5 Boeing aircrafts in its fleet and ramped it up
to 18 aircrafts covering 17 destinations and 117 flights daily by May 2008. It reported a net loss of
Rs. 133.51crores in the year 2007-08 and a loss of Rs. 17.91 crores in 3rd quarter of 2008-09.
It expanded further with another 30 aircrafts between 2008 and 2011.
2. Open to foreign investments as well as buyouts: On July 15, 2008 Billionaire Wilbur Ross invested
$80 million (about Rs 345 crore) in the low cost airline.
"If any foreign airline comes on board as a strategic partner, we will certainly welcome them. If
the right opportunity is presented SpiceJet could be a buyer too." –Chief Executive Officer, Sanjay
Aggarwal on Feb 18, 2009. According to him the landscape is too small for so many players;
therefore he expects consolidation in the airline industry.
3. Convenience to Passengers: It plans to initiate roaming agents wherein passengers without baggage
are assisted by the roaming agents at the airport to skip check-in are some of the other initiatives. In
future, Spicejet plans to start Web Access Protocol (WAP) on the mobile phones of the passengers and
SMS check-in through which passengers can skip check-in by just showing the barcode or the
notification on the mobile phones.
4. Ancillary Revenues: SpiceJet have entered into a Joint venture with The UK based online retailer
UnderFivePound.com. The company through its website, sells a range of men’s, women’s and children’s
clot hing along with other items such as jewelry and house-ware gadgets, all for less than £5 and is
known for its discounts and freebies. Keeping the pricing of the merchandise in sync with the image
of a LCC, SpiceJet expects to sell value-for-money items on board, to its customers.
5. Automation to sustain expansion: SpiceJet has automated its cargo business processes to support its
aggressive expansion plans for its domestic cargo operations. This will ensure an integrated
management of cargo reservations and ground operations including flight planning inbound cargo
operations, billing and shipment tracking. SpiceJet becomes the first Indian LCC to use this high-
end business solution.

28