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BW Businessworld

How An Airline Lost Its Spice

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In June this year, the SpiceJet management decided not to renew its contract with consultant Bain & Company. It was probably the first sensible decision it had taken in some time. Bain & Company had been advising SpiceJet — for a rather hefty sum— on routes to fly. However, whether it was because it ignored the advice or because the advice itself was bad, the fortunes of the airline were only taking a turn for the worse. SpiceJet recently declared its highest-ever loss of Rs 1,003 crore for the fiscal 2013-14. In the past few quarters, the airline which was profitable not so long ago has been consistently making losses. At its last audit, the accountants raised the red flag and questioned the airline’s ability to remain a “going concern”.

Since January this year, aviation industry sources say the airline has been scrambling for cash to meet operating expenses. Lease payments have been delayed, the Airports Authority of India (AAI) has put it on cash and carry at least once, vendors have been complaining of late payments and it is calling agents and on time travel portals (OTP) to advance cash to it.  TDS has been cut from  employees’ salaries but not paid to the government. The airline has also been trying desperately to attract a foreign investor ever since the UPA-II government eased foreign investment guidelines in the sector but to no avail. According to Kapil Kaul, chief executive officer, South Asia, CAPA, SpiceJet needs an immediate infusion of $200 million to stay afloat. Although the airline has been claiming that it is very close to announcing a deal (with an investor), till date there has been no announcement.

Despite introducing a series of discount schemes to mop up cash and manage its cash flows, the airline has been struggling to make ends meet. What’s worse is that several of its experienced hands and senior people have quit in the past two years — some who have been with the airline since its inception.

In June-July this year, its on-time performance fell and flights were routinely cancelled. Newspaper reports claimed recently that the Directorate General of Civil Aviation (DGCA) had asked the airline to refund fares to passengers for prolonged delays, something that seems to have become quite common for the airline. Though SpiceJet refused to respond to requests for information, its PR agency, Adfactors, sent us a mail saying on-time performance had remained at 85 per cent and not deteriorated. However, passengers and aviation ministry officials say SpiceJet’s on-time performance had been getting worse by the day and complaints were rife.

What went wrong with an airline that just a few years ago made a profit in seven out of eight quarters and, in fact, ended two years (2010 and 2011) with a small net profit? In 2009-10, the airline made a net profit of Rs 67 crore. The following year, the net profit went up to Rs 101 crore. Since then, however, the airline has been making losses. While there is no denying that the losses are partly due to factors outside the control of the carrier (high aviation turbine fuel prices, taxes in India, severe price-cutting due to competition), sources say a large part of the blame for SpiceJet’s woes can be laid on the mismanagement of the airline in the past couple of years.

In 2010, Sun Group head Kalanithi Maran bought a 37.75 per cent stake in the airline for Rs 750 crore. He has further invested around Rs 1,800 crore over the past three years in the airline and his stake now stands at 54 per cent. Despite the regular injection of funds by the promoter, things have, of late, been spinning out of control. A detailed questionnaire sent to Maran and senior group officials for this story remained unanswered despite the airline getting a month’s time to respond.

How It Got Here
SpiceJet as an airline has had a chequered past — run by several investors and owners at different points in its life. What really worked for SpiceJet in the four-five years (2009-2013) was the strength of its board, according to aviation industry observers.

The board was highly professional — with Ajay Singh (who owns a stake in the airline even today), London-based businessman Bhupendra ‘Bhulo’ Kansagra (who sold his stake when Maran bought in), representatives of US-based investment company Wilbur Ross and Dubai-based Istithmar. The board worked well, asking the right questions of the management and it remained clear about what it wanted — success for the airline, to build a strong network, be profitable and hire the right people. In October 2008, Wilbur Ross (which had a large stake in the airline at the time) brought in Sanjay Aggarwal, an aviation professional from the US, to revive the airline from a rough patch it had just gone through. After a few years of flying high, the aircraft were looking old, and new kids on the block like IndiGo were eating away at its market share. “The airline went through a period of drift and this showed in the service and loads,” says a former staffer.

Aggarwal was reasonably successful in steering the airline out of the trouble it was in partly also because he had luck on his side. “Not to take credit away but Aggarwal was also partially lucky as he was in the right place at the right time,” says a former board member of the airline. The 2008-09 oil crisis was history — oil prices were cooling, industry was turning around and cost structures were looking better.
Aggarwal, insiders say, worked well with the board, ensuring that the operational team was free to do its job (2010 and 2011 were both profitable years). He also invested in marketing and the brand. “Aggarwal had the ability to manage the fractured board, carry his people with him and understand what the consumer wanted,” says one of his former team members. Off and on, however, airline insiders felt that a single owner with a strong voice would help.

That’s why Maran’s entry was welcomed by most. “All we needed was a strong promoter with reasonably deep pockets and the ability to take risks. We already had a good product and a professionally run airline,” says a former employee.

With the change in ownership, everyone at the airline knew that the chief executive officer and chief financial officer would change. Aviation professional Neil Mills was brought in as CEO and S. Natrajhen — Maran’s front man and former CFO of the Sun Group — was brought in as the CFO of the airline. The old board members, including Ajay Singh and Kansagra, both of whom had previously held large stakes in the carrier, were asked to resign as were all the other nominees selected primarily by Kansagra. He (Kansagra) himself was promised a free hand to run the airline in an advisory capacity by Maran — something that Maran went back on a few months later, according to former board members.

The replacements on the board were largely Maran’s own family members and trusted aides but not necessarily people with experience of running a business — leave alone an airline. “We were no longer being asked the right questions because the board members did not know what to ask,” says a former senior official, who often interacted with the board.

It was around the same time that the airline was taking a fairly large gamble — introducing smaller aircraft to service stations where operating a Boeing or an Airbus was either not possible or justified (due to low traffic). The SpiceJet management was aware that it needed to differentiate itself from its closest competitor — at the time IndiGo. IndiGo had taken the market by storm. To build differentiation (otherwise both would end up flying to more or less the same cities and would try and match each other’s frequencies), SpiceJet decided to go in for a second line of aircraft. The choice was between ATR and Bombardier’s Q400. Since the Q400 flies faster and offers a few more seats per aircraft (although it is a bit more expensive, around $2 million more than an ATR), a decision was taken to go in for the Q400. The original blueprint envisaged 50 Q400s flying at an average of around 11.5 hours a day (this didn’t happen as planned but more on that later).

A few months after Maran took charge of the airline, things began to unravel. Former staffers say Mills was having a hard time managing both Maran and Natrajhen. Former employees of the airline claim that Mills (partly because he was constrained and not given a free hand) and Natrajhen could never come to grips with airline operations. “The airline business is complex and even the best airlines struggle to make money. I am not questioning the competence of Maran’s choices but with an airline you take no chances,” says a former board member.

Meanwhile, SpiceJet began cutting costs. An airline that had always invested 1.6-1.7 per cent of its revenue in the brand and the product suddenly had an owner who was frowning upon spending on these heads. “In a low-cost airline, what product differentiation can you offer? You simply have to spend on the brand. But they were unwilling to do it. Obviously, the brand took quite a beating,” says a former employee of the carrier.

Many old SpiceJet hands, not quite convinced about the management’s choice of candidates, also began to make their exit. One of the biggest losses for the airline was that of Samyukth Sridharan, who quit in January 2012 to join Cleartrip as president and chief operating officer. Attempts to contact Sridharan for this story failed but those close to him say he left because he felt the airline would not survive in the long run.

Others too were beginning to feel that way. One reason for this was that those who left were often replaced by people with links to the Sun Group rather than merit, according to former employees. In June 2013, the airline lost Sridharan’s replacement — Harish Moideen Kutty — who spent just a year with the carrier. This was followed in July by the then CEO Mills, who left one and a half years before his contract was to end.

More recently, the airline’s chief financial officer, Sam Issac, and general manager of revenue management, Ravi Patwal, also quit. The airline also bid adieu to its chief technology officer Virendra Pal.

“Not only did most of the board resign, the airline also saw a steady stream of senior exits. This is bound to reflect on the airline,” says a former board member. In many cases, Maran initially replaced senior hands with people he trusted and were cheaper in terms of salary outgo. When the replacements were found incompetent, fresh hires were taken on board at two-three times the salary paid to the original man. “In one case, someone who was earning Rs 70 lakh a year was eventually replaced with someone who had a take-home of almost Rs 2 crore,” he adds.

What was worse was that all this coincided with IndiGo’s meteoric rise. As Kingfisher stopped flying and slots fell vacant, IndiGo went in and captured almost all the Delhi-Mumbai slots and strengthened what had once been a weakness in its network. Before the slots were reallotted, SpiceJet had roughly six to seven flights a day between the two metros and IndiGo had around seven to eight. Today, IndiGo has close to 15 flights between the two metros. Delhi-Mumbai drives the aviation business in India and accounts for almost 60 per cent of traffic in the country.
Even as IndiGo was posing more and more of a threat, the Q400 operation didn’t go exactly as per plan either. For one, route decisions didn’t always seem to be driven by the market. The airline put its first few Q400s into the Hyderabad market and flew to places around Hyderabad since GMR had offered a good deal to SpiceJet. The next logical hub was Bangalore — Kingfisher had vacated many slots and capacity had come down — but the chairman insisted on Chennai, raising a lot of questions in the minds of those involved in the daily running of the airline. After Chennai, the airline chose to fly the Q400s from Delhi, leaving the Bangalore area unserviced. In Delhi’s winter, the utilisation of the Q400s suffered as they were not CAT III compliant. Overall, the utilisation of the Q400 was around 10 hours a day. “If that had been the plan, the ATR could have done as well. To justify the higher spend on the aircraft, one had to utilise it more, closer to 11.5 hours a day, which the airline did not do,” says a former employee.

Other things also went wrong with the way the Bombardier Q400 operations were planned and the way they were eventually executed. For one, the airline failed to get a good bargain from Bombardier on maintenance and services. A former senior engineer with the airline says they could have asked for more since it was the first Bombardier order of this size (50 aircraft) with options for another 50. “Even today, at any point, one or the other Q400 is on the ground due to some maintenance or spares issue. The airline should have negotiated with Bombardier in a way that the onus for such faults would lie with the manufacturer. In fact, they should have asked for an extra aircraft to fill in while the company fixed problems,” says another former board member.

If the Bombardier operations are not running to plan, the main network is no better. “At one point, the network was sacrosanct and watertight. This began changing to the point where network advice was being sought from outsiders (Bain & Company),” points out a former employee.

Former employees say there would be sudden demands to start flights to say Kozhikode, Mysore or Trichy or some other destination. Even as they coped with these new routes, the airline lost its dominance on routes it had pioneered. Take, for instance, Delhi-Ahmedabad. It was SpiceJet’s first route and was seen as a SpiceJet stronghold. At that time the airline had three flights a day and was contemplating a fourth. But today, SpiceJet has just two flights — both in the evening.
For several months the network, which many argue is the heart of the airline, was being run by Bain & Company — COO Sanjeev Kapoor’s former employer — which many argue was the “final nail in the coffin” just as with Kingfisher, which had outsourced its network decisions (where the airline flies to and where it doesn’t) to Accenture. Many see this as an admission of the lack of expertise to run and operate an airline. Aviation industry sources argue that “when you start needing consultants to tell you where to fly, you may as well stop flying”.

Why An Airline?
In fact, many question why Maran bought into the airline at all. As GVK, GMR and other airport operators in India often ask, why would anyone run an airline in India when they can run an airport? In fact, this holds true the world over. Airlines rarely make money while airports rarely fail to. As Richard Branson famously said: the quickest way for a billionaire to become a millionaire is to own and run an airline.

When Maran looked at buying into the airline, it had made profits for two years in a fairly tough environment. Further, with the Sun Group’s relatively unknown profile in the North, the airline would have been the ideal way to get a pan-Indian presence. But as aviation industry sources point out, if the objective was to give the Sun Group a larger canvas, the reticent manner in which Maran has handled things so far has certainly not worked. “Apart from slapping a logo on an airplane, little else seems to have changed. Unlike Vijay Mallya, if Maran’s plan was to leverage the airline’s brand and popularity for the Sun Group, he doesn’t seem to have managed that,” says a former SpiceJet employee.

Few, therefore, are able to see why he bought the airline. He apparently did not seem to enjoy the limelight and glamour associated with running a high-profile business. With Natrajhen as CFO, he chose to run it from the shadows. Very few of the senior team had a chance to interact with him and all Maran’s orders were conveyed through Natrajhen. This also made life difficult for those running the airline on a daily basis. “We never knew whether it was Natrajhen’s filter that applied or it was what Maran actually wanted,” says a former employee.

Also, since Maran had no airline experience, most of the people who were being brought in were not up to the mark. “Outside of Mills, choices of candidates reeked of a regional bias; everyone seemed to have some connection with the South,” says a former employee.

Insiders also feel Maran ran the business much like the rest of the Sun Group where a top-down approach is the norm. “It was not as if the Sun business was built on the strength of the professionals it has. Similarly, although Maran had good professionals in the airline, their advice and counsel was not relied upon,” says one.  

Shakti Lumba, an aviation veteran who spent many years in Indian Airlines before joining IndiGo’s startup team, says this  problem afflicts all domestic carriers barring IndiGo. Lumba also argues that often the fate of airlines in India is linked with “who they are aligned with”. In this case, he argues that the decline of SpiceJet “strangely coincided with the exit of the DMK from the UPA-II government”.

Whether it is micro-management of the airline or forces outside its control, SpiceJet has never hit such a low. Whether Maran manages to pull it out of its present crisis (rumours that he is refusing to put in any more money and is desperately looking for a buyer continued to float as BW went to press) or ends up letting it go the Kingfisher way remains to be seen. But either way it holds lessons for future promoters of airlines in India. 

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(This story was published in BW | Businessworld Issue Dated 25-08-2014)