A SpiceJet Boeing Ltd. 737-800 jet prepares to land at Mumbai International Airport in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Davos WEF 2018: Ajay Singh Says UDAN Helped SpiceJet Maximise Profit

SpiceJet Ltd.’s Chairman Ajay Singh said the budget carrier has been able to maximise its profit by flying to smaller cities under UDAN, a scheme aimed at boosting regional connectivity in the world’s third biggest aviation market.

“Our flights operating under the scheme are the top-performing flights in the network,” Singh told BloombergQuint’s Menaka Doshi on the sidelines of World Economic Forum 2018 in Davos, Switzerland.

Passenger load factor in flights operating on regional routes has been in excess of 90 percent, said Singh. That’s mainly due to SpiceJet’s ability to capture the unserved demand for aviation services to tourist destinations like Pondicherry, Jaisalmer and Porbandar.

The ‘Ude Desh Ka Aam Nagrik’ scheme, launched in 2016, subsidises airfares to make flying affordable and connect smaller cities with the aviation grid. Five airlines, including SpiceJet, won bids in the first round to operate flights to 31 new destinations in March last year. Routes to another 29 airports and 31 helipads were added in the second round of auction that concluded yesterday. More than 100 million Indians travelled by air in 2017 and the numbers are expected to rise as economic growth boosts incomes.

“We don’t expect to lose money on these routes at all,” said Singh, adding that the carrier is ready to commence flights to the new routes as and when the government is ready to kick-start operations. The only hindrance will be airports that are still not ready, he said.

Singh said the costs to make aircraft available on the new routes is “fairly minimal in the larger scheme of things”. The cost of setting up an airport in India is also relatively low and the Airports Authority of India is efficient and helpful, he said.

The Gurugram-based air carrier will get 200 new Boeing aircraft till 2024 —14 of which will come this year. The carrier will extend its flying range with fleet expansion and explore new overseas routes, said Singh.

The SpiceJet chief expects aviation turbine fuel to come under the Goods and Services Tax as it comprises nearly 30 percent of a carrier’s total costs. Fuel prices have go up with with the rising crude.

Here are the edited excerpts from the conversation:

What did you make of the kind of reception that Prime Minister Narendra Modi got in Davos, how was his speech, what were the reactions to it like?

He’s been pretty unprecedented. I’ve seen times when India was too small and insignificant from World Economic Forum to take seriously. From there, we’ve come to a point when the Indian Prime Minister opens the WEF, is the first speaker at the forum, and gets so much interest. It’s just incredible, this is clearly India’s Davos.

What is the outlook for the aviation industry in India in 2018?

India is the fastest growing aviation market in the world today, and we have just 3 percent of our population flying. We’ve been growing at around 20 percent, and there is no reason for that growth to slow down anytime soon. You can see that the pent-up demand is really really high. So we expect the market to grow in 2018 despite the rise in crude oil prices. One of the great things that has happened is the implementation of the regional connectivity scheme, UDAN, which has done phenomenally well.

You have just won bids in the second round of UDAN auction as well.

Yes, we have. We were the first airline in round 1 and we demonstrated that these UDAN routes can actually be profitable. They also have this additional benefit of opening new airports, which have never been used. This is opening new markets, leading to better capacity, and taking away some of the pressure that we’re facing due to problems at Mumbai and Delhi airports.

What about the pressures arising from higher crude price, how are you seeing aviation turbine fuel price moving up and the impact on financials?

Stronger oil prices are always detrimental to aviation growth. Having said that, we have been able to pass on the increase in crude prices to consumers so far. We also expect crude prices to not remain around the $70 per barrel mark, because every time they come close to $70 per barrel, we see an uptick in shale production, and once the Saudi Aramco IPO is out of the way we will have a downward pressure on oil prices. So we expect oil prices to remain in $50-$60 per barrel mark going ahead. A weaker dollar is obviously great news for the aviation sector because a significant amount of our payments, including lease payments are made in the U.S. dollar.

Is there any way to estimate what the cross-impact of this will be on your financials?

At this time, it’s looking reasonably neutral.

Are you expecting ATF to come under the Goods and Services Tax bracket?

Absolutely. We have been discussing this with the government for a while now. That’s how it is done across the world. If India wants to be internationally competitive, we should follow international structures of taxation as well. We have put forward these suggestions to the government, as petroleum products are one of the only four products that are yet to be taxed under GST. We are hopeful that this issue will be taken up at a GST Council meet.

What has been the success rate of Round 1 of UDAN, and how do you see Round 2 panning out?

We were the only large organised airline that participated in the first round of UDAN and since then we have started flights from Mumbai to Porbandar and Kandla, Hyderabad to Pondicherry and Delhi to Jaipur to Jaisalmer. These flights have done exceedingly well, we’re soon going to start a flight to Kanpur as well and to Adampur Jalandhar. It’s surprising that well populated cities like Kanpur had no flight connectivity. So these flights have done very well.

What do you mean when you say that they have done ‘well’?

They are amongst our top-performing flights in the network at this point in time.

What is the passenger load factor in these flights?

Passenger load factor is always in excess of 90 percent consistently, and in terms of yield as well, these flights have done well. We have some 20 odd routes where we will be commencing operations in Round 2, and we expect that they will do very well. The availability of airports will determine as to when we’ll be able to commence operations in those routes. We are ready, when they (airports) are. We have to start in six months anyway. But we expect some of these to commence before six months.

What about the cost that you incurred in the process? How has the overall experience been like?

The cost of setting up an airport is relatively small in India and the Airport Authority has done a fantastic job in making these airports functional. Under this model, the government bears the cost of creating the capacity. In the larger scheme of things, the cost we’ve incurred are fairly low.

And those costs have been completely justified owing to the strong passenger load factor you’ve been running?

Absolutely. It is also important to note that there is a factor of exclusivity in these routes, so for three years we have an exclusive right on those routes, which is of considerable value.

How do we understand the profitability from the scheme?

It’s one of the finest schemes of this government. We had 77 airports, and suddenly we have additional 40, so you’ve created capacity and there is connectivity in small towns that never had flights and are growing so rapidly . So it’s a great scheme. In terms of profitability, these flights are in the upper quartile of our profits, certainly in the top 25 percent. We are making money on these routes. They started to break even almost immediately. We saw that there was pent-up demand, so as soon as we commenced operations, things took off. Even our first flight had over 90 percent of passenger load factor.

But there is pricing control in the scheme, right?

There is pricing control only for a limited number of seats, beyond which there is free pricing. Because the pent up demand is so high, we can price them higher, and make significant yields.

How is the cost of adding aircrafts on these routes going to impact your financials?

From our perspective, flying aircrafts on UDAN routes sometimes makes more sense than flying them on non-UDAN routes. The cost of aircraft is built in when we calculate profitability of routes. I don’t expect these routes to lose money at all.

You have not expressed any interest in Air India, right?

No, we haven’t because we’re too small an airline and Air India is a very large problem. Larger players need to take on those problems.

Are you not even interested in any parts of Air India that the government is planning to sell?

We do’nt know what parts they will sell. We’ll figure that out once they announce how they will do it. From what we hear, they are going to sell the operations together and sell the MRO separately, so we’ll see what happens.

Are you at all looking to expand any of your long distance international routes?

We are in seven countries at this point in time. As we get these new aircrafts in 2018, the Boeing Max, we’ll look at expanding our international routes as those planes give us additional range. We are getting 14 planes in 2018, 18 in 2019 and which are part of an order for close to 200 planes, whose deliveries are due till 2024.

A Parliamentary panel suggested cap on pricing. What do you have to say about that?

We’ve been hearing that for over 10 years now, but the current system is working exceedingly well from the consumers’ perspective too. DGCA did a study last year that revealed that only 1 percent of the fares were peak fares, and more than 80 percent of the fares were really low. Fares have consistently gone down as oil prices fell. The fares are pretty low currently. If you buy early enough, you could get Delhi-Mumbai for under Rs 2,000, which is less than the train fare. I don’t think the government should interfere in pricing, as the system has worked well so far. You’re seeing the growth, you’re seeing. Airlines are not making disproportionate profits, they have in fact lost money for several years. The government must ensure that all sectors are healthy.

How do you see the ownership of SpiceJet evolve from here on?

I’ve had a really great time doing what I’ve done. We became a distressed asset, the airline shut down for a day and from there we’ve managed to reach this stage where we have clocked passenger load factor in excess of 92 percent in the last 32 months. We have been profitable in every quarter ever since we took over. We have a long, long way to go. We have tremendous growth coming our way, we have a significant opportunity in our country. I don’t see the ownership changing for several years down the line. The company doesn’t need the cash. At this time, I think the ownership will remain where it is.