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Spice Jet Take Over – Good Times are Here for Aviation Industry

New Delhi. The Indian aviation industry has got a boost with the takeover of SpiceJet Airlines by Chennai based media magnate Kalanithi Maran. He not only acquired a 37.7 per cent stake in the airline for about Rs. 740 crore, but also made an open offer to acquire another 20 per cent stake which is likely to bring his total investment to about Rs. 1200 crore. The takeover indicates the growing health of the domestic aviation sector especially budget airlines. Analysts may be wondering why existing stake holder billionaire Wilbur Ross opted for the deal at a 16 per cent discount on the market prices of the shares, but it is clear that savvy entrepreneur Maran has high hopes for the airline’s future prospects.

Maran’s acquisition makes it evident that the growth segment of the aviation industry is going to be the budget airlines. In the case of SpiceJet, after half a decade of existence, it has finally recorded profits of Rs. 61 crore in a full year of operations. This is in sharp contrast to the full service carriers who may have a larger market share but are saddled with huge debt burdens. The largest airline in terms of market share is Kingfisher but it has a debt of about Rs. 5600 crore while Jet Airways has a debt overhang as high as Rs. 13,000 crores while Air India’s accumulated debt is estimated at Rs. 22,000 crore.

These factors clearly weighed with Maran before he went ahead with the take over of this no frills carrier. He made it clear that SpiceJet was chosen only after making a careful study of the Indian aviation sector. As a result of this study, he appreciated the tight ship being run by current CEO Sanjay Aggarwal and claimed that so far there are no plans to rock the boat by making any management changes. He has also revealed that his decision to buy a 38 per cent equity stake in the company was based on the fact that SpiceJet is nearly zero debt and has a healthy EBITDA (earnings before interest tax depreciation and amortisation). In addition,the budget carrier which has a 13 per cent market share has raised revenues by nearly 30 per cent during the last fiscal and load factors have remained consistently over 80 per cent.

Spicejet has been cleared to fly to four destinations in South Asia, which may increase the debt burden on the airline. But Maran clearly has ambitions to make Chennai an international hub for the airline. The airline’s strategy of leasing aircraft has paid rich dividends as now the larger players like Kingfisher and Jet Airways are pulling back on fleet acquisition. This leaves room for the smaller airlines like Spicejet to expand their fleet by both acquiring aircraft and leasing to meet the growing demand. Expectations are that the budget airline will reach a market share of 15 per cent in the current fiscal itself (2010-2011).

SpiceJet though is set to acquire another Boeing 737 aircraft.

The airline’s earlier avatar was as Modiluft, but was relaunched in 2005 as SpiceJet by the new promoters, Ajay Singh and the Kansagra family. In 2008, the billionaire Wilbur Ross who specialises in taking over troubled companies and reselling them for a profit, bought 30 per equity stake in the airline at a cost of Rs. 345 crore ($ 80 million). Ross has now sold his stake to Maran at 16 per cent less than market prices, but has made a 100 per cent profit on the deal. In this context, one must note that in the past one year, the company’s stock price has gone up by over 150 per cent, primarily due to the improved performance of the budget carrier.

Maran, who is chairman of the Sun Network, has acquired the airline through his aviation company known as Kal Airways, jointly promoted by him and his wife Kaveri. One of the major plus points of this takeover is that the fragmented holding pattern of the company will be consolidated with Maran ultimately expected to hold as much as 57 per cent of its equity. This will make it easier for its board to take decisions especially at a stage when the carrier is poised to expand both in the domestic and international arena. It has been seeking to raise 75 million dollars for these expansion plans. In fact, it is being felt that with Maran involved in the venture, his deep pockets and political clout will make SpiceJet a game changer in the aviation sector. The company has already been given permission to fly to Colombo as well as other destinations in South Asia. It may have earlier feared other budget carriers in the region like Air Asia and Tiger Air, but with Maran’s decisive brand of business, it is felt that Spice Jet can become a worthy competitor to these airlines.

What is interesting in this entire development is the fact that Maran has made no secret of the fact that he was approached by at least three to four airline companies before he carried out this takeover. Clearly the aviation industry is facing tough times as it looks for cash rich companies to bail them out from their heavy debts. Some of the consolidation has already been carried out in the industry. Jet Airways bought over Sahara to create its budget airline called Jet Lite. Similarly Kingfisher took over Air Deccan to form its no-frills carrier known as Kingfisher Red. This was not enough for Jet which has launched yet another budget wing known as Jet Konnect.

Given the fact that other airlines have approached Maran, it is possible that another round of consolidation may take place in the aviation industry. There have been persistent rumours that Go Air is being sold though these have been strenuously denied by the promoter, Jehangir Wadia. The fact that the airline is looking for a strategic investor, however, has been conceded by the company which remains one of the smaller players with a seven per cent market share . There has also been speculation that some of the budget carriers might merge to make operations more viable. For the time being, however, it seems all plans have been put on hold owing to recent surge in the aviation sector.

The latest government data for May this year confirms this revival of the airlines business. An official release says that India’s domestic airlines carried a total of 47.85 lakh passengers in May as against 41.88 lakh in April. Of this, Kingfisher Airlines carried 10 lakh passengers, Jet Airways carried 8.69 lakh, Air India carried 8.47 lakh, Indigo 7.53 lakh, SpiceJet 6.32 lakh, Jet Lite 3.84 lakh, Go Air 2.81 lakh and Paramount 0.19 lakh. Kingfisher had a 20.9 per cent market share, followed by Jet with 18.2 per cent. Market share of Air India was 17.7 per cent, 15.7 per cent for Indigo, 13.2 per cent for Spice Jet, 8 per cent for Jet Lite, 5.9 percent for Go Air and 0.4 per cent for Paramount. The seat factors of the airlines in May were 92.3 per cent for Indigo, 90.4 per cent for Spice Jet, 86.6 percent for Paramount, 86 per cent for Go Air, 85.4 per cent for Jet Lite, 83.2 per cent for Kingfisher, 82.5 per cent for Jet Airways and 77.8 per cent for Air India.

The first and most positive news from this data is that more and more people are travelling by air now that the clouds of recession have disappeared. The second is that the seat load factor is much higher for the budget airlines than for the behemoths who may have a much larger market share. Profitability is thus better for the smaller players than for the big guys in the fray. Some of the larger players like Jet, however, are already finding an improvement in their bottomline by making an operating profit in the last fiscal as recessionary conditions have eased and air travel is once again booming. But the airline had to make significant changes in its operations over the last two years including shifting a large chunk of full service operations into the budget segment by calling it Jet Konnect.

Kingfisher Airlines also recorded a 50 per cent dip in operating losses, but is still in the red for the time being.

The good times, however, seem to be on the way for the Indian aviation industry. SpiceJet’s take over by media baron Kalanithi Maran will strengthen the budget carrier segment which seems to be going from strength to strength. At the same time, the larger players will have to continue their strategy of cutting costs on all fronts.

The silver lining is that air travel is once again showing a resurgence and this should translate into higher revenues and profits for the domestic airlines.

© India Strategic