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-RyanAir considers its passengers as “self-loading freight”
by Devesh Agarwal
“While 80% is common, there is no single LCC model that is used across the world”. These were the thoughts expressed by SpiceJet’s Chief Executive Officer Neil Mills in a relaxed and free spirited conversation with Bangalore Aviation’s Devesh Agarwal, enroute to Niagara Falls immediately after taking delivery of the new Bombardier Q400 fleet. Mills is a veteran of iconic Low Cost Carriers (LCC) EasyJet and flyDubai and we wanted to better understand the LCC segment through the prism of his global expertise.
About the LCC model?
While 80% is common, there is no single LCC model that is used across the world. The LCC model is adapted in each geography to meet local cultural expectations. For example, RyanAir considers its passengers as “self-loading freight” who accept this treatment in return for a very low fare.
The Indian market is not ready for this. RyanAir’s model will just not work in India. Here, when any person visits, it is basic courtesy to offer them water, regardless of their economic stature, from a labourer to a landlord. Which is why SpiceJet offers its passengers their first bottle of water free of charge.
SpiceJet wants and provides its passengers a safe and efficient service at the lowest cost the airline can deliver it for, and make a small margin along the way, with the lowest operational complexities.
How would you compare SpiceJet with IndiGo?
I wouldn’t. SpiceJet is not a “me too” airline. We have our own service philosophy and business model and I am confident it will deliver the right results. In the past SpiceJet has suffered from too many management and ownership changes. [Under the new ownership of Mr. Kalanithi Maran] We have recoved the lost focus. We are focussed on profitable growth not market share. I cannot pay the bills with market share.
I will acknowledge that IndiGo has a good business model and is efficiently run. And, they got a great aircraft acquisition deal from Airbus.
The state of the airline industry in India
The rise in fuel prices and slowdown in business is testing the airlines. With very high fuel prices, efficiency and productivity will be the key determinant of who survives and thrives. In India fuel hedging is not a practical option; so SpiceJet continues to work on constantly reducing our non-fuel CASKs (Cost per Available Seat Kilometer) which are already one of the lowest in India.
This is also a time for airline promoters to express confidence in their airlines and invest. Mr. Kalanithi Maran is going to buy another 5% shares in SpiceJet at Rs. 36 per share when the current price is Rs. 22. This shows the level of commitment I am talking about.
What should be the role of government
Government should focus on policy. For example, regional markets are inherently more risky. The government needs to maintain and strengthen its regional aviation policy and also look to strengthening infrastructure at regional airports.
Government should not over-regulate or over-tax. The Indian airline market is at a tipping point and the time has come where industry has to improve itself. Government should step out of the way and let the free market sort itself out.
About SpiceJet’s Q400 regional service expansion
We know Bangalore is a key market, and we look forward to a more enthusiastic proposal from the airport operators. We will definitely create a hub at Ahmedabad. Chennai’s terminal is a choke point at present, but the airport operators are addressing it. We will take a look at it [Chennai hub] once the expansion is completed.
Mumbai is a key market and the existing airport [CSIA] is over congested and Navi Mumbai airport is already five years overdue.
About SpiceJet’s Q400 maintenance and MRO plans
We have a “Smart Parts” parts provisioning agreement with Bombardier for the Q400 aircraft. The warehouse is at Hyderabad airport rented from GMR. Our 737’s go to Malaysia for their C checks. MRO is not a core business for SpiceJet and we will not venture in to this business. We are talking to various MROs including Indian MROs for the Q400 maintenance, but Indian MROs must be commmercially competitive.
Why is the 180 seat Airbus A320 and Boeing 737-800 so popular in India?
Airlines, especially LCCs, select aircraft based on their residual values (i.e. re-sale value or the value at the end of the lease). The Boeing 737-800 has the highest residual value in the industry becuase it is such a popular aircraft around the world. The Airbus A320 is marginally lower. Hence these two aircraft are also the most popular in India. The Boeing 737-700, 737-900ER and the Airbus A319 and A321 do not enjoy the same residual values [in percent] of the 737-800 or A320 and are therefore not as popular.
About the Airbus A320neo?
I am concerned about the interim period and the demand for the classic A320s till the neo’s start getting delivered. Which aircraft leasing company is going to risk leasing the classic [old engine] models with their falling residual values when the neo is just around the horizon? It will be a challenging situation.
Will SpiceJet consider changing all or part of its 30 Boeing 737 order to the new 737 MAX?
We will always look at what ever safely saves us money, and fuel constitues over 50% of my expenses today.
How does an airline pay for an aircraft – What is a typical payment schedule?
[Editor’s note: This was asked to better understand the two large contracts for A320s signed by IndiGo and GoAir]
Typically an airline pays 1% of the agreed price on signing the contract. Two years out [i.e. 24 months prior to delivery] it pays 6%. Then every six months it will pay 6% i.e. at 18, 12, and 6 months. Then the payments accelerate until delivery by which time the airline would have paid the full amount.
Do you see LCCs joining an airline alliance?
Traditionally an airline approaches alliances for membership, but not in the case of LCCs. Across the world with LCCs out-performing their legacy counterparts, alliances are increasingly looking at LCC’s, especially in Asia. SpiceJet is open to anything, but we are not talking to anyone right now.
