Once again Air India gives Boeing a headache with its update this morning on what it is paying the US aircraft manufacturer for its 787-8 deliveries. It was confirmed that Air India had paid $1.804bn for the 16 787-8s delivered thus far, an average of $112.80 million each from the $206.8 million list price, or indeed in any event a total discount over the 16 aircraft deliveries of around 45%.
As Air India continues to re-fleet amid continuing, if improving, losses, one of its victims continues to fight-on. SpiceJet has been on the ropes once or twice over the past few years but like a great boxer it keeps on going. It remains to be seen if SpiceJet can withstand the attack of AirAsia and Tata but for now its fight for market share with heavily discounted prices has seen its market share increase in June 2014.
SpiceJet’s task was to try and hold margins while going on a war for market share through discounted fares so that it could overtake Air India. In June this was achieved and the airline captured 19% market share and the third place spot on the airline rankings list. In the process also producing very good load factors. Of course this plan depended on increasing ancillary revenue to hold margins, but the Indian economy service passenger has held true to his/her frugal nature and the promise of upselling has it seems come to nothing and now we are seeing the same pattern emerging that marked the beginning of the end for Kingfisher.
When we reported over a year ago that SpiceJet may not be able to continue without radical reform and/or a very knowledgeable hands on (an outside airline) investor, we did indeed hope that we would be wrong, but today the details regarding delays of TDS (tax deducted at source) certificates and Form 16 to employees seems to confirm that what we thought was a blip back at the turn of the year is in fact an ongoing situation, with many key employees confirming to us that they are indeed looking for jobs at other airlines for fear that their airline may become the next Kingfisher. So much worry now surrounds SpiceJet that regulators have this week ordered an urgent engineering audit to check that the airline is carrying on with normal safety measures as it should. News of this reached the markets just before the close yesterday sending SpiceJet shares down 16.2% to finish at Rs14 from Rs16.70.
Even so, amid all this uncertainty surrounding the long term future of SpiceJet, management continues to try and find investors, but it will have to bite the bullet on valuation in order to save the airline if, as forecast, it makes an Rs90-110 crore loss for the June quarter. Total debt for the airline stood at Rs 1,736 crore at the end of March. Customer satisfaction, service and load factors are for nothing if seats are being sold at a loss. Lessors need to be wary of the current situation.
Meanwhile MAS majority shareholder Khazanah Nasional is expected to submit a plan to take the airline private next week, which in the process will see wholesale management changes take place and a complete re-branding exercise begin that could yet involve a name change further down the line. We are given to understand that the process will be modelled on the JAL reforms with wholesale root-and-branch overhaul and streamlining. When this process is complete a lean, mean airline will be available for investment.