Monday, August 02, 2010

Are they ‘Nuts’?! A crazy success recipe...

There was a time when buying aircraft and flying overseas appeared just another plan for Indian aviators. The slowdown ensured everybody cut on fleet and rationalised routes. All except one – SpiceJet! Are they nuts (apart from being, er, India’s only profitable airline company right now)?! by Steven Philip Warner

Kevin Freiberg created a global ruckus when, in 1996, in a book titled Nuts!: Southwest Airline’s Crazy Recipe for Business and Personal Success, he profiled Southwest Airlines founder Herb Kelleher’s salacious, radical, nutty, yet fantastic strategies to make his fleet one of the few profitable airlines (sometimes, the only one profitable) in the US. The increase in air traffic due to Herb’s then eccentric strategies – low fares, no frills, short skirts, long legs and that jazz – was so dramatic that the US Department of Transportation introduced a formal term – ‘The Southwest Effect’. It’s weird, but it’s only a matter of time before ‘The SpiceJet Effect’ gets formal usage in Indian skies.

The carrier will now become the first Indian low cost carrier (LCC) to fly overseas. This at a time when everybody is cutting fleet size faster than you can say Jack Robinson. But there’s reason behind this madness. During a year when the domestic aviation industry lost Rs.70 billion (in addition to accumulated losses of Rs.260 billion, as per the Centre for Asia-Pacific Aviation, CAPA) and the global industry loss totalled $9.4 billion (as per IATA), SpiceJet recorded a positive bottomline of Rs.532 million! SpiceJet was the only Indian airline in profits for the whole year!

Three years ago, the same airlines was in doldrums. When we had met SpiceJet’s CEO Siddhant Sharma at that time, he had no answers for the unhealthy price cuts, scramble for scanty infrastructure and plummeting market shares. In fact, like us, he was equally baffled about the airline’s future. SpiceJet’s stock price was in trouble too. In the seven months leading to July 14, 2008, it had lost 71% of its value. What changed since then so dramatically? Umm, the CEO. Siddhant had to resign.

It took the board three months, to bring Sanjay Agarwal on board as the new CEO, whose job was to repair, restore and relaunch. He did; and very well too. In the past 12 months, SpiceJet has been the highest gaining airline stock (in relative terms), having increased in value by close to 300% (to touch Rs.59.60 as on April 27, 2010), while the Sensex rose 60%.

Profitability has become a phenomenon hard to come by in the business of Indian aviation; logical reasoning has become harder. But SpiceJet is clearly an exception. It has learnt from the mistakes of others. During the past couple of years, Jet Airways and Kingfisher Airlines have been loud about ‘long-distance’ expansions to Europe & US. But given a choice, they’d play silent about their books. In the nine months ended December 31, 2009, Kingfisher Airlines reported losses of Rs.10.75 billion (after losing Rs.16.09 billion in FY2008-09). Jet Airways is a reflection. Its loss for the first three quarters of FY2009-10, stands at Rs.5.26 billion (after a loss of Rs.4.02 billion in FY2008-09). Clearly, their international bets haven’t paid off too well. Then what about SpiceJet’s international plans? Says B.Somaia, Regional Director of Sydney-based CAPA to B&E, “International operations are far more complex than domestic due to issues related to regulatory requirements, language, foreign exchange, the need for new distribution networks et al. The management cannot lose focus on the core domestic market just as the situation is stabilising. Building the brand overseas will take time & investment.”

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Source : IIPM Editorial, 2010.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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