Three airlines broke the back of the aviation strike called for August 18. They are also India’s only profitable airlines. The stories of SpiceJet, IndiGo and Paramount Airways...india Updated: Aug 08, 2009 21:51 IST
They are the Davids who are showing the Goliaths how to stay ahead.
The Indian aviation sector lost Rs 10,000 crore (roughly the cost of electrifying 83,000 villages) in 2008-09, but three small airlines — SpiceJet, IndoGo and Paramount Airways — stood out for their profitability and unique business models.
Paramount, which offers only business class seats, is very popular in the South and has only recently begun expanding across the rest of India. SpiceJet, India’s second-largest low-cost airline, and IndiGo cater to the value-conscious flyer. But that’s where their similarity ends.
SpiceJet, which names its aircraft after spices, reported a net profit of Rs 26 crore for the April-June quarter of 2009 (the first quarter of the financial year 2009-10), compared to a loss of Rs 129.2 crore for the same quarter in the previous year.
Unlike SpiceJet, Paramount and IndiGo are not listed, and so don’t have to announce their results. But the Centre for Asia Pacific Aviation, one of the world’s leading aviation market research firms, estimates that IndiGo earned a net profit of Rs 40-60 crore in the April-June quarter of 2009. Paramount, too, is believed to be profitable.
No wonder they forced the big daddies to toe their line and call off the strike planned for August 18. Read on.
Head above the clouds
by Lalatendu Mishra
IndiGo was still a year away from launch. But it stunned the global aviation industry in 2005 by placing an order for 100 Airbus A 320 planes for $6 billion (Rs 27,000 crore then). The buzz at the Paris Air Show that June, when IndiGo chairman Rahul Bhatia made the announcement, was, “IndiGo who?”Four years later, no one is asking that question anymore. The airline, India’s youngest and one that turned three on August 4, is also its most profitable. IndiGo is estimated to have earned a net profit of Rs 40-60 crore in this year’s April-June quarter.
|Bhatia kept IndiGo lean and efficient (HT file photo)|
For good measure, it is also India’s largest low-cost carrier, with a market share of 14 per cent. Kingfisher and Kingfisher Red, that was Air Deccan in a previous avatar, report combined figures, so the latter’s individual market share is not available.
How did IndiGo achieve this when the big boys — Kingfisher, Jet and Air India — are awash in red ink?
A brand new fleet (of 21 planes now) of A320s, lower maintenance costs that come from having a homogeneous fleet, very good in-flight experience and a philosophy of never selling tickets at a loss have ensured that IndiGo did not go the way of the others did. And, importantly, it does not spend much on advertising.
“IndiGo has a well-structured business plan that has started paying off,” says Kapil Kaul, CEO (South Asia) of the Centre for Asia Pacific Aviation.
“The association with Rakesh Gangwal (56, former CEO of US Airways and a major investor in IndiGo) helped tremendously,” said an employee on the condition of anonymity. It was Gangwal’s credibility and backing that prompted Airbus to take seriously Bhatia, 46, then just the owner of InterGlobe, a mid-sized travel agency based in Gurgaon.
The airline management declined to meet HT. Gangwal did not respond to emailed queries. CEO Aditya Ghosh, too, refused comments. And Bhatia said over phone, “We don’t run our business through newspapers. I don’t want to say anything.”
That’s Bhatia for you. “He can be brusque, impolite and downright pushy. But he has an enthusiasm that’s infectious and rubs off on people around him,” said an employee.
It was Bhatia who first revolted against the decision of Federation of Indian Airlines, the domestic airline lobby, and walked out from the proposed strike on August 18 within hours of agreeing to it on July 31.
He of course had his reasons. IndiGo is believed to have lower capital and running costs than most other airlines. Since it ordered 100 planes, it was able to negotiate good rates with Airbus.
“You won’t find throwaway fares on IndiGo,” says a senior executive at a rival airline. “It also manages to keep its occupancy levels (the number of passengers flying as a percentage of the total number of seats) at above 80 per cent.” An airline usually needs at least 70 per cent occupancy to break even. The numbers tell the story.
Bringing back the spice
by Lalatendu Mishra
One look at Sanjay Aggrawal’s face says it all. The hairline is receding, but is carefully concealed. The eyes are intense. There is not an extra ounce of flesh, or a hint of that double chin that bedevills the early 40s so often. The nose is sharp, but doesn’t descend into a moustache below. It’s a no-frills face — quite like the budget airline he is revitalising.
|Aggrawal changed the top team first. Raj K Raj / HT photo|
Last quarter, SpiceJet posted its first profit since getting listed on the stock exchange seven years ago. It earned Rs 26 crore more than it spent through the April-June quarter in sharp contrast to a loss of Rs 172 crore in the same quarter last year.
Around this time last year, aviation experts had begun writing SpiceJet’s obituary. That is, till US-based investor Wilbur Ross decided to bail it out with a $100-million (Rs 421 crore at the then exchange rate) lifeline.
That’s when Sanjay Aggrawal came on stage. In October 2008, the 41-year-old Ambala-bred engineer took charge as CEO, changing both the style and substance of the airline’s management. He marshalled the skills he had picked up at his stint in Flight Options, a US-based private jet company, and as manager of finance planning at US Airways.
“My first priority was to put a good top team in place. And the rest started falling in place,” says Aggrawal, who returned after 17 years abroad.
It wasn’t the first time things had gone wrong for SpiceJet, the country’s first private airline in the post-reform era. Starting as Modiluft, a partnership with Lufthansa of Germany that begun in May 1993, the company kept tumbling from one disaster to another — a rude suspension of operations within four years, several aborted revivals, a resumption of operations under a new investor but incurring accumulated loss of Rs 850 crore. All before Aggrawal scooped out a net profit from thin air.
Among the measures the new boss took was putting a tight leash on foreign currency spending that makes up 70 per cent of the airline’s operational costs.
Then the turnaround time (the time it takes to prepare an aircraft for the next flight) was cut to 30 minutes against an industry average of 1 hour 9 minutes. That helped SpiceJet squeeze more flights out of the same number of aircraft. Where it was operating 97 flights with 19 aircraft last October, it’s running 125 flights now with the same. The planes are flying for an average of 12 and a half hours a day as against 11 hours 42 minutes last year. The same average for full-service carriers such as Jet stands at 10 hours.
For now, Aggrawal seems to be set on his task at hand in India. His two children, Mahima and Nandan, are 9 and 8 years old. It’s some time before they may want to explore higher education in the US. For now, the doting father is ensuring that his children get accustomed to Indian food and learn Hindi. Such indications of digging his heels in India could be music to the ears of his 2,300 employees.
It’s not just about size
by M.R. Venkatesh
He should be the industry’s poster-boy — but chances are that you haven’t heard of him. In a beleaguered industry run mostly by people over 40, 31-year-old M. Thiagarajan has quietly led his four-year old company, Paramount Airways, into the second straight year of profits.
|Thiagarajan nurtured a niche market. Photo courtesy: Paramount|
Thiagarajan’s dream was seeded in 2000 in an unlikely setting in faraway Frankfurt. As a 23-year-old aspiring pilot, he was invited by a friend to step into a simulator of the 747 Jumbo jet. “My friend left me with the controls — and that was the starting point. I came out with an unshakeable desire to fly,” says Thiagarajan.
He enrolled himself into a flying school near London and secured a private pilot’s licence. Soon the desire to fly an aircraft turned into an ambition to pilot an aviation company.
But then, Thiagarajan had to stand out in an industry that was already somewhat crowded. He set about the task innovatively. When others went for the larger 180-seater Boeing 737s or Airbus A320s, Paramount bought 80-seater Embraers from Brazil. “I compromised on size, but not on the flying range,” claims Thiagarajan. Also, they guzzle a quarter less of jet fuel.
And because the Brazilian company was trying to break into the Indian market, the planes also came at relatively lower rental and maintenance costs (the actual numbers are not disclosed as the company is held privately). The smaller aircraft can also land at smaller airports and be made ready for the next flight quicker. What’s more, as the aircraft are less than 40 tonnes in weight, Paramount is spared the parking and landing fees. The size also entitles the airline to a 4 per cent sales tax on the jet fuel, rather than 28-32 per cent that the others pay.
So the benefits of the simple business decision were dramatic indeed.
Then there were other ways Paramount differentiated itself. It expanded and nurtured the southern Indian market. The airline’s unwavering focus on the area has made operations possible with only five aircraft.
At the same time, all these aspects make Paramount a smaller company than most of the rest of the industry. Thiagarajan is unfazed by that; he points out that he has a 27 per cent of the market he operates in, that is, south India. So his sky maybe limited, but Thiagarajan is the biggest star in it.
To top it, all the seats he offers are business class. So they earn more per seat. But, truth be told, this could a fragile model to guard. Even a little laxity may tarnish the carefully-crafted image of a high-flier.
But then, Thiagrajan has always balanced diverse images. His long exposure to Western society stands next to the fact that he’s from a traditional family whose patriarch, his grandfather, is the chief patron of the Madurai Meenakshi temple. He could have rolled in luxury; but he runs his business from an inconspicuous corner of a modest office-cum-home. Thiagrajan’s is, perhaps, the true Indian-bred model.