Tuesday, August 02, 2011

SpiceJet plans new regional routes, but headwinds remain

SpiceJet Ltd hopes to launch fresh operations connecting towns and cities in South India this month, but the carrier is still awaiting aircraft import approvals.

India’s second largest low-fare airline, controlled by Kalanithi Maran of Sun TV Network Ltd, has secured slots at various airports to run the regional operation, due to start on 24 August.

But the Directorate General of Civil Aviation (DGCA) has not yet permitted the carrier to import the Bombardier Q400 aircraft it plans to deploy.

The aviation regulator will allow SpiceJet to import the planes only after the Reserve Bank of India (RBI) permits the airline to finance its purchase with the help of a Canadian bank.

“The airline’s regional schedule will be cleared after this,” said a government official, asking not to be identified.

SpiceJet said the import permission is not a serious concern.

“At the moment, the thing is stuck with RBI. It is not something under our control,” chief executive officer Neil Mills said. “If I don’t have money, how can I pay for it (aircraft)?”

Mills said the 24 August launch date was tentative and will be reviewed this week.

SpiceJet plans to use Q400s with 80 seats each to connect South Indian towns and cities. The first flight of its regional operations will be to the temple town of Tirupati from the airline’s regional hub Hyderabad. Other likely routes include Hyderabad-Goa, Hyderabad-Madurai, Hyderabad-Bangalore, Bangalore-Visakhapatnam, Tirupati-Visakhapatnam, Hyderabad-Mangalore, Hyderabad-Bhopal, Indore-Bhopal, Hyderabad-Nagpur, Hyderabad-Aurangabad, Hyderabad-Cochin, Cochin-Trivandrum, Trivandrum-Chennai and Hyderabad-Pune, said an official familiar with the matter, asking not to be identified.

Just five Q400s will service all these routes to start with, the official said.

While an Airbus A320 or Boeing B737 can do six-seven flights a day, the Q400 can average eight flights over shorter distances. With 15 Q400s joining its fleet by July, the budget carrier can add 120 daily flights for short-haul operations.

SpiceJet currently has a 14% market share and flies 30 Boeing 737 aircraft, of which at least two have been grounded for maintainance in the past few days due to separate incidents.

Mills said one of these will be back in service in a few days.

He also said the airline will have two more hubs in the South and one in the West. The northern region, he added, is not a priority in the short term.

The launch of regional operations will make SpiceJet a rival of full-service carriers Kingfisher Airlines Ltd, Jet Airways (India) Ltd and Air India Ltd, which have so far controlled the profitable small-town routes with 27, 20 and 11 short-haul aircraft in their fleet, respectively.

These three airlines fly either turboprop ATRs or Bombardier CRJs on these routes. The government charges a lesser tax of 4% on fuel for aircraft with less than 80 seats, compared with up to 30% for aircraft such as the Airbus A320 and Boeing B737. It also waives landing and parking charges at airports for the smaller aircraft.

Increasing competition will lower the fares for passengers, said Keyur Joshi, chief operating officer of the travel firm MakeMyTrip India Pvt. Ltd.

“We have lopsided capacity where connectivity in smaller cities is extremely poor—Ludhiana, Surat, Ranchi, Madurai, Mysore, etc.,” he said. “We need fares from India and not necessarily point to point. With connectivity and good hub and spoke operation (and pricing) the market will grow to tier-2 and tier-3 cities significantly.”

A few years ago, Alliance Air used to operate two-three flights a week to Dehradun, Joshi added. “Kingfisher introduced a double daily and it was one of highest yielding routes for them.. Now there are many flights and all are doing well. Same with Amritsar.”

SpiceJet’s stock has fallen nearly 64% from Rs.81.90 a share in January to Rs.29.55 on Tuesday. The Bombay Stock Exchange’s benchmark index Sensex lost nearly 12% to 18,109.89 from 20561.05 points in the same period.

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