Indian Institute of Management Bangalore

CASE
SpiceJet: Becoming the McDonald’s of Indian Aviation

This case has been written by Indranil Chatterjee and Sumit Sharan (PGP2 students 2007-09
batch IIM Bangalore) with Rishikesha T. Krishnan, Professor of Corporate Strategy, IIM
Bangalore. It is based primarily on public information, except for an interview with a member of
SpiceJet’s senior management. This case is not intended to be an illustration of effective
management and is intended for class discussion purposes.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 2

SpiceJet: Becoming the McDonald’s of Indian Aviation1

"There is nothing low cost about low cost carriers. The cost remains the same. The
difference is that they are offering lower fares now. But is this business model
sustainable two years down the lane?" i

– Vijay Mallya, Chairman, Kingfisher Airlines,

at India Travel Congress, September 2006

In May 2008, a sudden spike in fuel prices threatened the fortunes of India’s fledgling low-cost
airlines. Till then, the “Low Cost Carrier” (LCC) model pioneered in India by Air Deccan in 2003,
and emulated by SpiceJet, IndiGo and GoAir had been very successful in market terms. Their low
fares had ignited demand, leading to a compounded growth rate of more than 25% in an
industry that had historically grown at the rate of India’s GDP. In the process, LCCs had captured
almost half of the market.

As the most cost-effective of the LCCs, SpiceJet expected to be relatively less impacted by the
increase in fuel prices. But analysts and Spice Jet’s management were concerned that this
development would necessitate higher fares with a resulting decline in demand, further
exacerbating the problem of over-capacity in the Indian airline industry. This would delay the
airline’s move towards profitability. What if there were to be some truth in the words of Vijay
Mallya, Chairman of Full Service rival Kingfisher (who had, ironically, bought Air Deccan some
months earlier)?

The Global Low Cost Revolution

LCCs do not offer many of the frills offered by traditional airlines – such as free meals, interlining
and other various amenities - and pass on these savings to the customer in the form of reduced
prices.

Southwest: the Pioneer of the LCC Model

The LCC model was born in the US market in the early 1970’s. While few of those early airlines
survived, Southwest is a notable exception. It was founded in 1971 as a small Texas airline.
Today it is one of the biggest airlines in the US with over 500 aircrafts. It is also unique in the US
airline industry as it is the only company consistently making profits over the years, even during
cyclical downturns.

1
This case has been written by Indranil Chatterjee and Sumit Sharan (PGP2 students 2007-09 batch IIM
Bangalore) with Rishikesha T. Krishnan, Professor of Corporate Strategy, IIM Bangalore. It is based
primarily on public information, except for an interview with a member of SpiceJet’s senior management.
This case is not intended to be an illustration of effective management and is intended for class discussion
purposes.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 3

Southwest focused on a strategy of operating on short haul sectors, offering low & unrestricted
fares (See Exhibit 1 for a snapshot from their website), high point to point frequencies and
punctual departures. It does not offer traditional frills such as meals, pre-assigned seats &
connecting flights. But it has developed its brand image as an airline where “flying is fun”. The
airline takes special care that its staff is highly motivated and trained in serving its customers.

Since its inception, it was successful in attracting leisure as well as business passengers to fly
rather than cover short distances by road. Its low fare stimulated demand much faste r than the
increase in capacity & so the utilization was always high. Traditionally, it picked markets where
no one else was operating or which were underserved and/or over-priced. Its goal was to
become a dominant player in any route it operated by offering high frequencies & low fares. Its
market share on its top 100 routes was 65 percent – while the next highest on those same
routes was American with only 7 per centii. The US department of Transportation coined the
term “Southwest Effect” in 1993 iii,iv,v to describe the phenomenon of huge increases in
passenger traffic between a pair of airports following Southwest’s entry on that route.

Southwest adopted a policy of careful & slow expansion – it took twelve years to grow its fleet
to fifty aircraftvi. New capacity was used to add frequencies to existing routes and only a small
handful of new routes were added each year.

Southwest’s single most important achievement was to operate at cost levels 28-50 percent
below its major operators (See Exhibit 2 for cost comparisons)vii. The essential ingredients of this
were usage of less congested airports which improved the turnaround time as well as reduced
the airport fees, a uniform fleet of Boeing 737 aircraft which reduced the maintenance & crew
costs, a larger number of seats per aircraft, point-to-point fares with no interlining, high aircraft
utilization, reduction of distribution cost by introduction of online booking, and using a
minimum number of highly productive crew members on board the aircraft.

Southwest’s successful business model was well known in the airline industry. Several
newcomers tried to emulate the success of Southwest in the US market, but few survived for
more than a few years. Even the larger established airlines such as Delta and United tried to
protect their turf by creating “low cost’ subsidiaries, but they were unable to match Southwest’s
performance.

Intrigued by this, several researchers tried to determine the secret of Southwest’s success.
While Southwest was well known for its maverick culture that promoted fun for both employees
and passengers, one prominent studyviii suggested that Southwest’s uniqueness arose from its
ability to build a “relational competence.” As a result of employees possessing this relational
competence, employees go beyond their respective narrow areas of responsibility to act in the
best interest of the organization. Southwest was known to place the ability to work in teams
with others higher than specific airline industry related skills in the hiring process. It was
 SpiceJet: Becoming the McDonald’s of Indian Aviation 4

believed that existing airlines would find it difficult to replicate this competence because of their
historically adversarial relationship with their unions.

JetBlue Airways

In the United States, only JetBlue, started in 1999 by ex-Southwest employee David Neeleman
was able to match Southwest’s success in the LCC model. Neeleman had worked in the top
management of Southwest & other airline companies before he started JetBlue. Neeleman and
his team thought they could not only emulate the Southwest model but do something even
betterix.

Neeleman ensured that JetBlue was well capitalized so that they had staying power. They chose
their routes carefully based on Neeleman’s belief that “You need to go where people want to
fly.” By providing services to under-served towns in the vicinity of New York City, Neeleman
managed to get some concessions that allowed the new airline flexibility in operating from New
York’s JFK airport.

JetBlue’s focus was on improving the passenger experience and reducing costs through the use
of technology. They invested in new planes, leather seats, more legroom & an in-flight
entertainment system offering live television.

JetBlue hired people who were in sync with company values. In order to be more attractive to
potential employees, the airline offered flexible compensation plans that suited people at
different stages of their careers and lives.

A couple of airlines in Europe – Ryanair and easyJet - were also able to emulate the Southwest
model. The low cost revolution there happened much later than in the US. Ryanair, established
in 1985 was the first notable low fare airline, but initially its costs were not low enough to
sustain its low fares. After significant accumulated financial losses (& a visit to Southwest
Airlines) in 1991, its management sharpened focus on the LCC model and by 1997-98 it made a
profit of 51%.

LCCs in Europe

In January 1993, international air services within the European Union were deregulated to a
large extent. The success of Ryanair & the presence of several high density high fare routes
pushed several new entrants to adopt the Southwest model. But, as in the US, the mortality rate
was high. By 2000, Ryanair & easyJet had established themselves as the major players in the low
cost domain.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 5

In Europe too, the low fares offered by the low cost carriers had a major impact on traffic, even
on well-established & relatively mature markets vi. For example, traffic on London to Nice route
during the mid- 1990s was static at around 0.55 million passengers per annum. In 1997, easyJet
started operating in this route. By 2000 passenger numbers doubled to almost 1.1 million.
Network carriers (like British Airways, Air France) had begun to react by lowering their tariff –
but still the fare offered by the LCCs bettered that. (See Exhibit 3 for impact of LCCs on the price
of a route and Exhibit 4 for cost advantage comparison of low cost carriers).

History of the Indian Airline Industry

At the time of independence in 1947 there were several regional airlines operating in the
countryx. In 1953, Indian Government created two state owned airlines – Air India & Indian
Airlines and the existing carriers were folded into these two organizations. Air India & Indian
Airlines maintained their monopoly status till 1992. On the one hand, successive Indian
governments saw air travel as a luxury and therefore made no significant effort to accelerate the
growth of the airline industry. On the other hand, Air India and Indian Airlines got bogged down
by factors such as political & bureaucratic interference. As a result the airline industry grew
slowly in tandem with the slow growth of the Indian economy.

As a corollary to the New Economic Policy of 1991, the Indian airline industry was deregulated in
1993 and several private players such as Damania, EastWest, Jet, Sahara, Modiluft and NEPC
entered the market. These airlines positioned themselves differently. For example, Jet targeted
the business sector with punctuality and quality of service whereas Sahara provided connectivity
to new destinations at relatively cheaper prices. But high fuel cost, management inefficiency,
and infrastructure problems soon caused a shake out. By the late 1990s Damania, EastWest,
NEPC, and Modiluft were no longer in operation.

After a temporary lull in activity in the airline industry, the healthy economic growth of India
following economic liberalization again prepared the ground for the entry of new players. Most
of these new entrants chose low fares as their selling propositions.

The LCC Model in India

Air Deccan, led by Capt. Gopinath was the first player to emulate the LCC model. It started its
operation in August 2003. It offered single class point-to-point service, offered no meals and
sold all its tickets through the internet. It created a new network of intermediaries (oil
companies, post offices) to sell their tickets. It introduced several new concepts which were
unprecedented in the then Indian marketxi. For connecting to smaller towns & short distances
they used smaller ATR aircrafts. Their distribution model was different – they eliminated the
standard process of sale of tickets through travel agents & thereby the lengthy and costly
account reconciliation system. It made sure that all payments were made before the tickets
were issued. People without credit card could also book the tickets over phone & deposit the
 SpiceJet: Becoming the McDonald’s of Indian Aviation 6

money in their collection centre within 24 hours. Instead of depending on a global reservation
system, they used much inexpensive software developed by an Indian companyxii. It started
using vernacular languages in their communication. It outsourced activities like ground handling
in smaller cities. The entry of Air Deccan created a sort of revolution in the Indian sky. Air travel
became affordable to the “common man” for the first time & demand increased at an
unprecedented rate.

Some industry pundits believed that the low cost model adapted by Air Deccan was not
sustainable in the long run as airlines in India did not have control over a major portion of their
costs (e.g. fuel, airport usage, and navigation fees). Supply of aviation turbine fuel (ATF) to
airlines was controlled by three public sector oil companies who saw ATF as a cash cow outside
the politically sensitive arena of petrol and diesel. Airports were largely controlled by the
Airports Authority of India, a government body that charged relatively high rates but was slow
to create supportive infrastructure. Though the government was moving towards privatization
of airports and new greenfield airports were being created under private ownership,
government regulations that forbade the operation of airports closer than 150 km from each
other ruled out competition between airports. Airlines were further hampered by route
dispersal guidelines that required them to service non-metro and low demand destinations.

The entry of Air Deccan did impact the established players. Indian Airlines, Jet & Sahara could
not ignore Air Deccan for long & they were forced to offer discounted fares.

Captain Gopinath had a vision that every Indian should be able to fly –

“What happens to the urban man with rural roots who wants to visit his native small town?
What happens to the working woman who wants to visit her family which lives far away from a
metro?”
- Captain Gopinath, quoted from an interview with the BBC in August, 2004 xiii

With this vision, Air Deccan expanded rapidly – by mid-2007 it had 40 aircraft (a mix of
turboprop ATRs and Airbus A-320 jets), served more than 50 destinations, and had a market
share of about 19%. However, the airline was plagued by several operational inefficiencies
resulting in delays, baggage loss & customer dissatisfaction. It was never profitable, and faced
cash flow problems. It was acquired by Kingfisher Airlines in June 2007.

The growth of Air Deccan induced several other players to enter the market – SpiceJet, IndiGo,
GoAir, Kingfisher and Paramount. While the first three followed the LCC model, the latter two
positioned themselves as full service carriers (FSCs) targeting business customers.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 7

The Entry of SpiceJet

SpiceJet airlines started its operations in May 2005. In legal terms, it is a reincarnation of
Modiluft airlines originally promoted by the SK Modi Group. SpiceJet was promoted by Ajay
Singh, Sanjay Malhotra & Kansagra family (Royal Holdings Services Ltd).

Ajay Singhxiv is a technology graduate from Indian Institute of Technology - Delhi who studied
law from the University of Delhi and did his MBA from Cornell University, He wound up with a
career spanning companies such as SpaceAge Internet (where he was CEO) and Cranes Software
International (which he advised on strategic issues). He believes that “Life is all about learning
new things, new businesses" and being director of a low cost airline was his latest business.

Sanjay Malhotra’s business interests include oil and gas, refining, hotels, investments in real
estate. Resident in Europe, he specializes in corporate strategy. He is an advisor to a number of
owner-driven corporates in India.

The Kansagras family is a non-resident group with diverse business interests. They hold roughly
40% of the airline through a holding company.

SpiceJet’s Strategy

SpiceJet had the chance to see the operation of an LCC in India before they jumped into the fray.
"Air Deccan's done a good job of bringing the concept of budget airlines to India, but we feel we
can still improve on quality and customer service," said Mark Winders, Chief Executive Officer of
SpiceJetxv (See Exhibit 5).

SpiceJet’s mission is to “become India’s preferred low-cost airline, delivering the lowest air fares
with the highest consumer value, to price sensitive consumers. We hope to fulfill everyone’s
dream of flying!”

SpiceJet was modeled after successful LCCs. "We selected successful low cost models like
Ryanair and easyJet. SpiceJet is the result of the right team, the right brand and the right
execution,"xvi – said Ajay Singh. The positioning was chosen carefully - "SpiceJet will be the
McDonald's of aviation. That's how we want to position SpiceJet, as a great flying experience
available at cheaper prices." Reflecting this approach, SpiceJet started its service with a
promotional fare of Rs. 99 for the first 99 days, with 9000 seats available at this rate. This deal
was followed up with a Rs. 999 promotional scheme on select routes ( Exhibit 6).

In the Indian market SpiceJet faced stiff competition from other LCCs. SpiceJet made several
choices that directly or indirectly help it to achieve low costs. (See Exhibit 7, 8 for cost
comparisons).
 SpiceJet: Becoming the McDonald’s of Indian Aviation 8

According to SpiceJet’s management, they have carefully chosen routes where there is a
possibility of getting better load factor – this in turn reduces the operating cost per customer.
In flight route & time selection, careful market sensing has helped it choosing some profitable
route which gives an edge over competition.

SpiceJet chose to operate most of its flights on profitable metro routes to optimize its load and
yield (average revenue per passenger). 56% of these flights originated from Delhi, Mumbai,
Hyderabad and Bangalore. During FY07, Delhi and Mumbai accounted for around 40% of the
total domestic air traffic in the countryxvii.

By May 2008, SpiceJet’s network covered 17 destinations with 18 aircraft. SpiceJet’s market
share was about 10%, quite similar to that of IndiGo which had a network of a similar size and
complexity.

They chose a uniform fleet of Boeing 737 (primarily the B737-800 and a few B737-900) to make
the maintenance & use of crew cost effective. The B737-800 aircraft was customized to have
189 seats (compared to 180 seats in A-320s of competitive airlines). The average stage length of
SpiceJet was comparable to Indigo but higher than other LCC airlines. See Exhibit 9 for some
more comparative operating data.

Like other LCCs, SpiceJet used a single-class seating configuration. The single class aircraft fleet
allows low cost structure and allows greater efficiency and better maintenance.

The on-time performance of SpiceJet was amongst the best in India. It was 4% better than its
nearest competitor and 10-11% better than other full fare airlines. See Exhibit 10 for
comparative data of SpiceJet with other Indian carriers as well as International carriers. As per
SpiceJet website, their cancellation rate is among the lowest in the Indian airline industry.xviii
The maintenance support for SpiceJet Airways is provided by KLM and backed by international
companies like Star Navigation, Tech logs and Russell Adams which ensures that the complete
operation is safe, seamless, regular and comparable to the highest international standardsxix.

SpiceJet’s operation is supported by a robust IT backbone. SpiceJet uses data from reservation
system to focus offers on promotions on passengers with specific characteristics – having flown
particular sectors, flights, etc. They have also been able to achieve technological superiority
using a LCC-oriented booking engine (Navitaire) which allows quick feedback and analysis
(Navitaire is used by both SpiceJet and IndiGo). According to SpiceJet management, this is in
contrast to big reservation systems used by FSCs which can take weeks to generate reports. The
Global Distribution Systems used by the Full Service Carriers cost 3-4$/booking more than the
web-based booking system used by SpiceJet.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 9

Customer facing staffs have been given more the flexibility to take on the spot decisions (e.g.
excess baggage waivers). SpiceJet management believed this helped in enhancing the
customers’ perception of service, and hence customer loyalty.

According to SpiceJet management sources, a small compact decision making team at

headquarters helped them capture quite some cost cutting or revenue earning opportunities.
For example, they have leased aircraft for Haj pilgrimage, and to European carriers to manage
capacity utilization. This is particularly useful for lean months for domestic travel (July-Oct)
SpiceJet won awards for “Best Low Cost Airline for 2007” by Travel Agents Federation of India
and “Best Low Cost Airline” by a reader’s survey conducted nationally by India’s leading travel
magazine Outlook Traveler in February 2008.

SpiceJet also sought ancillary revenues from a web-based hotel reservation service (which they
discontinued later), and through in-flight contests and space selling on its boarding passes,
baggage tags and seat covers. It also sold travel insurance at the time of ticket booking.

See Exhibit 11 & 12 for SpiceJet Balance Sheet and Profit/ Loss statement respectively. Exhibit
13 shows SpiceJet stock performance against the market in 2008. Exhibit 14 shows some
comparable operating statistics of some competitors.

The Future of SpiceJet

The phenomenal increase in global oil prices in 2008 threatened the future of the Indian aviation
sector. In June 2008, SpiceJet declared that it would not achieve break-even in 2009 as expected
earlierxx. During the middle of 2008, there were reports of a possible merger with different
airlines, as the SpiceJet pursued funds for continuing operations. However finally it did not go
for the merger route & instead it secured US$ 100 million fund from WL Ross and Goldman
Sachsxxi. The fund gave the company the required oxygen for staying in the business at a tough
time due to rising oil prices. SpiceJet intended to use the funds for servicing its debt as well as
for working capital.

SpiceJet faced a strong competitive environment with rivals including IndiGo (which, like
SpiceJet, followed a “pure” LCC model, and was reputed to have an edge on certain factors such
as customer handling and cleanliness) and Deccan (now a part of the Kingfisher group). FSCs
were also offering some part of their capacity at low prices comparable to those of the LCCs.
Over-capacity and declining demand were expected to make competition worse than before.
Amidst this scenario, SpiceJet’s management wondered what they should do to survive and
prosper in the Indian airline industry.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 10

Exhibits

Exhibit 1: Snapshot from Southwest website (August 06, 2008)

Exhibit 2: Comparison of Boeing 737-300 operating cost, United States carriers, 2003

1 2 3 4 5
Costs* per Cost index** Average Daily Seat per
seat mile sector (miles) utilization aircraft
(US cents) (hours)

Delta 8.97 100 565 6.39 127

US Airways 7.94 89 458 8.40 126
Continental 6.79 76 802 7.66 124
United 6.19 69 626 7.94 125

America West 5.35 60 716 8.78 132

Southwest 4.47 50 501 14.34 127
Source: R. Doganis, The Airline Business, Routledge, 2005, p-154

Notes

* Direct operating costs only, i.e. fuel & labor cost of flying, all maintenance costs, aircraft
depreciation and rental s

** Delta Airlines = 100

 SpiceJet: Becoming the McDonald’s of Indian Aviation 11

Exhibit 3: Impact of low cost carriers on London – Toulouse return fares (US$)

Airline Route/ special 1 2 3 4

conditions Out Mon 15, Out Mon 14, Out Tue 2, Out Mon 4,
Back Wed Back Wed Back Thu 4, Back Wed 6,
17, 16, Dec 2003 April 2005
April 2002 April 2003
Ryanair Stansted – 187 180 109 112
Carcassonne
British Gatwick – 910 273 183 193
Airways Toulouse
Air France* Heathrow – 910 606 185 Discontinued
Toulouse
British If staying 246 198 239 211
Airways Saturday night
Air France* If staying 234 193 185 Discontinued
Saturday night
easyJet Gatwick – 91
Toulouse
Source: R. Doganis The Airline Business Routledge, 2005, p-166

Note

* Operated by franchisee British European but in summer 2004 Air France stopped serving
this route and easyJet launched Gatwick -Toulouse services; all return fares included
airport charges
 SpiceJet: Becoming the McDonald’s of Indian Aviation 12

Exhibit 4: Cost advantage of low cost carriers on short haul routes – a cascade study showing
cumulative cost advantage

Cost reduction % Cost per seat

Conventional scheduled carriers 100
Low Cost Carriers
Operating advantages:
Higher seating density -16 84
Higher aircraft utilization -2 82
Lower flight & cabin crew costs -3 79
Use cheaper secondary airports -4 75
Outsourcing maintenance/ single aircraft type -2 73

Product/ service features:

Minimal station cost & outsourced handling -7 66
No free in-flight catering, fewer passenger services -5 61

Differences in distributi on:

No agents* or GDS commissions -6 55
Reduced sales/ reservation costs -3 52

Other advantages:
Smaller administration & fewer staff/ offices -3 49

Low cost compared to network carrier 49

Source: R. Doganis, The Airline Business, Routledge, 2005, p-171

(The reductions in the cost of LCC is calculated using financial & cost data published by the UK
Civil Aviation Authority)

Note
* Assumes 100 per cent direct sales and none through agents
 SpiceJet: Becoming the McDonald’s of Indian Aviation 13

Exhibit 5: News archive item on the launch of SpiceJet

ROYAL AIRWAYS LIMITED – Ready for take off with SpiceJet New Delhi, 7 February 2005;
Royal Airways Limited today announced the launch of its new low-fares, no-frills, brand –
SpiceJet. With a young, modern fleet SpiceJet will be backed by cutting edge technology and
managed by a professional team with significant experience in operating low cost airlines. The
SpiceJet name and its imagery have been chosen to reflect the aspirations of today’s fast paced
and tech savvy travelers; vibrant and energetic imbibing Indian Ethos and flavour. Early this
summer SpiceJet promises to bring to consumers in India all the benefits of the global revolution
in the skies. Technological breakthroughs and innovative management which have significantly
reduced air travel costs all over the world will now be available to travelers in India. Soon the
growing Indian middle class can look forward to not just low airfares but also to world-class
standards in safety, efficiency and customer care. Mr. Mark Winders, CEO, stressed on the
airlines plan to use the latest in established and proven airline systems and a modern fleet.
“Using the latest technology is the only way you can ensure we can provide attractive pricing
without compromising on quality”. “Driving a low cost structure, boosting productivity and
delivering value will be our focus”, he added. Mr. Jason Bitter, COO, emphasized on developing a
high level of human skills and modern training methods. “Our culture will encourage cost saving,
teamwork and friendly service”. He also went on to say that the management process and
information technology would ensure the highest standards in operating efficiency and flight
safety. Royal Airways is the only listed Airline Company in India and is now ready to induct a
modern fleet to launch its operations in India.

About Royal Airways Royal Airways is the reincarnation of Modiluft, which was among the first
private companies that stepped into the Indian aviation sector. It was the market leader until
1996, when it ceased its operations.
Source: SpiceJet website – news archive
 SpiceJet: Becoming the McDonald’s of Indian Aviation 14

Exhibit 6: News archive item on the launch of SpiceJet

SpiceJet books 37,000 seats on day 1. “A New Asian Record”

SpiceJet opened its reservation system today and received an overwhelming market response.
SpiceJet sold 37,348 tickets by end of day yesterday. This is the largest number of tickets sold by
any airline in Asia on the first day of booking. SpiceJet introduced “Red Hot Special Fares”
ranging from Rs.99 to Rs.799, as well as regular fares ranging from Rs. 699 to Rs. 6999. SpiceJet’s
website www.spicejet.com received in excess of 5.4 million hits in the last 30 hours. “I am
astounded by the level of bookings yesterday. We took our first sale at 06:40 a.m. Tickets were
sold not only in the “Red Hot Special Fares” category but also in the regular fares category. I find
this amazing as we had no promotional efforts other than our press conference in the early
afternoon announcing the airlines start up plans. Our systems and staff were overwhelmed with
the volume of activity but they coped exceptionally well.” “The response that we have received
shows that there is a huge untapped travel market for air travel in India” adds Winders. The
proud CEO concluded by saying “We are confident that our business plan offering everyday
great value and our focus on product delivery and quality guest service will be a winner and
revolutionize Indian Air travel”
Source: SpiceJet website – news archive

Exhibit 7: SpiceJet Cost Comparisons

Source: ICICIdirect.com report on SpiceJet, November 2007

Exhibit 8: Global peer cost comparisons

Source: ICICIdirect.com report on SpiceJet, November 2007

 SpiceJet: Becoming the McDonald’s of Indian Aviation 15

Exhibit 9: Comparative Operating Data

Parameter SpiceJet Low Cost Competitor

Airline
Fleet B737-800 (15) A-320 (and ATR)
B737-900 (3)
Seating capacity 189 180
212

Average stage length 1025 Km 920 - 1000 Km*

Average fare (blended

fare – from Cleartrip
– taxes and
Surcharges etc. 1725 1618
This is Only Base
Fares and does not
include charges that
accrue to the airline

Source: SpiceJet sources, July 2008

*Industry estimate
 SpiceJet: Becoming the McDonald’s of Indian Aviation 16

Exhibit 10: Comparative data - On-time performance

SpiceJet Indigo

Kingfisher Jet Airways

Southwest Jet Blue

On time <15 minutes late

Late: 15-30 minutes late
Very late 30-45 minutes late
Excessive >45 minutes late

Source: www.flightstats.com, Accessed on January19, 2009

 SpiceJet: Becoming the McDonald’s of Indian Aviation 17

Exhibit 11: SpiceJet Balance Sheet

SOURCES OF FUNDS As at March 31, As at March 31,

2006 2007
Shareholder’s Funds
Share Capital 1843.39 2406.51
Reserves & Surplus 1060.90 3178.71
2904.29 5585.22
Loan Funds
Secured Loans 3596.40 3571.82
Unsecured Loans 610.85 749.70
7111.54 9906.74
APPLICATION OF FUNDS
Fixed Assets
Gross Block 588.83 621.12
Less: Depreciation 98.40 137.34
Net Block 490.43 483.78
Capital Work in progress 3628.92 6943.51
Investments 0.00 812.22
Current Assets, Loans & Advances
Inventories 33.98 79.40
Sundry Debtors 37.21 55.61
Cash & Bank Balances 634.32 3510.46
Loans and Advances 798.76 1153.79
1504.27 4799.26
Less: Current Liabilities & Provisions
Current Liabilities 1495.96 6456.22
Provisions 141.92 415.25
1637.88 6871.47
Net Current Assets (133.61) (2072.21)
Miscellaneous Expenditure
Deferred Revenue Expenditure 93.78
Profit & Loss Account 3032.02 3739.44
7111.54 9906.74
Source: SpiceJet Annual Report 2006-07
 SpiceJet: Becoming the McDonald’s of Indian Aviation 18

Exhibit 12: SpiceJet Profit & Loss statement

For the 10 month For the 12 month

Period Ended March Period Ended May
31, 2007 (Rs. Million) 31, 2006 (Rs. Million)
INCOME
Operating Revenue 6,404.44 4,196.45
Other Income 1,078.35 323.34
7,482.79 4,519.80
EXPENDITURE
Operating Expenses 6,441.10 3,783.73
Employees Remuneration and Benefits 855.00 479.73
Selling Expenses 279.56 231.74
Administrative Expenses 469.84 361.14
Finance Charges 42.65 41.64
Depreciation and Amortisation 58.47 81.58
8,146.61 4,979.56
LOSS BEFORE TAX AND PRIOR PERIOD ITEMS 663.82 459.76
Tax Expense - Fringe Benefits Tax 9.94 13.12
LOSS AFTER TAX 673.76 472.88
Prior Period Adjustments 33.67 (58.68)
NET LOSS FOR THE PERIOD 707.43 414.20
Add : Loss Brought Forward 3,032.02 2,617.81
BALANCE CARRIED TO THE BALANCE SHEET 3,739.44 3,032.02
Loss per Share
Basic 3.72 2.42
Diluted 3.72 2.42

Source: SpiceJet Annual Report 2006-07

 SpiceJet: Becoming the McDonald’s of Indian Aviation 19

Exhibit 13: Performance of SpiceJet stock compared to Sensex in 2008xxii

The SpiceJet stock has underperformed the market, losing 65 per cent since the start of the year, while
the Sensex has lost around 26 per cent. It could be a while before crude prices come off to levels at which
airlines can afford to cut fares. Until that happens demand for plane seats is likely to remain depressed as
are the bottom lines of airlines.

While lower aviation turbine fuel prices will no doubt help bring down costs for airlines, carriers are
grappling with falling air traffic— June saw airlines in the country carry fewer passengers than they did in
June 2007. This is despite the fact that some airlines are now operating on fewer routes and capacity in
the industry has been scaled back by about 15 per cent.

The trend could continue till the start of the festive season, say industry watchers, though higher fares
might mean falling traffic even during the peak seasons this year. Airlines have been compelled to hike
fares-- ticket prices have risen by 10-15 per cent on average in the last quarter. That has caused
occupancy levels to decline---SpiceJet’s load factor dropped 700 basis point in the June quarter. Airlines
are therefore in a fix; it’s unlikely people will fly more often unless they feel fares are affordable.
 SpiceJet: Becoming the McDonald’s of Indian Aviation 20

Exhibit 14: Comparative operating data of Jet Airways,

Air Deccan, Indigo and SpiceJet (2006 – 07)

Operating Traffic Statistics and Other Performance Indicators – 2006-07

Sl. Jet Airways Air Deccan Indigo SpiceJet
No.
1 Fleet Size (As on 31st 63 39 8 11
March)
2 No. of flights operated per 326 212 20 56
day
3 No. of passengers carried 29,423 18,220 2,501 7,119
per day
4 Market Share in Sch. 39.1% 18.58% 2.6% 7.3%
Passenger Traffic
Domestic 27.7%
International 3.5%
5 Growth Rate in Sch. 12.5% 118.7% - 134.5%
Passenger Traffic
6 Average Pax. Load Factor 69.9% 78.8% 70.1% 76.6%
7 Cargo carried per day 385 0 1 0
(Tonnes)
8 Market Share in Sch. 39.0% 0.0 0.1 0.0
Cargo Traffic
9 Growth Rate in Sch. Cargo 21.3% - - -
Traffic
10 Average Weight Load 64.2% 76.9% 63.0% 72.4%
Factor
11 Total Number of 11,088 3,053 1,085 1,665
Employees (as on 31st
March)

No. of Pilots 829 348 82 109

No. of Technical 1,910 877 139 207

Employees

Other Cabin Crew 2,779 531 168 425

12 No. of Employees per 176 78 136 151

aircraft
13 Operating Revenue per 6.37 7.02 2.0 4.55
 SpiceJet: Becoming the McDonald’s of Indian Aviation 21

Employee (Rs. Million)

14 Operating Expenses per 6.41 8.18 3.6 5.55
Employee (Rs. Million)
15 Operating Revenue per 6,571.9 3,221.4 2,369.0 2,915
Passenger carried (Rs.)
16 Operating Expenses per 6,620.3 3,753.3 4,276.4 3,556
Passenger carried (Rs.)
17 Operating Revenue per 5.7 3.8 2.4 2.80
RPKM (Rs.)
18 Operating Expenses per 5.8 4.4 4.3 3.41
RPKM (Rs.)
19 Operating Profit (Loss) -520.2 -3537.7 - 1741.3 -1666.6
Results (Rs. Million)
20 Non Operating Profit 1033.8 -624.0 - 270.8 1008.2
(Loss) (Rs. Million)
21 Net Profit (Loss) After Tax 416.3 -4195.7 - 2017.9 -670.6
(Rs. Million)
22 Net Profit (Loss) after 279.4 -4195.7 - 2017.9 -721.5
extra ordinary items (Rs.
Million)
Note: The Growth rates in the case of scheduled passenger traffic as well as in the case of
scheduled cargo traffic (as shown here) have been worked out on the basis of Aggregate traffic
carried during the year 2006-07 and not from the per day traffic.

Note: Indigo Airline started operation from August, 2006

Source: Website of Directorate General of Civil Aviation -
http://www.dgca.nic.in/reports/stat-ind.htm (last accessed on Jan 5, 2009)

End Notes
i
“Mallya questions sustainability of low-cost carrier biz models ”, The Hindu Business Line,
http://www.thehindubusinessline.com/2006/09/04/stories/2006090401990300.htm - last accessed on Jan 5,
2009
ii
Rigas Doganis, The Airline Business, Routledge, 2005, p -150 -156
iii
The Airline Deregulation Evolution Continues – The Southwest Effect – US Dept. of Transportation,
May 1993
iv
Southwest Airlines: An In-Depth Review - Chapter 8: The, "Southwest Effect" – Justin Ritter
v
The Southwest Effect - Wikipedia, http://en.wikipedia.org/wiki/The_Southwest_effect - last accessed on
Jan 5, 2009
vi
Rigas Doganis, The Airline Business, Routledge, 2005, p – 151
vii
Rigas Doganis, The Airline Business, Routledge, 2005, p – 153 - 154
viii
J.H. Gittel, The Southwest Airlines Way, McGraw Hill Professional, 2005
ix
Case: JetBlue Airways: Start ing from Scratch – Prof. J.H. Gittell, Prof. Charles O’Reilly – HBS Case No.
9-801-354
x
Case: The Indian Airlines Industry in 2008 by Prof. RT Krishnan, IIM Bangalore
 SpiceJet: Becoming the McDonald’s of Indian Aviation 22

xi
Emerging Landscape and New Value Propositions in the Civil Aviation Sector – In conversation with
Captain G R Gopinath – Prof. Murali Patibandla, IIMB Management Review, March 2005
xii
Case: Air Deccan: Revolutionising the Indian Skies – Dr. D.V.R. Sheshadri, Visiting Professor and Jane
Henry, Research Assistant, IIMB – South Asian Journal of Management, Vol. 12, No.4, Oct-Dec 2005, pp.
94-126
xiii
Case: Air Deccan: Revolutionising the India Skies - Prof. D.V.R. Seshadri, Visiting Professor and Jane
Henry, Research Assistant, IIMB – South Asian Journal of Management, Vol. 12, No.4, Oct-Dec 2005, pp.
94-126
xiv
“SpiceJet to be McDonald's of the sky”, P R Sanjai, Business Standard, December 2006,
http://www.indiaabroad.com/money/2006/dec/15spice.htm- last accessed on Jan 5, 2009
xv
“NRI, founder Royal Airways to target train travelers in India” – www.nriinternet.com, March 21, 2005.
The company was known as Royal Airways initially.
xvi
“SpiceJet to be McDonald's of the sky” - P R Sanjai, Business Standard
xvii
ICICIdirect.com report on SpiceJet, November 2007
xviii
“ SpiceJet Celebrates Three glorious Years of Flying”,
http://www.spicejet.com/newspage.asp?strNews=gloriousYearsofFlying, last accessed on January 19, 2009
xix
ICICIdirect.com report on SpiceJet, November 2007
xx
“SpiceJet Ltd. Provides Earnings Guidance for the Fiscal 2008” – SpiceJet web sources – 11th June, 2008
xxi
“SpiceJet to get $100 million from WL Ross, Goldman” – Economic Times website – 11th August, 2008
xxii
“SpiceJet: Crude realities”, Shobhana Subramanian & Varun Sharma , Business Standard,
http://www.business-standard.com/india/storypage.php?autono=333489