Sunday, August 03, 2014

SpiceJet waging interesting battle

So again SpiceJet has come back with super sale, that too for travel as early as next month. It made sense when such offer was launched initially. But now every other day there is a super sale offer that I am tempted to equate it with road-side sales which run throughout the year. The mode for them is simple - put the price tag to an exorbitant amount and then offer discount to tempt the buyer. Simply put, Airline fares are probably only 20% cheaper in these super sale. They appear much cheaper as fare is artificially inflated during non-sale period. During last one year, the aviation fuel has not got any costlier. Though it was costliest in Sep 2013 when it crossed the last peak of August 2008 for the first time, the price has remained subdued in last year on account of global price movement. As projected by Airlines, aviation fuel constitutes close to 50% of running costs, so there is no genuine reason for airlines to increase price by 30% during non-sale season of off-peak season.

I did mentioned earlier that such discounts do make sense at end of the year as it makes balance sheet healthy and gives access to easy cash. However discounts everyday and even for period till Oct next year smells bad. For Indigo which is probably only airline in black, it has been a catch-up game as it is a market leader and is planning to come-up with an IPO soon. It simply cannot afford to loose any market share to SpiceJet as it will have impact on its valuations. Though such strategy might not bode well if IPO is delayed as the revenues will take a hit with such discounted fares for immediate travel (of course for trips beyond 4-5 months, I can bet its a good strategy).

But what of SpiceJet which has reported losses in excess of Rs 1000 cr in last fiscal. It is in hard need of cash to run operations. To keep the flag high, it is selling tickets till October 2015, more than a year later. It is a fool's guess if someone will buy a ticket for next October, but whatever small percentage it manages to sell, it still brings in liquidity. It will be difficult for it to sustain operations with such discounted fares and I am afraid it is going Kingfisher way. Just scared with the thought if this airline gets grounded or taken over in near future.

SpiceJet must be hoping that with economy reviving, people will start flying again and that will help it tide over this crisis. But it is hoping against hope. Since the slowdown of 2008 that led to travel freeze in most companies, people have learnt to work though audio and video conferencing. With economy reviving, this trend is not going to reverse as now even any infrastructure is not needed for video conferencing. In addition to downturn in Business Travel, baggage allowance restrictions turned away the family traveler. Cheap tickets for foreign destinations and new domestic airlines is not helping either. Recent incidents with airlines made matters worse.

So what this means is that SpiceJet is overburdened with over capacity. When everyone is offering discount, it is probably to lure passenger from other segment, but it is surely not a planned strategy or work of cartel. With all airlines offering discounts in response confirms the fact that supply is more and it is more of action and reaction.  Hoping for an revival in flying habits of passengers might hit them below the belt. Such frequent discounts is only going to harm the sector as a whole and someone should put in serious thoughts that working like a frenzied strategist. Probably some of my EPGP mates can help these guys ;).

No comments:

Post a Comment