Business Turnaround and Organizational

Transformation (BTOT)
Group Assignment: The fall and rise of SpiceJet
An assignment submitted
In partial fulfillment of requirements of the course

Instructor: Prof. Sunil Maheshwari

Academic Associate: Mr. Luthufi
M

By
Abhinav Biyani
Akshat Anand
B Ramachandran
Puneet Gupta
Tusheer Chahal
Date: 22nd July 2016

Indian Institute of Management, Ahmedabad

The report illustrates a brief understanding of the history and context of the SpiceJet’s
turnaround. It highlights the growth and challenges in Indian Aviation industry, the competitive
landscape, the macroeconomic context, the reasons for SpiceJet’s decline and the strategies used
by the company and its aftermath leading up to the present situation.

Introduction
In the words of Mr. Tony Tyler, Director General and CEO, International Air Transport
Association (IATA) , Indian Aviation industry is exciting for the world. Be it manufacturers,
airlines, global businesses, tourism boards, individual travelers or businesspeople. A common
shared vision among the stakeholders can push industry's bright future.
The Indian civil aviation industry is amongst the top 10 in the world with a size of around USD
16 billion. India’s industry is on a high-growth trajectory. According to a recent KPMG report,
the current aviation industry is sized at 16 Billion US dollars, contributing to 0.5 % of GDP.
Currently, 150 million passengers are transported by air every day. By, 2020, this number is
forecasted to rise to 450 million passengers. Total passenger traffic has grown at 5.5 CAGR in
FY 14. Airport Authority of India estimates that passenger and aircraft movements at the entire
airport will grow at the rate of 5.3 and 4.2 percent respectively. India aims to become largest
aviation market by 2030. (IBEF report,2016)
The Civil Aviation industry has heralded in an era of expansion, stimulated by factors such as the
growth of low-cost carriers (LCCs), development of modern airports, investment in the form of
Foreign Direct Investment (FDI) in domestic airlines and growing emphasis on regional
connectivity (IBEF report, 2016). The FICCI-KPMG 'Indian Aviation 2014' report also points
out that development of air transportation services and socio-economic development are highly
correlated.
• Increasing presence of Low-cost carrier (LCC) model: The most important factor in the
Indian domestic market is the increasing dominance of the low-cost carrier model, which in
FY-2013 made for around 70 percent of the local capacity. LCCs has been the reason for the
rise in aviation through low fares, the creation of regional routes and periodic discounts. Full-
service carriers plan to shift more seats to their low-cost offerings in line with market trends.
The Indian carriers plan to double their fleet to around 800 aircraft by 2020.
• Increase in regional initiatives: The report notes that regional airports will trigger the next
generation of aviation growth in India. Some states, especially in the eastern part of the
 country, have started taking proactive steps to strengthen air connectivity. These initiatives
include reduced sales tax on Aviation Turbine Fuel (ATF), development of airports with zero
frills, promotion of aviation academies and supportive policies for airlines and tourism. West
Bengal deserves a special mention as it was the pioneer regarding a large state declaring 15
% sales tax on ATF used by additional flights started at its metro airport in Kolkata and zero
percent sales tax on ATF at its other airports. However, right now there are around 450
used/unused/abandoned ports and airstrips spread all over the country (KPMG report, 2014).
• Government initiatives: According to some government agencies around 500 airports would
be required by 2020. Public Private Partnership models are being promoted for the
construction of airports, with strong state government support in terms of concession and
financial aid. In the Union Budget of the year 2016-17, the government introduced various
programs for Maintenance, Repair and Overhaul (MRO) operations for airplanes including
customs and excise duty exemption for tools used in MRO works. (IBEF report, 2016)

Competitive Landscape
Indian aviation industry is concentrated with LCC players who can be classified into two broad
categories based on ownership. The Public players are Air India and Alliance Air- Air India
Regional- LLC while the Private players are Jet Airways, Kingfisher India, Indigo, Spice Jet and
Go Air. 2014 saw the entry of four new players- Jet-Etihad, Vistara, Air Pegasus and Tata Air.
The market shares of these players are provided in Figure 1 highlighting that Spicejet is
performing moderately with a fourth largest market share of 16%. According to a survey by
TripAdvisor, IndiGo and Jet come up as the most favorite airlines among consumers, a reflection
of their market share positions, Air India surprisingly emerges the third favorite though it fares
poorly in safety perception. IndiGo fares well on punctuality and value for money but cedes
ground to Jet on the appearance of cabin crew and overall experience. The details of the
TripAdvisor survey results are provided in Figure 2 on a scale of 1-100 with 1 being lowest. 50%
respondents who took the survey had flown by Spicejet in the past year while only 7% listed it at
their favorite airline. The business models of few of the players are provided in Figure 3
indicating that the strategies range across the spectrum- cost leadership to focused differentiation
("Check out the best & worst airlines in India", 2004).
IndiGo is the clear market leader in the LCC industry. With 534 daily flights to 37 destinations
including several international locations has used differentiation strategy over cost leadership for
business fliers who are willing to pay more. IndiGo does not provide complimentary meals in
any of its flights to keep fares low however additional benefits can be availed. ("A going
concern's growing concerns: A case study on Spicejet India", 2016).

PESTLE Analysis
The major macroeconomic factors influencing airline industry are global crude oil prices, the
extent of FDI in the sector, prices of other modes of transportation and the business cycles. The
industry is very susceptible to changes in the political environment as it has a substantial impact
on travel habits. Business cycles also affect the sector for instance, during recession air travel is
considered a luxury & therefore spending on air travel is pruned leading to price reduction. The
loss of income for airlines leads to higher operational costs not only due to low demand but also
due to higher insurance costs. This forces the industry to lay off employees, which further fuels
the recession as spending decreases due to the increase in unemployment. Additionally, since
India is a land of extremes there are people from various religions and castes and every
individual traveling by an airline would expect customization to the greatest possible extent. In
conclusion, all the 6 PESTLE factors significantly affect the industry.

Rivalry Analysis
• High Supplier bargaining power: Any airlines face a duopoly of two major providers of
aircrafts i.e. Airbus and Boeing. There are other providers like Dauphin, Dronier, Bell, ATR
42 but do not meet the requirements to serve the low-cost commercial aircraft carriers.
Thus,
suppliers are few and thus in a better position to bargain.
• High buyer bargaining power: Buyers in airlines industry are large in number and highly
fragmented thus lowering their power. With the growing Indian economy and increasing low-
cost carriers, the buyers have increased and so have growth opportunities.
• Intense rivalry: The aviation industry is a highly competitive industry reducing the scope of
returns for the players. With little room for differentiation in this mature market, the
competition is cut throat and requires a unique strategy.
• Low availability of substitutes: Railways do not cater to the convenience and service of the
airline travelers.
• Low threat of potential entrants: The high entry barriers regarding regulatory requirements,
high capital investment for setup, a narrow scope for differentiation & fluctuating fuel
prices make the threat medium.

Indigo Jet Airways Jet Lite SpiceJet

Air Costa Air India Go Air

9%
18% 35%

1%
16%
1% 19%

Figure 1: Market share of Indian aviation players

Factors\Name Indigo Jet Air Go Air Jet SpiceJet
Airway India Connec
s t
Value for money 44.4 13.2 6.8 2 1.1 6.3
Services- food and 47.2 47.2 32.2 1.1 2.2 6.9
entertainment
Cabin crew appearance 35.8 46.5 3.6 2.7 1.7 9.7
Cabin crew quality-Service 36.1 44.9 5.6 2.7 1.6 9.1

On Time performance 65.5 18.3 6.8 2 1.1 6.3

Landing & Take off quality 39.7 31.3 16.9 2.4 1.7 8

Time taken to deliver 41.2 34.7 9.2 2.7 2.5 7.5

baggage
Seat Comfort/ Leg room 18.2 38.6 34.1 1.9 1.6 5.6
Overall experiance 38.8 39.1 12.6 1.7 1.7 6.6
Figure 2: Comparison of performance of Indian Aviation players
 Figure 3: Comparison of business models of Spicejet, Kingfisher, Go Air and Air Deccan

SpiceJet Limited
SpiceJet aims to service the India's budget-minded travelers (Figure 4). By offering low-priced
flights to almost 20 cities throughout India using 20 Boeing 737s, which are suited to medium-
range flights the company makes within the country, it keeps the fares low. In addition to its
flights, the company offers corporate incentive programs and travel insurance. With the help of
SBI and GE Capital Services, it also provides a SpiceJet branded MasterCard. In 2004, Ajay
Singh invested in the airline, which led to the formation of SpiceJet that began flying in 2005.
The airline was formed in 2005 and plans to offer international flights. Media magnate Kalanithi
Maran owns about 40% of SpiceJet through his KAL Airways. On 7 March 2005, the AAI
approved three overnight parking slots to SpiceJet, with two in Delhi and one in Mumbai.
SpiceJet opened bookings on 18 May 2005. In 2008 it was India's second-largest low-cost carrier
in market share. SpiceJet in addition to low fares also offers priority check-in and extra legroom
seat, domestic travel insurance, bag out first, SpiceMax, student discounts, in-flight meals,
excess baggage allowance (Wikipedia, 2014).
Always on a lookout for stable investors like its competitors, SpiceJet’s hunt for an investor saw
global investor Wilbur Ross investing a decent amount. In 2010, Kalanithi Maran bought the
airline from Ross and his partner. A year later, Ajay Singh also left.
 Figure 4: Sample SpiceJet promotion scheme

Phases and analysis of SpiceJet’s decline

Critical success factors in this industry are strategic route planning, seating capacity, cost
leadership, ability to diversify, investment in technology and customer service. Airline
Economics are measured in terms of Air traffic, Airline demand, Available seat mile, Average
load factor, Average stage length, Average passenger trip length and Average number of seats
per flight departure.
In January 2014, SpiceJet revisited its strategies and made a fresh attempt at turnaround after a
year of dismal performance. Using a combination of frequent discounts and efficient services,
Spicejet was still suffering from escalating losses with 1003 crore in May of 2014. Let’s deep
dive into the decline timeline and the reasons for the market panic. (Figure 5 and 6)
Phase I: Illegal and reckless operations
June'13: Defer statutory
dues hoping to pay
fuding from outside
investor

May '14: 5 fold rise in loss at 1003 cr

July' 14: Rises to No. 2
in market with its
sales
strategy Aug' 14: Losses continue at
124 cr in quarter ending
June
Airline closes deal with TPG
capital and Indigo partner to
infuse funds
CBI charges
promoter Maran
with criminal
misconduct

Sep'14: TPG and Inidgo walk away

followed by sudden cash outflow
for deferred tax payments
Figure 5 : June’13 to Sep’14 performance
Phase II: Panic all over
Oct'14: Lessors panic
and force aircraft
return

Nov'14: Fifth quarterly loss and

starts cancelling flights
Dec 4: Pays 85% of
salaries
Dec 5: DGCA takes action for
cancelled flights
Dec 15: Tells DGCA it wants to
suspend operations; DGCA asks oil
companies to be lenient on SpiceJet
Dec 16: Flights
off after
take
Maran pays up
companies

Dec 31: Delays salaries again

Figure 6: Oct’14 to Dec’14 performance

The company has been consistently incurring losses from FY 2009 when it posted an
accumulated loss of Rs.1335.07 million. While 2011 saw profits, FY 2012 again witnessed
losses of 6,057.68 million and FY 2014 reports indicate losses of 10,032.44 million - up five
times from Rs. 191 cr. in the previous fiscal. SpiceJet posted a net loss of Rs. 310 cr. for Sep’ 15
quarter but also witnessed revenue growth of 15% as compared to last year's quarter. Towards
the end of November 2014, the airlines had AAI withdrawing credit terms because of Rs. 2
billion debt accumulation. The company has however denied this ("Forbes India Magazine -
SpiceJet's second take-off," 2016).
 Figure 7: Financial
performance of Spicejet Ltd. from 2011-15

Fuel prices and weakened currency (2013-14)

The depreciation of Indian Rupee along with rising fuel prices along with significant tax burden
continued to hurt the domestic aviation sector (Jet, Spice Jet drop after weak Q4 earnings, 2013).
40% of airlines’ operating cost are attributed to fuel costs (Poovanna, 2014). In July 2011, the
trouble for Kingfisher surfaced after oil company HPCL apparently cut off fuel supply over non-
payment of dues. Sufficient funds for two days had to be collected before supply was resumed
(Ethiraj, 2012). During the third week of December 2014, three years later, SpiceJet faced the
same music from its fuel suppliers ("A going concern's growing concerns: A case study on
Spicejet India", 2016). Directorate General of Civil Aviation (DGCA) issued warning over non-
payment of salaries and dues, while the operators put the carrier on cash-and-carry mode, which
meant the airline could use the facilities of an airport only upon immediate payment. However,
the Passenger traffic grew almost 14% in the quarter ended September 30 as compared to
previous year quarter. The control of the airline was transferred to in January 2015 by the board
of directors to Mr. Ajay Singh, the founder of SpiceJet who also used to run the airlines earlier.
Increasing competition and fare wars (2014-15): In this period, there was no difference
between full-service and low-cost flight prices. The airline was focused on improving top line
with an increase in traffic in conjunction with constant costs to achieve growth in bottom line
too. But the strategy was in vain. The LCCs had no choice but to reduce prices to avoid
bankruptcy. In this process of cutting fares, both FCCs and LCC bled and lost. The timing of the
price was inappropriate. Unfortunately, these schemes were unleashed during the high cost of
operations period. The CEO’s strategy of transitioning to cash in on a first-mover advantage by
flying to smaller cities also added to the mess. To achieve this, the fleet composition has to be
reconfigured from Boeings to Bombardiers which added to the operational costs. Both FCC and
LCCs lost over $500 million in the September-ended quarter. So in a month’s time, i.e., the end
of September, all of them increased their fares by 15 to 25%. The market share and cash flows
were temporarily strengthened due to frequent schemes and promotional fares. For instance,
SpiceJet managed to mop up over Rs 400 crore- 500 crore with the help of special Diwali
Dhamaka offers, early bird sale, and massive sales in which it sold all-inclusive tickets at Rs
1,800.

Reason 1: SpiceJet had a mixed fleet of Boeing 737s and Bombardier Q400. But they spread
out too thin in terms of network and finally their constant fire sales cost them dearly

Continuous operational losses and cash crunch (2014-15): SpiceJet has a fleet of 47 leased
aircraft and hence high lease rentals and lesser depreciation and amortization as compared to Jet
Airways’ 102 owned aircraft. One the most significant revenue metric, the load factor, was
consistently up in the SpiceJet from the year 2014. In Q2 FY2014-15 the airline recorded the
aviation industry’s highest ever domestic load factor in recent history, of 85.9%. At 20% growth
rate in loading but insufficient funds to balance this cost, the company found it hard to rely only
on advance sales and badly needed an infusion of funds ("A going concern's growing concerns:
A case study on Spicejet India", 2016).
 Figure 8: Aircraft cost analysis of Indian players

The history repeated itself with a frantic search for another investor or promoter.

Reason 2: A fight for survival and desperate hunt for investors is nothing new for crisis-
ridden SpiceJet.

Deferment of statutory dues and CBI charges: Deferment of statutory dues and CBI charges:
In July 2013, the airline's management began to defer service tax payments and source tax and
other statutory dues and started using the money available as working capital, hoping that
funding would soon be available. It was reckless and illegal. On August 29, the CBI pressed
charges of corruption and criminal misconduct against Maran, his brother, ICT Minister and
several others in the Aircel-Maxis case. Knowing this, the PE funds pulled out from the
uncertain and volatile Indian market. Sanjiv Kapoor, the SpiceJet CEO, refused to disclose the
particulars of the lost deal. He mentioned that the reasons for the pullout were dependent on
factors that weren't necessarily in SpiceJet's control. The decision to illegally defer the statutory
dues backfired and it was evident when the company was forced to pay nearly worth `380 cr. (15
months of payment ) between August and November (Prabhakar, 2016). The payment was
accelerated by diverting dues to other creditors such as aircraft lessors. SpiceJet soon started
returning planes to the impatient panicky creditors. Just between October and November, around
9 planes were returned. The reduced fleet resulted in a spate of sudden cancellations of flights.
SpiceJet canceled 110 flights a day. On December 5, DGCA punished the airline for the
cancellations. On December 15, the SpiceJet management told the DGCA it was about to
suspend operations. (Prabhakar, 2016).
Reason 3: Illegal and reckless decision of deferring statutory dues and poor image of
company’s promoters made survival all the more difficult.

Choice of leadership and the partial turnaround strategy: Sanjiv Kapoor, the CEO’s plan to
revive SpiceJet was to treat it as an airline startup. Besides trying to make it a 'fun' airline, he
brought in a new team, including a new commercial director. He reduced loss-making routes. He
introduced seats with extra legroom and charged a premium. The only blight in Kapoor's strategy
could have been that he was a tad too "brand conscious". That too, and other plans, may have
worked in the long run, especially with declining jet fuel prices, which accounts for nearly 50%
of airline’s costs. But funding was missing. SpiceJet's fate hung on the outcome of Ajay Singh's
due diligence and future funding. He emerged on the scene as a savior not because he found
SpiceJet attractive. He smelt an opportunity — the steep fall in oil prices. Many think Ajay
Singh is the right man to restore SpiceJet's health. Sanjay Aggarwal, who was recruited by Singh
and Kansagra to run Spice-Jet, said Singh knows best what needs to be done to revive the airline.
Mark Martin, a former head of strategy at SpiceJet, said Singh played a proactive role in making
critical decisions on the fleet, maintenance issues, recruitment and pricing strategy. "Ajay is
hands-on and does not flinch when it comes to taking a tough decision," said Martin. Ajay Singh
on board is a big plus for SpiceJet. He has an excellent record of raising funds from PE players
as he did between 2004 and 2006 and also knows the low-cost carrier business, including what
needs to be done to fix the airline (Prabhakar, 2016). That said, Singh's investment is far from a
done deal. Granted he has an emotional connect with the airline, but he is still desperately trying.
Singh planned to recast the management. Due to their different visions and style, Kapoor's exit
seemed inevitable. He seemed resigned to the possibility. "My job is not important. My interest
is that the company should survive, and the staff should have a bright future," he said (Prabhakar,
2016).

Reason 4: Even great leadership cannot achieve much when there is just not enough cash to
even sustain one day of business operations.

Employee’s Morale and Attrition: : Before the troubles started brewing, the company had more
than 400 pilots on the payroll. The DGCA reported that the number December’14 had reduced
significantly with some 132 commanders and pilots resigning. The incessant delay in salary
payments to staff resulted in attrition and further cut down in number of flights. This also led to a
trimmed fleet from 31 to 24 aircraft, a result of going lean (Gupta, 2014).The media was soon
speculating with buzzing headlines on whether SpiceJet was headed in the same direction as the
defunct Kingfisher Airlines. This hurt the public sentiment in the market and it was evident when
the company’s stock feel approximately17.5 per cent. In December 2014, SpiceJet had canceled
over 1,861 flights expected this number of resignations to go up to2 00, since the carrier further
trimmed its Boeing fleet from 37 aircraft to 17 ("A going concern's growing concerns: A case
study on Spicejet India", 2016).

Conclusions that can be drawn from the findings above are as below:
• The generic nature of Aviation industry is of a highly capital intensive industry and the
competition is severely intense.
• It gets impacted by macroeconomic and regulatory situation significantly rendering it
powerless (the overall economic sentiment, taxes, outbreak of illnesses, price of oil and so on)
• While the industry has to face a lot of competition, the suppliers that airlines have to deal
with are highly monopolistic. Given this, airlines are not always in the best position to control
their costs.
• But like Mallya, aviation is not Maran's primary business. His primary business is spread
across television channels, a cable TV distribution network and newspapers in Tamil Nadu and
other surrounding states. Maran's lack of experience in the aviation sector started to come out as
soon as he took over the airline.

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