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SpiceJet’s mega order: Indian aviation market set to surpass Japan, become 3rd largest

Jan 13, 2017 18:05:56 IST

Sources : www.firstpost.com

New Delhi: SpiceJet today announced an order for 100 new Boeing 737 Max aircraft for $11 billion at list prices, the second highest aircraft order ever from India. Combined with an earlier order, this means it will receive 155 narrow body jets between 2018 and 2024, besides also having purchase rights for 50 more wide body aircraft from the same manufacturer. The narrow bodies will be used to service the domestic market as well as select international destinations. The wide body fleet of 50 Boeings – when SpiceJet does firm up the order for it – will enable the airline to launch a long haul low cost service like Singapore Airlines’ subsidiary Scoot and Norwegian Air.

Anyhow, the new aircraft are 8 percent more economical on a per seat basis and about 20 percent better in fuel efficiency. Chairman and MD Ajay Singh said today the new aircraft will allow the airline to fly for an hour longer, which means new international destinations will anyway be added to its network. As of now, one in four SpiceJet flights or 25 percent of the network flies to international destinations, with 10 daily services to Dubai alone.

So why is SpiceJet going out on a limb to place a mega aircraft order which will require mega bucks? Singh said today that the domestic market has been growing at about 25 percent in recent years. “Indian airlines together have about 400 aircraft now, even if we take growth at 20 percent going forward, this means 80 more aircraft are needed each year….as the market grows, appetite for fleet expansion also increases.”

SpiceJet wants to obviously have a proportionate share of the domestic aviation pie. Remember, India’s domestic market is on track to surpass 100 million passengers by March this year for FY2017. This means India would overtake Japan to become the world’s third largest domestic market, behind USA and China.

In reaching this milestone, India will have achieved average domestic traffic growth of over 15 percent per annum since the liberalization of the sector commenced in FY2004.

Fiscal 2017-18 is expected to be the third consecutive year of domestic growth above 20 percent, according to global research agency Centre for Asia Pacfic Aviation.

Passenger growth could be as high as high as 25 percent, though this may be tempered 3-5 percentage points due to the recent demonetisation.

Based on aircraft deliveries, competitive dynamics and the positive outlook for the economy, growth above 20 percent could continue for up to a further two years. In such a scenario, every Indian airline is looking at mega expansion, reason enough for SpiceJet to also chip in with a large order for aircraft. CAPA says Indian airlines are together scheduled to induct 60-65 narrow bodies and 10-12 regional aircraft in FY2018. “The pace of aircraft inductions in FY2018 will be one of the key drivers of traffic growth,” it says.

Earlier this week, GoAir placed a firm order for 72 A320neo aircraft, doubling its firm order book for the aircraft type to 144. It now operates a fleet of twenty three aircraft. With the neo induction, Go Air will expand its network and offer fliers better connectivity. “The A320neo provides the latest technical innovations and unbeatable economics….This new order will further strengthen our network by adding more domestic and international routes in the years to come,” said MD & CEO, Wolfgang Prock-Schauer. Market leader IndiGo already has 125 aircraft in its fleet and another about 400 on order, with staggered delivery schedules.

Almost all airlines use the sale and leaseback model to pay rational price for mega aircraft purchases. Singh of SpiceJet said this model and some other financing models were under consideration for the 100 new aircraft this airline will acquire. “We will not raise fresh debt, neither will we need to infuse equity to finance this aircraft buy. We are looking at the cheapest finance options so that the balance sheet does not get impacted”.

SpiceJet, which was briefly forced to ground its fleet in late 2014 when it ran out of cash, has about 13 percent of the Indian air passenger market. That is behind market leader IndiGo which has over 40 percent share, the Jet Airways group and state-run Air India. Besides the narrow bodies, SpiceJet also flies a fleet of the smaller Bombardier Q400 aircraft on regional routes.

Singh said he had been mulling an expansion of the small aircraft fleet too but these plans have been suspended for now. It is interesting to note that the government’s regional connectivity scheme, for which airlines must place bids by Monday, relies almost entirely on airlines which have a fleet of small aircraft or are willing to acquire such a fleet. Singh said he will be placing his bids by Monday.