Monday, December 27, 2010

SpiceJet - Surviving and succeeding in a bleeding market

When times are going good, the economy is in boom, stock market is on an uptick and the respective sectors are growing, all companies that succeed get talked about and written about in books. But when times are good, it is anyways quite simple to succeed. It’s only when the going gets tough that real strategy is able to emerge. A classic example of real strategy emerging in difficult times is Spice Jet.

In an era when Air India is bleeding probably without repair and Kingfisher and Jet Airways owe thousands of crores of money to fuel companies, Spice Jet is one of the very few airline companies that has managed to make a profit in 2009-10.

Net profit (2009-10) in crore rupees
Jet Airways
Kingfisher Airlines
Spicejet Ltd.

After Sun TV’s Maran acquired a 37.7 per cent stake with a 20 per cent open offer in Spicejet, its CEO Sanjay Agarwal quit the company and has since joined Kingfisher Airlines. But we ascribe the success of Spicejet in 2009-10 completely to the decisions taken by Sanjay Agarwal who had taken charge in Dec 2008. Hence in this post, we will talk about the changes that he brought about while he was at Spicejet.

Increase in aircraft utilisation: There is a metric “aircraft utilisation” that airlines use to indicate efficiency. This means the number of hours that an aircraft flies in one day, and obviously has a direct impact on the revenues. In 2008-09, SpiceJet had an aircraft utilisation of 10.5 hours/day, and it managed to increase this to 12.5 hours in 2009, when the average for Kingfisher was 9.5 hours, for Jet it was 10.5 hours and for Air India it was 8.5 hours. It was able to manage this change by small improvements in ground handling, reducing refuelling times and then strategically rescheduling flight times. This helped reduce its cost per available seat km much below Kingfisher and Jet.

Cost Avoidance: Apart from cost-cutting, SpiceJet followed a strategy of cost avoidance. Fuel costs constitute 40% of costs for airlines in India. SpiceJet was able to reduce that cost due to two reasons. Firstly, unlike other airlines which owed huge dues to fuel companies, SpiceJet paid its fuel bills on schedule, which helped them negotiate a 15% discount in the fuelling contracts. Secondly, they made small tweaks to the flight operations by adjusting ascent and descent profiles of the planes. They ensured that short-haul aircrafts did not ascent too high and long-haul aircrafts ascended to their right height quickly. This helped reduce the fuel expenditure by 14% in 2009-10.

Providing Good Quality: The biggest challenge that SpiceJet faced was to maintain a perception of good quality in spite of its low-cost personality. It needed to create this belief in its quality both to attract customers and to retain employees.  To create that perception, SpiceJet launched a new ad campaign that focused on a “value-led” proposition rather than a “promo-driven” proposition or “cheap rates” proposition. The brand message that was being communicated was "Get more when you fly SpiceJet". In line with this brand image, the quality of in-flight meals was also improved and advertised about. Though food sales, which in fact increased by 200% in 2009-10, do not contribute much to the revenue, but they help attract passengers. Also, to create a plush and clean feeling while travelling, the inside aircraft maintenance staff was increased, frequent painting was done, carpets were changed, regular washing of the aircraft was carried out etc.

Much of the credit for all the innovative measures taken at SpiceJet goes to the top management who implemented the required changes and motivated the other employees to contribute to SpiceJet’s mission to succeed. In fact, with the exit of Sanjay Agarwal and his team of 10 people, it will be interesting to see how SpiceJet fares from now on with its new management.

SpiceJet was able to make cost-cuts where they were needed and where the impact would be the most, while still investing to maintain or build a reputation of a good-quality carrier. It managed to do this at a time when the airlines industry was in shackles, and all its competitors were bleeding badly. It came out of the crisis relatively unscathed because of the innovative strategies that it deployed. That is what real strategy is all about.

Reference: Business Standard

1 comment:

  1. I want to apply for Spicejet Recruitment 2017, will you please provide me the syllabus for Interview.