SpiceJet achieves a much wider wingspan

Early in December, low-fare airline SpiceJet signed an interline agreement with Singapore-based Tigerair that will allow the Indian carrier to provide connectivity to Singapore from Hyderabad. The deal would also mean greater access for Tigerair to the Indian market.

The agreement allows SpiceJet passengers from 14 destinations to touch down in the Andhra Pradesh capital and take Tigerair’s Hyderabad-Singapore service from January, while Tigerair flyers from Singapore can take SpiceJet flights from Hyderabad to any of the 14 destinations agreed to under the deal.

Investors welcomed the move, even pushing SpiceJet shares up 12 per cent after the announcement. Among other things, the partnership has given SpiceJet and Tigerair first mover advantage in the India-Southeast Asian region that is fast becoming a global hot zone for low-cost carriers. While AirAsia, Singapore Airlines and Jet Airways have announced their plans to enter this market, they are yet to start operations and the alliances they have struck with Indian carriers are still in their infancy.

The reason airlines are fostering regional alliances to expand their footprint is not hard to see. The potential of the region, at least going by numbers, is too obvious to be ignored. India, which is among the fastest growing aviation markets, is set to become the third-largest market in the world by 2020 after the United States and China. This offers a huge opportunity for all airlines, especially the low-cost carriers, which at present account for only 30 per cent of the traffic between India and Southeast Asia. In comparison, according to a report by aviation advisory Centre for Asia Pacific Aviation, or CAPA, low-cost carriers account for 70 per cent of the capacity within India and 60 per cent within Southeast Asia.

Lucrative segment

The India-Southeast Asia circuit also makes business sense as international routes are more profitable than domestic ones for most airlines. With the exception of GoAir and IndiGo, Indian carriers are making losses in the domestic market but are profitable on international routes. With a travel boom forecast for this region – in the next 10 years, there will be 337 million domestic and 84 million international passengers in India every year, compared with 117 million domestic and 43 million international passengers at present – the deal between Kalanidhi Maran-owned SpiceJet Airlines and Tigerair, in which Singapore Airlines has 33 per cent stake, is easily explained.

Airlines rely on strategic partnerships to enter prospective markets since adding flights and routes of their own would entail high operating and capital expenses. Alliances instantly expand routes and distribution networks and boost passenger loads via cross-selling of tickets. According to analysts, such deals also help them to reduce costs as enhanced scalability gives them stronger negotiation powers when they are deciding on sourcing deal with dealers or negotiating with airports.

SpiceJet’s Chief Operating Officer Sanjiv Kapoor says, “This partnership will benefit travellers from India and Singapore, and represents one of the building blocks of the emerging new SpiceJet.” He says the airline is exploring more such deals with other aviation companies. “From SpiceJet’s point of view, our load factors are currently around 70 per cent, which could be raised further using the Tigerair relationship,” adds Kapoor. Tigerair’s load factor, or the ratio between utilisation and capacity, is between 70 and 80 per cent.

SpiceJet expects an additional 200 passengers daily to and from Hyderabad following the tie-up with Tigerair. It also expects its revenue to increase 6 per cent in the first year of allied operations.

However, some observers point out that the benefits for SpiceJet are more on the operational front than on the revenue side. Deven Choksey, managing director of KR Choksey Shares and Securities, a brokerage firm, says, “Because there has been no equity infusion into SpiceJet, the agreement will bring operational benefits rather than financial ones. But given that the two airlines can tap into each other’s network, it is a win-win for both.”

Spreading wings

Spicejet currently flies to Bangkok in Thailand and Guangzhou in China, the only Indian private airline to fly there. Via Tigerair, it could potentially get a toehold in the entire region, reports CAPA. While the Mumbai-Singapore and Delhi-Singapore routes have sufficient demand, the cost of operating on these routes with all-economy narrow-body aircraft is very high. The Chennai-Singapore route is a more attractive one, but SpiceJet has traditionally stayed away from markets where competition is stiff, preferring instead to deploy its planes on niche routes. However, many say it could enter into an interline agreement with Tigerair on the Chennai-Singapore route at a later date, while retaining its focus on offering domestic connections at Hyderabad.

At present the Chennai-Singapore route is served by full-service carriers Air India, Jet Airways, Singapore Airlines and SilkAir and low-cost carriers IndiGo and Tigerair Singapore.

Profitable option

While SpiceJet is not keen to serve Singapore on its own, continued bilateral constraints (India-Singapore bilateral agreement is currently at capacity on the Singapore side) could persuade the carrier to operate alongside Tigerair on some India-Singapore routes. The partnership with Tigerair could make such flights viable. India has plenty of unused traffic rights as Indian carriers only account for 29 per cent of the current seat capacity between the two countries, says the CAPA report.

Meanwhile, SpiceJet is expanding international operations to less-crowded destinations to boost its dollar earnings and offset losses caused by currency rate fluctuations. The company, which posted a loss of Rs 191 crore in 2012-13, will begin flights to Bangkok, Dubai, Sharjah and Dammam and Riyadh in Saudi Arabia. International operations accounted for 11 per cent of its revenue in 2011-12 at around Rs 5,000 crore.

Professional in the business are, however, unsure about how beneficial the agreement will be for SpiceJet. “Maybe among low-cost carriers, this interairline deal is a first, but it doesn’t change anything, it’s only like adding a few more agents,” says the chief executive of a private airline, who requested anonymity. He points out that an interline deal is not a new concept, with AirIndia and Jet Airways both having around 200 such partnerships, and Kingfisher, around 160

SpiceJet achieves a much wider wingspan