Gaurav's Blog

Infusing life into Spice

An open letter to Spicejet Management

Your Q3 results prompted me to list down some suggestions that I thought may be of some use to you. Some of them will require fundamental changes in your business model which will (unfortunately) require fresh equity & money. Some others perhaps could be implemented more near term.

1.    Fundamentals of your Business model

Your business model will have to change for more than several reasons and whether this happens before or after the infusion of fresh equity (most likely after, as this requires major investments & risks) it will have to happen sooner than later. In tangible steps this means 3 related points:

-       You will have to find a way to be on the GDS: That your largest competitor is not on the GDS is just one of the reasons. That you operate in International markets is another and there are several more as you will read. Whether you use Hahn air for this, or you use TravelPort gateway to connect, this is critical missing piece. Like Easyjet, you need this to differentiate.

-       Similarly, you will need to interline & code share: Jetblue does it, GOL does it, V-Australia does it as do several others. Yes, it will add complexity but it will also add revenues that you cannot otherwise have.

-       Targeting the red eye bank

Take a look at international arrivals at Delhi airport from 2000 hours to 0200 hours- there are as many as 21 international airlines arriving not counting Indian & 3 Gulf biggies. (See list on the next page)

If an International carrier arrives after 20:00 hours, like UA does, given a minimum connection time of 2 hours, you will not get a single domestic connection until 5 am next morning (that’s about 7 hours later), if you are traveling beyond Delhi. (See chart on the next page)

This is a huge void & one that provides an opportunity.

List of International Arrivals into Delhi

At Mumbai too, while Jet Airways has a proper red-eye schedule bank (see chart below), there is sufficient reason to believe it may be withdrawn. Most of the foreign Airlines that feed this night bank are DIRECT competitors to EY. If the de-facto hub would be AUH, not Mumbai with as many as 26 Indian cities connected to AUH directly; there is no need for 9W to operate a night schedule bank. Moreover, to execute the plan to connect AUH, narrow body aircraft time will have to come from somewhere as there are very few new aircraft deliveries scheduled. I believe it will come from the aircraft that currently perform the night flights.

     

There are some obvious limitations:

•        Perhaps slot availability at night hours are an issue.
•        Changing the terminal Spice jet operates if required, will again adding complexity and cost.
•            Typically, given the shortage of flight deck crew in India, no airline wants to use more than 2 sets of crew per aircraft. An airline (especially an LCC) wants to start its schedule no sooner than 05:00 am and finish it before midnight, say at 23:00.  With two, 8 hour pilot shifts one can manage to fly each plane with just 2 shifts. (With perhaps a built-in short gap in the afternoon dull hours). Those are the underlying economics. When you introduce a mid-night bank, it means that you have to either have aircraft on the ground or use more than 2 shifts of pilots. Both add to costs.

But a cost-benefit analysis needs to be done and I believe it will reveal that it is still beneficial to operate like this.

2.      Fighting with dominance

This is a point about choosing which battles to fight. Historically, for whatever reasons, Spicejet seems to be have really lost the plot in the India’s largest market – Mumbai, it reflects in the capacity it has deployed in this market- it failed to take advantage of either Air India moving out or Kingfisher going out of business to secure slots in this highly congested airport. One can’t compete effectively without enough frequencies in the top 6 metro markets.

Nevertheless here are some suggestions:

The next 20 strategy

One look at the competitive capacity at metros is convincing enough to recommend that Spicejet must turn its attention at to the next 10-20 cities in terms of traffic. Your nearest competitor competes with frequencies mostly around the top 6 metros. Your other competitor is Mumbai-centric & increasingly Abu-Dhabi focused which means it is likely scale down its domestic network considerably. Your own routes to over 40 destinations seem to have far more spread than frequency, more breadth than depth. That could work, but you can’t operate over 300 flights in a 2-aircraft fleet & not have a node/ nodes, a center point (I want to avoid using the word hub as it has very set connotations in people’s mind) connecting them.  All you are managing to do is in fact, subsidize your competitors when you connect a tier-3 city that previously had no scheduled air services- Passengers board your aircraft to a Metro from a Tier 2/3 city & if they are going beyond on a competitor, there is no price fencing to prevent this from happening. As an example, a passenger from Dehradun to Bangalore may travel on your flight to Delhi & then take Indigo from Delhi to Bangalore if the fare on this leg is cheaper on Indigo.

An example of vertical nodes

Spicejet will have to construct nodes to take control of traffic from tier 2-3 cities first through fencing achieved through O&D fares & eventually through a change to an O&D system that will give you super point of sale control. Its contemporaries Jetblue, Westjet & V Australia all went through similar changes.  

While Spicejet is strongest at HYD amongst the 4 suggested nodes, operationally, Spicejet has an advantage over others if it chooses to set up a node out of ‘hot & high’ Nagpur, where the Q400’s perform relatively better than the ATR’s in summers. Also, as traffic congestion at Mumbai increases (just 3 prop flights today compared to more than 20 just 3 years back), transfer traffic will have to start to flow away from Mumbai.

Targeting 1-stop traffic

If IATA statistics have to be believed, about 5.2 million domestic India trips annually are still made 1 or 2 stop. As a percentage this is just 10% of the total traffic (this number seems understated as passengers may be buying 2 separate tickets that are difficult to account for as beyond traffic), but it is a big enough number by itself. It is interesting to see that this fits in exactly with the Next 10 strategy. The top 6 metros have nearly all of its traffic arriving non-stop. The next 10 (tier-2) has about 85% and for Tier-3 cities it drops to below 60%. (See classification chart below)

Targeting 1-stop traffic isn’t new. Emirates does it for long haul. If the total elapsed time remains competitive this could succeed in short haul too.

   

3.    Near perfect price information

If Price is the strategic P in India not Product, unlike let’s say in Japan (where things are also changing now) and even if Spicejet is the lowest cost producer (& you definitely are not the lowest!), it is still not in your favor to let the market have perfect information on the lowest fares as it interferes with you ability to sell-up. There is near perfect pricing information available today at one’s finger tips. This isn’t helping. Take the Mobile operators as an example- there are so many price offerings offered through multiple distribution channels that it is impossible to discern which one is the cheapest. Customers view to pricing is obscured through use of smart packaging.

Yes, creating multiple price points will increase audit complexity so the solution isn’t easy and it has some dependency on IT, but at some point you will have to think about it.

4.    Blanket across the board discounts?    

When launching promotional fares, typically it appears this is an ‘across the board’ exercise to raise load factors system wide with some more successful flights getting fewer discounted seats while others less popular ones getting far more.

First, dropping fares creates its own distortions in demand patterns that are impossible to either predict accurately or measure. Second, you are training the market to buy down permanently, setting up your revenue management for failure as far as the months of Feb/Mar are concerned. Any (and every) RM professional will/should tell you his/her worst nightmare is ‘Spiral down’- a name for a phenomenon about a company charging its customers less even when they were willing to pay more.

Third, while ultimately discounts must be offered based on flight level demand forecasts, some attention also has to be paid to the share of capacity out of a city. Spicejet owns a dominant 1/3 rd share of seats out of Chennai market but at Mumbai, it is at the 4th place & not much ahead of Go air. Which market would you much rather offer discounts- at Mumbai or at Chennai?

Are blanket advertised discounts the only option? Take an example: In the last few months of Kingfisher’s existence, even with highly irregular operations some consolidators were still buying deeply discounted seats in bulk and were able to push them through. There were still some people who were willing to bet on a 50% discount on a fare even if the flight may leave delayed or not leave at all. If an airline that was in the throes of shutting could still move inventory, albeit deeply discounted, could Spicejet use select consolidators to sell discounted inventory discretely, instead of offering across the board discounts? It is the reason an airline cultivates consolidators & OTA’s. It is the reason an airline even needs a sales force.

5.    Value is passé, Smart is in

Or more accurately, value as a proposition, as a brand promise is already taken, by your nearest LCC competitor. If an airline runs on time, offers unparalleled frequency, has an acceptable product & all this comes at a low enough price, how else can one define value? You can plaster innumerable posters as being The value carrier to send out the message on what you want to be but believe me, that slot in the prospect's mind is already taken, it’s gone. Once that happens, you may propose the positioning, but the customer doesn't accept it. He positions you as per what he perceives you are. The gurus of marketing say a product has to own a word in the prospect's mind.Take the case of the Tata Nano & its repositioning- not as an entry level car but as a second car in the household- by now a celebrated case study. What are the lessons for you?

What word could Spicejet own in the mind of a prospect that she does not already associate with a competitor?

Yes Value is taken. But is Smart still available? How can an Airline lay claim to being Smart? To answer that, one has to look at who is traveling on your planes. For much of the 80-90’s only the top management of a company was traveling. Today, however, it is the top/middle management that forms the bulk- safe to assume in the age group 30-40. Is there a case for in-flight connectivity? I leave it to your marketing team define Smart for your travelers.

And before I forget to mention, on a lighter note, run as far away from the sandwiches as you can, because that too, as an in flight meal offering, is taken. Consider the humble (& nimble) Samosa- after all you are ‘S-p-i-c-e’ jet. I once visited an eatery that offered samosas with 32 different fillings.    

Notes: 

- This is an outsider’s view. There are many minor details that one cannot know from the outside.
- All information used here is available in the public domain