Sanjiv Kapoor, COO, SpiceJet is hopeful of further price cuts in the aviation turbine fuel (ATF) being passed through going forward. However, he says any price cut has been a welcome one and eases the costs pressures. The company sees an impact of Rs 320 crore from this cut.
According to him the ATF prices in India are still significantly high, 40-60 percent higher than rest of the world. Globally the prices have dropped 17 percent from June, whereas in India only 10 percent has been passed through so far.
The price of aviation turbine fuel (ATF), or jet fuel, at Delhi was cut by Rs 4,987.7 per kilolitre, or 7.3 percent, to Rs 62,537.93 per kl, oil companies announced today.
The slew of festive season discounts offered by the airlines has led to improved revenues, and the load factor too improved to 86% in September, said Kapoor.
Below is the transcript of Sanjiv Kapoor's interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: Is it good news at least of ATF price cut or will you have to pass it on?
A: It is good news certainly for the airlines, aviation fuel prices in India have been above 40-60 percent higher than rest of the world, combination of both the base price and taxes. So certainly a 7 percent plus 3 percent reduction that was done earlier, total 10 percent reduction is fantastic for our cost situation which will give us relief.
However, if people are expecting that to be passed on to customers then we already have the lowest fares on average in the world and this is just relief for the airlines on the cost side which was much welcome and much needed.
Sonia: So when you say that there is relief can you quantify that for us, is there any margin positive impact that you would see at all?
A: What I can just state is based on our financials which are public for fiscal 2014, fuel bills for the year was Rs 3260 crore, if you take out 10 percent it is Rs 326 crore, so significant impact but not enough on its own to turn the airline industry around. However, it would certainly help us substantially on the cost side.
Latha: You are factoring in a 10 percent fall?
A: 3 percent happened earlier in October and 7 percent now.
Sonia: So how much more of a cut would you want to see in order for you to see a greater impact on your margins?
A: Like I said fuel prices in India are 40 to 60 percent higher than rest of the world. Now fuel prices have fallen 17 percent globally since June, and our reduction has been 10 percent. So while that is welcome the gap actually relative to global aviation fuel prices the cut passed on to us is smaller than what global reduction has been.
So in an ideal world we would hope that all of it is passed on to us and another 7 percent could be cut but we are happy with at least what has happened, we are hopeful that more will come in the future.
Latha: You would expect that at least in Q3 you will be able to get into the black at a net level?
A: I cannot comment on that but certainly any cost reduction is welcome.
Sonia: You have announced a slew of low fare offers in the last many weeks and months. Can you tell us what the impact of all this has been in terms of passenger growth and load factor?
A: The low fare offers that we have been offering are essentially to get rid of excess inventory, excess seats. The worst thing an airline can do is to hold on to seats and at the last minute discount it, because last minute passengers tend to be the least price sensitive. So if you have excess seats you want to get rid of them early. So our discounting has been designed by and large to give the deals to passengers willing to plan and book early, around 30-60 days early.
The impact has been very positive on load. In September, normally airlines fly with one third of the seats empty, with 65 percent occupancy or load factor. We ended September with 86 percent load factor.
However, loads alone are of course not the answer because you can easily fill your planes by giving tickets away for free. What you need to look at is has your unit revenue improved. I am happy to say that over the months where we have had the sale, the pricing philosophy that we have been following, our unit revenue measures have improved significantly so that is proof that the efforts to get rid of excess inventory early are positive for us and I believe for the whole industry.
Latha: Capital is also getting cheaper globally as well as you are saying fuel prices and may be an expected turnaround in the economy should all work to your advantage. Will you be looking for capital, strategic partnership? Anything at all that we should hear now that the circumstances are propitious?
A: I cannot comment specifically but of course we do need to recapitalise and efforts are ongoing on that front that is all I can say. You are right that macro indicators are positive and that is certainly good news.
Sonia: For the next quarter what kind of passenger growth will the industry see as a whole and what will SpiceJet do? In a sense what kind of market share are you looking at right now?
A: Well market share is just incidental. Our goal is to return to the black so we will do whatever is necessary whether it is rationalising capacity further etc to get to the black.
I don't want to set any market share goals and in terms of market growth I just want to emphasise that India is probably one of the most price sensitive markets in the world. We have seen that when you drop prices your loads go up sharply, demand just spikes but the opposite is also true.
So unfortunately it is not a cost pass industry, we cannot say look our cost is this therefore let us price above that. If it was that easy then every airline in the world would be making profits. So we need to just somehow maximise the revenues that we can get and then try to minimise the cost and hopefully the equation works in our favour eventually.
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