Operations management - Spice Jet


Published on

This assignment covered an analysis of operations of spicejet.

Published in: Business, Technology

Operations management - Spice Jet

  1. 1. Operations Management Submitted by: Sashidharan.S (PGDMB10/43) Sumit Rawat (PGDMB10/86)
  2. 2. About SpiceJet SpiceJet is a low-cost airline based in Delhi, India. It began service in May 2005 and by 2008, it was India's second-largest low-cost airline in terms of market share. It is promoted by Ajay Singh and the Kansagra family. SpiceJet marked its entry in service with Rs.99 fares for the first 99 days, with 9,000 seats available at this rate. This deal was followed it up with a Rs.999 promotional scheme on select routes. Their aim is to compete with the Indian Railways passengers travelling in air conditioned coaches. On 15 July 2008 Billionaire Wilbur Ross suggested he would invest $80 million (about Rs 345 crore) in the low cost airline. The board of directors of SpiceJet accepted an offer in-principle from the US-based PE firm that would make available about Rs 345 crore to SpiceJet, a joint statement issued by SpiceJet and WL Ross & Co. SpiceJet operates 19 Boeing 737-800 aircraft (as of Feb 2009) and has a 12% share of the Indian market. The airline’s new fleet of aircraft is backed by cutting edge technology, and infrastructure. It has maintenance support from KLM and state-of-the-art technology from world leaders like Star Navigation, Russel Adams and Tech Log. SpiceJet has a partnership with Navitaire, the world’s renowned low-cost support system for reservations and revenue management for providing e-booking and e-ticketing services.
  3. 3. Main Revenue Generating Activities Yield Management Yield management is an approach to maximizing revenue when a business has a fixed, perishable resource and can segment customers into groups willing to pay different prices for the same resource. In passenger airlines, capacity is regarded fixed because changing what aircraft flies a certain service based on the demand is the exception rather than the rule, a seat is “perishable” as the revenue potential disappears once the flight has flown. The airline needs to keep a specific number of seats in reserve to cater to the probable demand for high-fare seats. The price of each seat varies inversely with the number of seats reserved, that is, the more seats that are reserved for a particular category, the lower the price of each seat. This will continue till the price of seat in the premium class equals that of those in the concession class. Depending on this, a floor price (lower price) for the next seat to be sold is set. Revenue through Advertisements: Onboard promotions of cellular service provider Airtel and insurance company Max New York Life is another revenue generating activity. SpiceJet aims to increase its revenue through advertisement space selling on its website - spicejet.com. The airline had identified various advertising opportunities at a lucrative price package on its website, which would help generate additional revenues of Rs. 8000000 by FY 2010 for the company. Since the inception of the airline, spicejet.com has been receiving tremendous number of hits everyday. With over 14 million page views a month and eight lakh registered database per month, the website accounts for 75 to 80 per cent of the airline's ticket booking. With this new initiative, SpiceJet will bring a whole host of advertising opportunities, for online advertisers,available in different shapes and sizes in the form of banners on home page, flight schedule page; pop-up windows and space on exclusive e- mailers that are sent to all SpiceJetters, it added. Ancillary revenue streams: SpiceJet is looking to looking to bring in an additional Rs 100 per passenger though this route to support yields. The carrier started selling food on board. It also takes courier on board, an effort that mopped up Rs 1.5 crore in the first month since introduction.
  4. 4. Revenue Generating Assets More Aircrafts: SpiceJet plans to induct nine more aircraft by 2012. This leads to an increase in the fleet size and hence more revenue. More Capacity: The seat design and materials used in the aircrafts allows SpiceJet to fit at least 10-15 seats more than other single-class airlines using similar aircrafts. This further reduces cost along with increasing revenue potential. SpiceJet’s aircraft are configured in a single economy class having 189 seats, which is among the highest in the industry. This is possible as the airline focuses on maximum space utilization for generating more revenue per aircraft. SpiceJet accommodates 21% more seats than a dual (business and economy) configuration. With costs like fuel, lease, maintenance remaining same per aircraft, its per-seat costs comes down by around 20%. Better flight and ground staff: From aircraft to crew and ground staff the focus is on performance. Each SpiceJet employee is groomed to be smart, friendly, efficient and well-informed, ensuring that any interaction will make you feel welcome and looked after. Experienced pilots, well-trained cabin crew will make every flight a comfortable one. The philosophy is no-frills but high- performance. Consolidation to result in stabilization of yields The Indian aviation industry has undergone through a major consolidation with the market leader Jet Airways acquiring Sahara Airlines, Kingfisher taking a stake in Deccan Airlines, and the government-owned Air India and Indian Airlines merging. Post consolidation, these three together have a combined market share of around 80%. Earlier, airlines used to sell huge inventory of tickets at low or near zero prices (Re 1/- to Rs 9/- base fare per ticket) to attract traffic and gain market share. With consolidation, the large players have shifted their focus on profitability from market share. As a result, the yields per ticket have been improving and the practice of heavy discounting has declined. SpiceJet, which has the lowest cost in the industry, will be the first beneficiary, when the yields start improving.
  5. 5. Focus on additional markets Currently SpiceJet passenger mix is about 40 per cent business fliers, and 60 per cent leisure. The global slowdown in air travel has impacted leisure segment, and has made SpiceJet accelerate its increasing focus on business passengers. In parallel, the airline is also on track in increasing its load factors from an average 100 passengers per flight, to 140. Reaching out to business travellers, SpiceJet now offers services which it hopes will appeal to them. SpiceJet is also taking a cue from Air Asia X and is actively finalizing pre-ordered (and obviously pre-paid) sandwich and snacks. This eliminates wastage of food and jet fuel which rather surprisingly, costs as much as Rs. 1,000 ($20) per meal. Other services on offer: SpiceJet has introduced hot coffee or tea with cookies service for Rs 20. Business travellers can collect their boarding passes for a same-day return flight. Introduction of a corporate travel program with key account managers and other flexibilities (which normally means ability to change ticketed flight dates and times without surcharges).
  6. 6. Primary Resources Required Fleet expansion, funding on track SpiceJet has unveiled a phased capacity expansion over FY08-FY12. From a fleet of 11 aircrafts at the end of FY07, it plans to add 15 by FY10E, and another 8 in FY11-12E, which will take its total fleet size to 34. The company has already secured financing arrangement for the next phase of its expansion. In December 2005, it raised US$ 80 million through an FCCB (foreign currency convertible bonds) issue, proceeds of which are being utilised for the Pre-Delivery Payments (PDP) of first ten aircrafts. The subscribers to the bond issue include Goldman Sach, and Istithmar, the private equity arm of Government of Dubai. The company also has a sale and lease back arrangement with Babcock & Brown Aircraft Management and Nomura Babcock & Brown, for all 16 aircrafts to be purchased during 2007-09. The deal is valued at over US$ 1.1 billion based on the manufacturer’s list prices. Further, in January 2007, the company raised US$ 67 million (Rs 297 crore) through preferential equity allotment to strategic investors like the Tata Group, Istithmar, KBC Financial Products (UK) and BNP Paribas. Equity funding Investor US$ million Tata 18 Istithmar 31 KBC UK 3 BNP Paribas 15 Total 67 Source: Company, ICICIdirect Research Support Resources Required Availability of skilled personnel Rapid growth in the industry has led to a sustained shortage of pilots and other trained personnel in the industry. This is aggravated by the high gestation period (more than 3 years) required for acquiring a commercial pilot’s license. The training period for a cabin crew ranges from 6 months to one year. This shortage is driving the cost of high-skilled staff. Also, the limited availability of the required ground & maintenance staff could adversely affect growth plans of the company.
  7. 7. Main Planning and Scheduling Activities Focus on profitable routes SpiceJet operates most of its flights between profitable metro routes to optimize its load and yield (average revenue per passenger). It currently operates from 16 destinations with more than 700 flights a week. 56% of these flights originate from Delhi, Mumbai, Hyderabad and Bangalore. During FY07, Delhi and Mumbai accounted for around 40% of the total domestic air traffic in the country. Airport Number of Flights/Week Delhi 136 Mumbai 98 Hyderabad 83 Bangalore 77 Ahmedabad 57 Chennai 56 Phased capacity expansion SpiceJet has unveiled a phased capacity expansion plan to meet its growth objectives. It started operations with a fleet of 3 aircrafts, which it has now increased to 14. It plans to add another 12 by FY10E, which will take the total to 26. During the time when the domestic market was mired by over capacity and fierce competition, SpiceJet was able to increase its market share, while maintaining its load factor. With an average age of 2 years, its fleet is also among the youngest in the country. Brand Building SpiceJet's "Get more when you fly" campaign, launched mid 2009, and received a fresh thrust with the appointment of i-Vista Digital Solutions. Online reputation management programme continuously tracks consumer sentiments and provides constant creative and technology solutions. This has increased their online presence and helped to drive customers to SpiceJet website which is the most cost effective distribution channel for them.
  8. 8. Critical Applications for success Direct distribution of tickets The airline sells its tickets via the Internet or call centre route. This helps it bypass travel agents who work on commissions, and expensive GDS (global distribution system) employed by FSC for ticket reservations. The mechanism also helps in reducing working capital requirements as the company receives the money in advance prior to travel. There are no receivables, and also controls bad debts. Overall it helps the company cut its distribution costs by 10% of the revenues. High aircraft utilization A carrier aiming for the lowest possible cost of operation has to develop a schedule that would give a high annual utilization of each aircraft in its fleet. Such a policy will lower cost as the fixed costs of the aircraft ownership or lease rentals can be spread over higher quantity of output (ASKM). SpiceJet has been consistently reporting high aircraft utilization (around 12 hours a day), in line with international benchmarks. This is possible because of its high on-time performance (82% within 15 minutes) and a low turnaround time of 20-25 minutes as compared to 40-45 minutes takes by FSC. No loading of meals or complex cargo and faster check-in system helps in reducing turn around time. Overall it reduces fixed cost absorption by 15-20%. Customer Preference In a recent consumer survey (released on December 23, 2009) conducted by a leading national newspaper, SpiceJet was recognized as India's best low- fare airline. SpiceJet was rated the best overall airline operating from New Delhi and Chennai. They received highest satisfaction rating on key factors covering the efficiency and friendliness of the ground and the in-flight services. While SpiceJet occupied the first position in all major categories among its direct competitors, it ranked higher than leading full service airlines in Arrival Service, Approach to Customer and Airport Baggage Service.
  9. 9. Performance Metrics On Time Performance and Cancellations During Oct-Dec 2009, SpiceJet consistently recorded the lowest cancellations amongst comparable airlines. SpiceJet's performance has remained in the top tier on these two parameters over the last few months. Their Technical Dispatch Reliability is at an very high 99.38 %. Market Share SpiceJet's market share has seen a significant increase despite no major capacity induction during this period, moving up to 12.5% during Oct-Dec 2009 from 10.5% during the same period last year. This has been possible due to better aircraft utilization. SpiceJet has consistently carried more passengers per departure than any of our competitors during this period, clearly indicating customer preference in their favour. Other Operational highlights for the quarter ended December 31, 2009: • 55 % growth in number of passengers. • 28% growth of Available Seat • 14 point improvement in load factor.
  10. 10. Role of Information Technology Online Ticketing An e-ticket offers many advantages for both travelers and airlines, including security, flexibility, cost and convenience. At the same time, it also provides the standard assurances of the traditional paper ticket, such as seating choice, travel time options and other flexibilities. Dealing with e-tickets is much less costly to airlines, which makes it possible for airlines to offer more competitive fares to passengers. The tickets also are booked and processed in a more timely way, saving labor hours and cutting down on traveler frustration. SpiceJet is a ticket less airline. An itinerary does not constitute a document of carriage. The Booking in the SpiceJet database is the primary record of carriage and in the event of any differences between the itinerary and the Booking in the SpiceJet database, the Booking will prevail. The website of SpiceJet airlines offers many options for flight reservations. The available option also includes last minute reservation of tickets. Other Advantages One can see the flight schedules online and book the tickets according to the convenience. The online SpiceJet also looks after the traveler's amenities and privileges which include flight updates, web check-in, PNR lookup and enormous discounts.