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Bombardier to Help Indian Billionaire Return to Profit

March 28, 2013

Bombardier to Help Billionaire Return to Profit

A SpiceJet Ltd. aircraft prepares to land at Chhatrapati Shivaji International Airport in Mumbai. SpiceJet, which started operations in 2005, is the fourth-largest carrier and competes with IndiGo, India’s biggest by market share, and Jet Airways (India) Ltd., the nation’s biggest publicly traded airline. Photographer: Dhiraj Singh/Bloomberg

SpiceJet Ltd. (SJET) (SJET), controlled by Indian billionaire Kalanithi Maran, is counting on Bombardier Inc. (BBD/B) turboprop planes to add more connections to under-served towns and help reverse two years of losses.

The Bombardier Q400 turboprop services will contribute about 20 percent of revenue in the next 12-20 months from 11 percent currently, Chief Executive Officer Neil Mills said in an interview in New Delhi. The Chennai-based carrier, which has 15 of the aircraft, will fly to more destinations as it expands the fleet, he said.

SpiceJet (SJET) is strengthening its network to take on competition from Asia’s biggest budget carrier AirAsia Bhd (AIRA)., which plans an Indian venture by the end of this year. Mills started adding the 78-seat Q400s from September 2011 to access more airports with runways too short for jet planes such as Boeing Co. (BA:US)’s 737s. The carrier is looking outside of the biggest urban areas for faster growth as India’s $1.8 trillion economy expands at the slowest pace in a decade.

“Economic growth in smaller cities is faster than in metros,” Mills said. “For us, these smaller cities are hugely important and they help to support not only our growth but also local economic growth as well.”

Threefold Increase

SpiceJet, which started operations in 2005, is the fourth- largest carrier and competes with IndiGo, India’s biggest by market share, and Jet Airways (India) Ltd (JETIN)., the nation’s biggest publicly traded airline. The number of domestic fliers is estimated to increase threefold by 2020 from about 60 million last year, according to the Ministry of Civil Aviation.

Still, airlines in India have been losing money amid high fuel costs, airport charges and a price war. Jet Airways hasn’t made an annual consolidated profit in five years, according to data compiled by Bloomberg. Kingfisher Airlines Ltd. (KAIR) ended operations in October after years of losses and piling up 85 billion rupees ($1.6 billion) in debt.

SpiceJet is headed for its second straight annual loss in the year ending March 31, according to 10 analysts’ estimates compiled by Bloomberg. The carrier, which reported a profit in the first and third fiscal quarters, may return to a full-year profit in the year starting April 1, according to nine analysts’ estimates compiled by Bloomberg.

‘Highest Utilization’

The carrier operates 110 flights a day, or a third of its daily services, using the Q400s, Mills said. It plans to add five more of the aircraft from the Montreal-based manufacturer.

SpiceJet’s Q400s are airborne about 10.5 hours a day, which Mills said was probably the “the highest utilization of the aircraft in the world.”

Shares (SJET) of SpiceJet have tumbled 40 percent this year, compared with a 7 percent decline for Jet Airways. SpiceJet dropped 2.8 percent to 26.1 rupees at 9:22 a.m. in Mumbai. Eight of 12 analysts recommend buying the company’s shares, according to data compiled by Bloomberg.

The turboprops will help add to SpiceJet’s profitability as the planes enjoy lower taxes on jet fuel, cheaper refueling rates and some airport fee exemptions, according to Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. in Mumbai, who recommends holding the stock.

“The Indian sky is different, not just in topography, but we have these various airports that can’t accept a jet landing,” Mahantesh said. “If you want to expand your network, turboprop is the natural choice.”

Landing Fee

Aircraft weighing as much as 100 metric tons must pay a landing fee of at least 281.82 rupees per ton at the New Delhi airport. Q400 planes each weigh 29.6 tons, according to Bombardier’s website. In airfields such as Chandigarh and Dehradun, operated by state-owned Airports Authority of India, Q400s are exempted from landing fees because their seat capacity is below 80.

SpiceJet is also cutting costs by pruning expatriate pilots on its payroll and changing flight crew schedules. Starting January, the operator has been using local pilots for its Boeing 737 aircraft, while retaining foreigners to fly its Q400s.

Overseas nationals typically get paid 40 percent more than their local peers in India’s aviation industry, including tax liabilities.

Spending (SJET) on workers at SpiceJet, which had hired 60 expatriate pilots for its Boeing fleet, rose 66 percent to 4 billion rupees in the year ended March 31 after the carrier added the Bombardier turboprops. Jet Airways spent 18 percent more on salaries during the period, according to data compiled by Bloomberg.

Not Weak

Sepang Selangor, Malaysia-based AirAsia aims to start Indian operations in the fourth quarter after winning approval March 6 for the nation’s first foreign aviation investment since rules were eased in September.

AirAsia (AIRA) will own 49 percent of the Indian venture, while Tata Sons Ltd. will hold 30 percent and Arun Bhatia of Telestra Tradeplace Pvt., whose son is married to the daughter of billionaire Lakshmi Mittal, will own 21 percent.

The joint venture will be applying for a regional license to operate services out of Chennai, where SpiceJet controls 30 percent of all departing seats.

“We are the largest operator in Chennai,” Mills said. “When you have two strong players, it is the weak guy who suffers. I don’t think we are weak.”

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net


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