Spicejet needs to undergo serious restructuring

Students or young executives who have gone through a strategy course often ask me how they can keep up their interest in strategy and continue to sharpen their knowledge even though they may not be in a position which involves taking strategic decisions.

 

I have found that the simplest way of doing this is to take one industry and study it carefully on a real time basis.  By identifying issues before the industry and looking at the responses adopted by different companies, it is possible to identify what strategic choices are made in practice.  

Even better is to make your own predictions, and then compare your predictions with subsequent events in the industry. One industry I have found useful for this purpose is the Airline Industry.  It has a limited number of players each of which has a distinctive strategy.

Fortunately most of the players are focused on the airline industry alone.  So it is relatively easy tolink strategic decisions to outcomes through standard financial measures reported in the companies’ accounting statements. 

What can we learn about strategy from studying the Indian airline industry in recent months? 

Let us start by recounting the major developments.  Indigo has gone from strength to strength and currently dominates the market with a share of 36% according to the DGCA. Spicejet almost collapsed and has to thank both the Government and Mr. Ajay Singh for bailing it out in the nick of time.  

Air India has not been much in the news but looks to be more confident after its application for entry into the Star Airlines was finally accepted.  Vistara got off to a low key start and does not seem to be in a big hurry to expand.  

However, its entry stirred up strong emotions with the Federation of Indian Airlines opposing relaxation of the rules that prevent Indian airlines from internationalizing unless they have completed five years of domestic operation. Air Asia has been somewhat subdued possibly due to the unfortunate crash of one aircraft of its Indonesianaffiliate.  Go Air has been talking about fleet expansion.

Jet Airways reverted to a full service strategy on all its flights with effect from December 1, 2014.

What can we learn about strategy from these developments? 

Spicejet’s troubles show important it is to follow a consistent strategy.  The airline started with the classical low-cost model based on using a single type of aircraft, no-frill services, point to point operation etc.  

However, media reports indicate that just the decision to operate to smaller towns with the Bombardier Q500aircraftmay have jeopardized the future of the whole airline.  Interestingly, when I had done a detailed analysis of the airline industry in 2009, I found that SpiceJet and Indigo had almost the same cost per available seat kilometer which is the standard measure for cost performance of airlines.  

Yet SpiceJet chose an aircraft for its shorter routes which is known to consume more fuel because of its higher thrust engines.  Combined with the higher maintenance and service costs of the aircraft, this increased SpiceJet’s costs in a price-sensitive market thus adversely impacting the performance of the airline itself. 

The most successful low cost airlines in the world including South West Airlines are all totally focused on making sure that they have the lowest costs in the industry.

SpiceJet didn’t follow this basic strategy principle and has paid a heavy price for it. In contrast to SpiceJet, Indigo has remained completely faithful to the low cost model right from the time of acquisition of new aircraft.  

By placing some of the largest orders with Airbus, Indigo is reported to have got an amazing deal from the company allowing it to ramp up its services without compromising on cost.  

As anyone travelling on Indigo can attest, the airline has remained completely focused on efficiency and cost control right since its inception. Jet’s decision to revert to being a full service airline from December 1st marks the end of six years of strategic confusion, a time during which Jet tried out many experiments but with indifferent results.  

Strategy purists argue that hybrid strategies are very difficult to execute and often result in the worst of both the worlds rather than the best. Jet’s experience would tend to corroborate this.  

Jet has tried all economy flights, a front cabin with an intermediate class called Konnect Select, a mix of no frills and full service flights and several other combinations with the result that no Jet passenger was sure what kind of service he would be receiving on a particular flight he booked.  

Passengers were not the only ones who were confused; at times, the crew was too.  It is not surprising that in the process there was a disconnect between the airline and its customers which will hopefully be removed now as the airline has gone back to its original strategy.

There is some room for optimism – Jet reported a profit in the October-November-December quarter for the first time in 3 years. Interestingly, the FIA has put its finger on the one issue that is most important to Vistara – how soon can it fly outside India?  

Vistara’s strategic value to its co-founding airline, Singapore Airlines lies in its ability to be an international airline with an Indian flag, thus allowing Singapore Airlines to carry passengers from India in a westerly direction without touching Singapore.  

This is the only way that Singapore Airlines can compete with the three Gulf Carriers, viz.  Emirates, Etihad and Qatar Airways which currently have a strangle hold on west bound traffic from India. 

What is the strategic future of the domestic airlines operating in India?  

I expect Indigo to become an even more dominating player in the domestic airline industry.  SpiceJet is going to take time and considerably restructuring to be a serious competitor.  

The other two low cost players Go Air and Air Asia are too small to posean immediate threat to Indigo.  Air Asia is likely to remain distracted by recent incident outside India for some time to come. In the full service category Jet will do better than before but it remains more dependent on its international business and its role as a feeder to Etihad’s operations.  

Its success domestically will depend on how many passengers see value in a full service offering and whether Jet is able to keep control on its costs Strategy would tell you that even a differentiator has to be cost effective to survive. 

For Vistara, the important thing is that the clock has started ticking and everyday gets it closer to an international license even if the regulatory regime remains the same as it is today. That’s possibly why they are not in a hurryto expand. 

Do you agree with this analysis?  Do write and let me know. In the meantime, select an industry of your choice to study going forward!

(The author is Director & Professor of Strategic Management, IIM Indore. The views are personal.)

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