Expat Pilots Pruned as SpiceJet Seeks Profit: Corporate India

SpiceJet Ltd. (SJET), India’s only listed budget airline, plans to cut costs by keeping fewer expatriate pilots on its payroll and changing flight crew schedules to help end two years of losses.

Starting this month, the New Delhi-based company is operating all of its Boeing Co. 737 aircraft using local pilots, Chief Executive Officer Neil Mills said in an interview. Overseas nationals typically get paid 40 percent more than their local peers in India’s aviation industry, including tax liabilities. A weaker rupee added to the expenses, Mills said. The airline will retain foreign pilots needed to operate its 15 Bombardier Inc. Q400 turbo-propeller planes, he said.

“They supported us very well and they really helped us grow, but their cost has become very huge, particularly with the exchange rate having gone up adversely,” Mills, a South African, said on the telephone from his office.

SpiceJet, controlled by billionaire Kalanithi Maran, is joining rivals including Jet Airways (India) Ltd. (JETIN) and state- owned Air India Ltd. in trimming expenditure as competition, fuel prices and government levies weigh on earnings. SpiceJet shares more than doubled last year, the best performance since 2009, amid speculation Maran will sell a stake to an overseas partner after the government relaxed foreign investment rules.

Employee Costs

Spending on workers at SpiceJet, which had hired 60 expatriate pilots for its Boeing fleet, rose 66 percent to 4 billion rupees ($74 million) in the year ended March 31 after the carrier added the Bombardier turboprops. Jet Airways, the nation’s largest publicly traded carrier, spent 18 percent more on salaries during the period, according to data compiled by Bloomberg.

The Indian currency weakened 12.4 percent against the dollar in the same period, making it more expensive for employers paying salaries denominated in greenback.

New duty rosters for attendants will also ensure they return to their home base by the end of the day, eliminating hotel expenses, SpiceJet’s Chief Financial Officer R. Neelakantan said in an interview separately.

“Irrespective of the volume of savings, a good organization won’t pass up an opportunity to save even a single rupee,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “Pilot costs are a major expense for airlines.”

Saving Money

Air India too is switching to a new flight duty assignment system by March to ensure crew return to their home base, according to a statement from the Ministry of Civil Aviation. Mumbai-based Jet Airways, which has planes worth $2 billion available for sale and leaseback transactions, will be able to unlock $500 million after discounting aircraft loans of about $1.5 billion, K.G. Vishwanath, vice president of commercial strategy, said in a Nov. 5 conference call.

SpiceJet, which operates 36 Boeing aircraft and plans to add seven more this year, forecasts it will end the financial year without losses after reporting profit in the first and third fiscal quarters, CEO Mills said. A net income of 1.02 billion rupees in the three months to Dec. 31 exceeded the median 212 million rupees predicted by six analysts in a Bloomberg survey, compared with a loss of 392.6 million rupees a year earlier.

Net loss at SpiceJet may narrow to 610 million rupees in the 12 months through March 31, from 6 billion rupees a year ago, according to the median estimate of 11 analyst estimates compiled by Bloomberg. It may report a profit of 1.05 billion rupees next year, the estimates show.

Fuel Prices

Shares of SpiceJet have risen 4.9 percent this year, lagging behind a 7.1 percent rally in Jet Airways stock. The shares fell 1 percent to 46.15 rupees in Mumbai today. Seven of 11 analysts recommend buying SpiceJet shares.

Still, airline finances are strained because of high jet fuel prices and airport charges.

“The biggest challenge we continue to have is jet-fuel pricing in India, particularly around the taxes and the mechanism,” SpiceJet’s Mills said. “It continues to be so for the entire industry.”

India last year ended a ban on airlines directly importing jet fuel to help them save on local taxes that average about 25 percent. The petroleum ministry agreed to allow airlines to use refiners’ infrastructure at airports when they import the fuel, Aviation Minister Ajit Singh said in a Dec. 4 interview.

Kingfisher Troubles

SpiceJet has reached as many as nine agreements with suppliers and vendors to import the fuel, Mills said. The airline will receive its first consignment of imported jet fuel by March 31.

The nation’s carriers have also benefited from capacity cuts after cash-strapped Kingfisher Airlines Ltd. (KAIR) reduced services through last year and eventually halted flights in October. Kingfisher’s operating permit lapsed Jan. 1 after Chairman Vijay Mallya failed to show authorities the funds to restart and maintain operations.

“Airlines are gaining from improved yields due to Kingfisher,” said Sharan Lillaney, a Mumbai-based analyst at Angel Broking Ltd., who rates SpiceJet stock a buy. “This profit is going to be sustainable over a long period of time now,” he said, referring to SpiceJet.

SpiceJet isn’t desperate to raise cash from a stake sale unless the deal is attractive, Mills said. Owner Maran’s holdings in the airline and Sun TV Network Ltd. (SUNTV) are worth about $2.4 billion, according to data compiled by Bloomberg.

The carrier was in talks with AirAsia Bhd., an Indian government official said on Nov. 26, a claim denied the same day in an e-mail statement by the Sepang Selangor, Malaysia-based airline’s group chief executive officer Tony Fernandes.

“Where we’re going is really dependent on what deal is available, but we are not desperate,” Mills said. “I am the only CEO in India today that has any issue with fixed deposit rates because I have money in the bank.”

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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