When the Wright brothers came up with the idea of a machine
that could fly, they were brandished as the buffoons of the century. And
naturally, their idea found no traction with the investors (read: wealthy
people of the 20th century). But, that was indeed the 20th
century, where anyone with a revolutionary idea was effectively termed a
lunatic.
But, a hundred years later, things are quite the opposite.
As the trend goes, the more ridiculous the idea, the more backing it gets from
modern day investors. The latest being Elon Musk’s ridiculous (or not) idea of
high speed travel, or in the words of the famous Science Fiction writer Jules
Verne; Teleportation.
So, the bottom line is that the 21st Century is a
boon for companies looking for investors. But, then there is this one industry
that is the investor’s nightmare; the dreaded Airline industry. While the
industry has come a long way from the era of the Wright brothers, yet, it
stumps even the most seasoned investors.
It remains till date a most volatile market to be invested
in. And the recent Spicejet crisis is just another chapter in this book. A
company, which upon its inception shaped out to be the game changer in the domestic
airline industry in India, was seen crumbling like a set of dominoes.
And the problem does not lie with the market. The India
Civil Aviation Industry comes among the top 10 biggest aviation markets. It carries around 150 million passengers on a
daily basis; and this number is expected to increase to 450 million by 2020. It
has been repeatedly established that this sector has a huge latent demand, just
waiting to be tapped into. With new companies joining the airline bandwagon
each year (the latest being Air Asia and TATA’s Vistara), the sector should be
going through immense growth, right? Not really.
While the sector is growing rapidly, it’s mainly because of
the growing demand for air travel; due to economic development and increase in
the disposable income of the people. In most cases, the companies drive the
industry towards growth. But, in terms of this particular industry, the
companies are acting as dead weight.
As soon as it gains normalcy and stability, a huge setback
is dealt. Spicejet was considered a pioneer in the sector of budget air travel,
but the recent blow to the company has knocked it out of the race for some
time. And Jet Airways and Indigo are going to be the biggest gainers in this
mess.
The root of Spicejet’s downfall lies at its overzealous
pricing strategies. In order, to win over market share, it offered heavy
discounts on its tickets, the year round.
It offered tickets at over 15% lesser than other airlines. The logic
behind the company’s decision was sound. The surge in demand should have
factored for the discounts. But, it didn’t.
And what started as a marketing strategy, turned into an organizational
blunder.
Somewhere down the line, the company became obsessed with
the idea of increasing demand, figuring that it was bound to rise eventually.
But, the intense competition from Indigo and Jet prevented that from happening.
It’s almost as if the entire finance department of the company went into a
slumber while the marketing department was out playing.
And apart from the company, the biggest losers in this mess
were the investors. This debacle hit like a blow out of the blue. The shares of
the company had got a big boost last month when billionaire investor Rakesh
Jhunjhunwala purchased 7.5 million shares in the company, leading to huge
market gains for the investors as the stock price soared.
A growing stock price, big investments are all favorable
trading signs for investors. But, when the company hit the emergency button
this month, it was pandemonium all over. The market share of Spicejet fell by
around 17 per cent. The market cap of the company fell by around 400 crore
rupees. According to company estimates,
it needs an infusion of around 1800 to 2000 crores to regain stability. For
now, the situation seems to have calmed down with help from the government and
the company’s promoter Mr. Ajay Singh, who is being hailed as the Knight in
shining armor for the company.
Coming back to the issue, it really is quite evident now
that the whole sector is highly volatile; like a nuclear reactor just waiting
to melt down. There are quite a few
factors that contribute to this volatility; intense competition, fluctuating
variable costs, which include unprecedented changes in the prices of aviation
fuel, etc.
Apart from the above factors, several other factors include
poor corporate governance, messy financial reports and lack of investor
insight. It’s a very difficult market to invest into and many have had their
fingers burned. It is very difficult to
judge when the yields of the airline might be in the red.
So, if you were planning to invest in some airline, be
cautious. Many finance pundits have already marked it as a ‘NO-NO’ if you are
looking for personal investing. Leave this industry to the big guns. Or if you
do like to be the daredevil, do not dare to even blink; because you never know
when the tide might turn.
