The Perils of Airline Investing: The Spicejet Crisis

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 20^th century). But, that was indeed the 20^th 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 21^st 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.