Talking to CNBC-TV18, Kapil Kaul, CEO South Asia, Centre for Asia Pacific Aviation (CAPA), said the agreement is primarily a commercial one that allows Tigerair to get access to SpiceJet's domestic network. "You would see more commercial agreements from SpiceJet with other airlines going forward. It is just a basic need for load factor. I do not see a potential of investment. There are fundamental issues with respect to investments in SpiceJet, so they need to do a lot more before an investor comes forward," he said.
Also Read: SpiceJet jumps 8% on interline pact with Tigerair
When asked about the possibilities of a positive impact on SpiceJet's revenue side, he said, "I do not see this agreement making any huge revenue impact. But as long as they increase their code share and interline framework, possibilities of an impact on the revenue side would be there. However, at present, one must not overestimate the revenue impact. We have not come up with any number yet, but I am not seeing anything significant."
Below is the edited transcript of Kapil Kaul interview on CNBC-TV18
Q: SpiceJet was fairly categorical to say that there is going to be no equity arrangement in the future, so given that this is just an interline agreement what does it really mean for SpiceJet, that stock is up 9 percent today.
A: As Mr. Narayanan (SL Naryanan, CFO, Sun Group) had said this is primarily an interline agreement from Tigerair. Let us not read too much into it. It is primarily an agreement which allows to Tigerair to get access to SpiceJet's domestic network and it is primarily a commercial agreement. You would see more commercial agreements from SpiceJet with other airlines going forward. It is just a basic need for load factor.
Q: Is this a commercial argument that even though the company denies it could eventually lead to some sort of equity arrangement. Is that the potential you see with a player like Tigerair?
A: I do not see a potential of investment. There are fundamental issues with respect to investments in SpiceJet, so they need to do a lot more before an investor comes forward.
Q: If this is such a win-win for everybody, you get each others networks in other countries, why aren't we seeing more of this with other Indian carriers?
A: Earlier the low-cost airlines had a problem. The reservation and inventory management system they had, which is a Navitaire system which then allowed the flexibilities to do a GDS or code share and interline. But SpiceJet and Indigo had upgraded that to the new skies, reservation and inventory control system. That allows them an advanced distribution flexibility. So GDS, code share interline are possible. They upgraded about couple of months back. So going forward you will so more interline or code share agreements from SpiceJet and possibly with other carriers.
The only thing you need to note that though it could have the potential of improving load factors, but what it does in a sense that these are diluted products from a pricing perspective. I do not know normally how they share revenues from these 14 points. Largely you see a lot of dilution in the product. India is a market that if you are able to price it at a particular point, there is a tremendous market for such. So load factors are not a problem in India provided you get a fare which connects to more customers.
Q: In other words are you saying that you do not expect a huge revenue impact because of these interline agreements, at least on the SpiceJet end?
A: You might see some. This is basically a flight agreement on a particular route. This is basically the Hyderabad-Singapore route and other passengers could move to each other's networks.
As I said the reservation inventory control systems allows them, the key point which actually challenge this was how do you transfer baggage from a particular airline to another airline. Now airports have come forward, in Singapore you have Changi connect which takes the responsibility of transferring passengers from one low-cost to the other low-cost. So now I think the basic framework seems to be in place.
Q: Do you see this having a big positive impact on SpiceJet's revenue potential? Any numbers you may have crunched at CAPA?
A: To be honest with you once you see more advanced code share and interline with SpiceJet then you could see it. This might be a start for more such agreements and then possibly have a revenue impact. But I do not see just this commercial agreement between SpiceJet and Tigerair making any huge revenue impact. But as long as they increase their code share and interline framework, there's a possibility of an impact on the revenue side. But, at present, one must not overestimate the revenue impact. We have not come up with any numbers yet, but I am not seeing anything significant.
Q6: You said you doubt this would extent into some sort of equity arrangement or equity investment by Tigerair. The management of SpiceJet today said they have no update on any equity arrangement so far. Are you picking up anything post the Jet -Etihad deal, though there is some trouble around that deal whether there are more investors interested in Indian carriers such as Spice, Indigo or Go?
A: I do not think Indigo is in the market. Go and SpiceJet are. Increasingly as their losses increase, especially for SpiceJet, the funding requirement increases. This makes it very difficult to have an investor on board. When we did an assessment for SpiceJet in January 2014, we looked at a funding requirement of USD 250-300 million. I feel they would require about couple of hundred millions minimum to continue operations and that is much about their total market cap. So they are doing a lot.
Q: Where will that money come from - promoters?
A: Promoter investments would be the only solution at present. I even see SpiceJet downsizing as well. They are currently going through a restructuring exercise. You might see some downsizing. So a new SpiceJet could emerge, but it will take a while for investors to look at it positively.
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