3 things SpiceJet needs to do to stay afloat despite strong headwinds

An airline CEO is learnt to have recently told a journalist that one of the biggest imponderables in the domestic airline industry is how SpiceJet continues to survive even after being hit by ‘tsunami-like’ disasters.

The reality is that nothing seems to hurt the airline, not even a sinking bottomline, unless one counts the amount Boeing is expected to pay for the failure of the 737 Max aircraft, or even the near-misses in the air for some of its flights, its court battles with the previous owners, the Marans, over the return of the loan or the rejection of chairman and MD Ajay Singh’s anticipatory bail plea in courts. While the court order has recently been put on hold by one of the courts, Singh seems to be wading through one crisis after another.

The challenges for SpiceJet

Marans’ demand: Unable to take on the mounting liabilities, Kalanithi Maran of the Sun Group handed over SpiceJet to Ajay Singh for just Rs 2 in 2015, but in return, Singh also took on the liability of Rs 3,500 crore. However, Singh asked the Marans to put in some money to sustain the operations. The Marans invested Rs 578 crore into the operations, for which the airline issued cumulative redeemable preference shares (CRPS). While it did not give Marans any voting rights, it gave them a certain amount of foothold in the airline. However, the airline was unable to repay the money, the Marans claimed. 

The Marans also said that had the CRPS been allotted as negotiated, they would have owned 18.92 crore shares valued at Rs 1,200 crore. The courts finally intervened and the airline offered Rs 578 crore and Rs 22 crore as interest, which the Marans turned down. The Marans have now sought Rs 900 crore, which the airline is unwilling to pay, claiming that it is incurring losses.

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Payment default: The airline has deferred payments to various parties, including lessors and other vendors and dues to statutory authorities, according to SpiceJet’s financial statement. The airline has, however, recently settled dues worth $24 million to Credit Suisse.

Near Misses: Last week, there was a video of a SpiceJet aircraft hitting a pole on the Indira Gandhi International Airport tarmac when it was backing up. This is not the only incident in which the airline’s flights were involved.

Compensation from Boeing: It has been long in coming but the airline’s finance team mentions it regularly in its P&L (profit and loss) as “other income”, which has managed to keep the losses down. During the previous quarter, SpiceJet even managed to make a small net profit of Rs 23.28 crore compared with a net loss of Rs 57 crore during the same period previous year. This was largely due to “other income” going up to Rs 430 crore compared with Rs 189 crore during the previous-year period. 

In a note, Walter Chandok Co LLP said the management of the holding company had recognised a recoverable of Rs 1,554.90 crore over the period up to September 30, 2021 for recovery of rent, maintenance and other expenses incurred on Boeing 737 Max aircraft, which have been grounded since March 2019. As further explained in the note, “the holding company has settled the aforesaid claims with Boeing and 737 Max aircraft lessors during the quarter ending December 31, 2021 and has recognised further amounts as ‘other income’.”

“In our assessment, there was no virtual certainty to recognise any recoverable until September 30, 2021…,” said the note. What it clearly shows is that the compensation which was not due till the September quarter of 2021 should have not been included at all in the P&L.

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The airline has, however, managed to make some impressive progress with regard to its cargo business. The management has now decided to hive off its profitable entity (profit of Rs 67 crore in Q3), SpiceExpress, as a separate company which will result in a one-time gain for SpiceJet. As of now, the airline has a negative net worth of Rs 3,900 crore.

The airline should now expect to perform better as most of the COVID protocols have been relaxed. The number of weekly average daily fliers has grown from 2.96 lakh to 3.16 lakh as of February this year.

However, the rising airline turbine fuel (ATF) prices could be a dampener not just for SpiceJet but for other airlines as well. Hence, it is all the more necessary for the airline to raise funds to sustain its operations. The rise in ATF prices can pull the airline down again and even its cargo operations could suffer.

Three things Ajay Singh needs to do immediately

1. Settle the airline’s dispute with the Marans immediately as the interest cost on the loan it has taken from them will continue to rise.
2. Raise funds up to Rs 3,000 crore either from banks or from other lenders even if it means shedding equity and go in for recapitalisation.
3. Reorganise the route network and get out of unviable ones to reduce losses.

If these measures are not carried out immediately, the airline’s market share, which is currently at around 12-13 per cent, is bound to suffer and so will the share price which is currently at around Rs 59 per share.