SpiceJet’s Future – Still Hanging in the Balance

The beleaguered low-cost carrier SpiceJet has hit rough weather and has sought help from the Civil Aviation Ministry in the form of deferment of payments of dues, tax exemption and regulation related to flights etc. Last week, the SpiceJet Board approved a proposal of principal shareholder and promoter Kalanithi Maran to transfer the ownership, management and control of the company to former promoter and director Ajay Singh. Co-founder Singh, known for his business acumen and global contacts, is in command again and the Government has assured that if Singh comes out with a viable restructuring proposal then it will take all necessary steps to see the carrier flying. After Kingfisher, grounding another carrier would certainly be a setback for the sector as a whole.

Rise of SpiceJet

The post-liberalization era witnessed high growth rate and with rise in income the civil aviation sector got a boost. The monopoly of State-owned carriers was gone and many private players entered into this very competitive and high operating cost sector.

In 2005, Ajay Singh, as one of the promoters, started the budget carrier. Very soon, SpiceJet, with its fleet of new aircrafts, safety standards, quality services and low fair established itself as a strong player in the sector. It was a success story in the sector as it became the most profitable airline in the Indian skies and that prompted media baron Kalanithi Maran to buy majority stake (58.4 per cent) in SpiceJet in 2010. Maran had invested Rs 1,300 crore to own the airline. Currently, the airline occupies 17 per cent market share. The carrier is India’s second-biggest budget airline. IndiGo occupies the first position.

About four years ago, Singh exited from the carrier. However, the airline continued to grow and dominate the scene. But lately a series of bad decisions including replacing professionals with family and friends to run the airline, along with external factors like escalating jet fuel prices, high taxes and rising infrastructure costs started taking its toll. Since last couple of months the carrier is in deep trouble.

The debt factor

With a liability of Rs 2,000 crore, the present crisis at SpiceJet is not unprecedented. Rising debt may lead to grounding of the airline. In 2012, Kingfisher Airlines Ltd of liquor baron Vijay Mallya was grounded after accumulating $1.4 billion of debt.

The bankers, who lent huge money to Kingfisher and struggling to recover their money, go on record to admit that the sector had a ‘brand’ and it is painful to see that grounded. The Kingfisher was grounded because of huge operational losses it incurred by providing quality service to passengers at low cost and finally it became unsustainable. The bankers’ consortium was eagerly looking for a viable revival plan. Unfortunately, that did not happen and promoters were declared as wilful defaulters.

Similarly, SpiceJet is also not able to meet the high cost of operations at a time when the sector is going through consolidation phase. Sustaining high operational cost with cut-throat competition from big domestic and foreign players and strict norms set by the Government and its agencies made the going tough for the low-cost carrier.

The question is, What future awaits SpiceJet? Ground or sky ?

There is a hope that Ajay Singh is serious about revival with a viable long-term financial plan and striving hard to rope in investors. After several rounds of talks with senior officials of the Ministry, he has almost convinced the Government about the prospective investment in his company and wants support from the Government and its agencies like the Airport Authority of India, Director-General of Civil Aviation, oil marketing companies, among others.

Key issues

Significant and immediate funding from promoters is the key. Singh is a very well-connected businessman and that gives hope that he would raise funds to keep his airline flying. The key metrics include revenue per available seat km and cost per available seat km. Favourable metrics helped the airline to grow but started putting tremendous pressure once revenue began to fall and cost per seat increased. The airline has been losing money since.

The airline went on buying big jets as the number of domestic travellers was expected to triple in the decade to 159 million by 2021. That growth projection prompted carriers to order billions of dollars in new aircraft. SpiceJet was expected to spend $ 4.4 billion to buy new planes.

Now the company is forced to scrap its fleet expansion. It is also facing regulatory scrutiny after a spate of cancellations. The DGCA had barred SpiceJet from accepting bookings for travel more than a month ahead.

Experts feel that the operating costs are much higher here than in other large aviation markets, while the fares are lower. If these additional costs were passed on to the passengers, it would only dampen or stifle demand, as the airlines themselves cannot absorb any of these costs due to their fragile financial conditions.

The way forward

SpiceJet needs to draw a long-term plan. Investment should come as soon as possible and it would not come unless the Ministry gives its approval. So delay on the part of the Government can make prospective investors restless. Apart from capital infusion and financial restructuring the company would require reworking its network strategy for route rationalization. Going by media reports, Singh along with two other investors is expected to infuse Rs 1,500 crore in three equal tranches in the carrier till March, 2015.

It is also expected that going forward the airline would improve operational efficiency. It has cleared its dues to oil marketing companies. For other dues, the Government has given some relaxations. The ATF prices has gone down tremendously. This will help the airline as nearly 50 per cent operational cost goes to purchase of ATF.

It would be interesting to watch the developments. If Singh is able to bail out the airline from the crisis and profitability comes in by the next fiscal, we will certainly be author of yet another success story.

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