SpiceJet gets temporary relief

Kalanithi Maran, SpiceJet Ltd’s promoter, has decided to increase his stake in the company by 5% to 48.6%. This will be done through an equity infusion of Rs100 crore.

When promoters raise their stake in a company, it usually sends a signal to the market that they are confident of the viability of the business. The money will be used for expansion and, more importantly, to cushion losses.

How far will it help? Of course, the money will offer some respite but that would be temporary, given that the basic problems of the industry persist. All the three listed Indian aviation companies posted losses in the December quarter, considered the strongest three months for the sector.

Many analysts say SpiceJet has a comparatively better balance sheet. On 30 September, Jet Airways (India) Ltd had the highest debt on its books (Rs14,000 crore and debt equity ratio of about 4.2) among the three listed airlines. In comparison, SpiceJet’s debt as on 30 September was Rs712 crore (translating into a debt equity ratio of about 0.7).

But then, SpiceJet’s scale of operations is much smaller than that of Jet’s. Don’t forget that while announcing the December quarter financial performance, SpiceJet’s auditors made a note of the eroding net worth of the company thanks to accumulated losses of Rs1,078 crore.

Of course, Jet Airways and SpiceJet should benefit from Kingfisher Airlines’s Ltd’s flight cancellations in this quarter. But note that domestic passenger traffic growth has slowed. For the first time in three years, passenger traffic growth moved into single digits in December, considered a peak season for air travel. In January, airline passenger traffic grew 8.06% year-on-year, according to the directorate general of civil aviation.

Also, the most important variable for the aviation business—crude oil—is again at uncomfortable levels. In the December quarter, SpiceJet’s fuel expenses accounted for half of its total operating revenue and increased by 90% year-on-year. Tracking crude oil is critical not only for SpiceJet but also for all aviation companies.

True, SpiceJet did perform well on some counts in the December quarter—it improved its market share and reported a strong 41.5% year-on-year growth in revenue. But these improvements could not flow to its profits mainly due to higher crude oil prices and a weak rupee. While the rupee has started appreciating, crude prices are inching higher. All said, until there is a meaningful correction in crude prices, the profitability of all airlines, including SpiceJet, will be under pressure.