As losses mount, what’s next for SpiceJet?11 min read . Updated: 02 Jun 2014, 11:28 PM IST
Rising costs and record losses mean the budget airline doesn't even have enough cash to buy spares and parts
New Delhi: A SpiceJetBoeing 737 stands on the apron of Delhi airport, surrounded by mechanics who are systemically harvesting parts of the aircraft to provide spares for other planes in the airline’s fleet.
The mocking term used by aviation industry insiders for such aircraft, designated to have their parts cannibalized, is Christmas tree.
When an airline takes recourse to a Christmas tree, it is taken as a sign of crisis, proof that it doesn’t even have enough cash to purchase spare parts.
In the case of SpiceJet Ltd, once India’s most popular budget airline, the crisis has arrived less than four years after Chennai-based media baron Kalanithi Maran bought a 37.7% stake in the airline in 2010 to become its biggest shareholder.
The financials of SpiceJet, still India’s second largest budget carrier, are telling. The firm posted a record loss of ₹ 1,003 crore in the year ended 31 March. The loss has grown fivefold since the previous fiscal year.
The airline saw costs increase by 24% in 2013-14, but revenue rose by only 12%. The airline is effectively losing ₹ 2.75 crore every day it flies.
Internal emails accessed by Mint indicate that SpiceJet is finding it difficult to pay vendors, and this has now started having an impact on its operations.
“We have been advised that the Boeing aircraft originally planned to be made available in operation wef (with effect from) 8th May ’14 is getting further delayed," Sundaram Ganesan, general manager of network planning at SpiceJet, wrote to the engineering team in a 29 April email. “Kindly advise how soon you can get this aircraft into operation, enabling us to open the flight for sale."
The reply wasn’t encouraging. “Regarding serviceability status of VT-SGS (identity of a particular plane), I do not have confirmed date when aircraft can be offered to service," Arun Kashyap, general manager of fleet management and engineering, wrote back. “This is primarily due to want of engine and spares."
A lack of spare engines and parts to mount on existing aircraft have led the airline to resort to Christmas trees, the emails show.
Turkish Technic Inc. is contracted to maintain landing gear and components for SpiceJet. Maintenance services provider SR Technics Holding overhauls the firm’s plane engines. “We have robbed nearly 70 components to service other line aircraft due to Turkish Technic not supplying pool parts to us. Our finance is working on payment schedule for SRT & THY (SR Technics and Turkish Technic) for release of engine and component respectively. VP E&M (vice-president engineering and maintenance), COO (chief operating officer) and CFO (chief financial officer) are aware of current situation of payment to SRT and THY," Kashyap wrote without making a commitment to the planning department. “I can provide you date once engine is released from shop and Turkish Technic start supplying parts."
Cannibalization only helps to an extent. It carries with it the danger of spoiling an airline’s on-time performance, an important measure of customer satisfaction, if any additional aircraft is taken down from the network for any reason.
“There are spares constraints and we have to rob the spares from VT-SGI to service VT-SGO. We could not offer VT-SGI for service as spares were already robbed and installed on VT-SGO. We are hopeful that THY supply of parts will be resumed in few days. We are trying our best to keep aircraft in air with all constraints," Kashyap wrote in another email.
A SpiceJet spokesman denied the airline, which flies Boeing jets and Bombardier Q400 turboprop aircraft, was cannibalizing parts.
“Rupee, economy, industry capacity increase in excess of demand growth, and lumpiness of maintenance—for example a year ago there were no c-checks (maintenance checks) for Q400s. Now there have been several in the last few months," the spokesman said, identifying the reasons for mounting losses.
A cash crunch has forced SpiceJet to partly trim its fleet after facing pressure from lessors. It is returning seven aircraft to lessors, an airline official who declined to be named said.
It is perhaps not surprising that SpiceJet’s domestic market share shrank to 17.9% in April from 19.6% in the same month last year, while rival IndiGo maintained pole position at 31.6%, up from 29.8%, and is the rare entity in India’s airline industry that has announced profits.
IndiGo had a fleet of 66 aircraft in May last year which has risen to 78. SpiceJet, which had a fleet of 56 in 2013 including 15 Q400s, is down to 52 and the number is likely to decrease marginally as some Boeing jets are returned. The airline connects 48 cities with 350 daily flights including seven international ones.
How did things come to such a pass?
SpiceJet does face close scrutiny because it’s a listed firm, unlike many other privately held companies in the sector that do not disclose costs and other competitive data.
To be sure, all domestic airlines have been facing rough weather after India’s economy slowed to a growth pace of 4.5% in the year ended 31 March 2013, the least in a decade (growth in the following year is estimated at below 5%). High fuel and other operating costs haven’t helped.
Airline operators have accumulated combined losses of $8.6 billion (around ₹ 50,830 crore today) in the seven years ended March and are weighed down by $12.6 billion, according to estimates by aviation consulting firm Capa.
In 2010, when the downturn wasn’t visible and SpiceJet was doing well, Maranbought New York-based investor Wilbur Ross’s stake in the airline. The company’s net worth then was ₹ 478 crore and it had ₹ 450 crore in cash.
In fiscal years 2009-10 and 2010-11, the airline posted its first profits. But in the next two fiscal years, it posted a loss of ₹ 606 crore and ₹ 191 crore, respectively, before reporting the latest annual loss.
“It’s not been the easiest drive," SpiceJet’s then-chief executive officer (CEO) Neil Mills said in an interview in May last year, before leaving the firm in June.
SpiceJet had a negative net worth of ₹ 1,020 crore as on 31 March. Accumulated losses increased to ₹ 2,189 crore and total debt was ₹ 1,736 crore.
Its cash balance of ₹ 450 crore in 2010 has shrunk to ₹ 5 crore.
According to Rashesh Shah, an analyst at ICICI Securities Ltd, who has tracked SpiceJet closely for the past five years, the airline is partly paying the price for its rapid expansion. For instance, its fleet has more than doubled from 22 when Maran bought into the airline.
“Being small is better; if the industry is not growing fast, the more you expand your cost is increasing. That is hurting the firm in the downturn while in the upturn the big companies will do better," Shah said.
Until recently, ICICI Securities had a “sell" rating on SpiceJet’s stock starting in May 2013. The stock has lost 67.45% since Maran bought the stake on 13 June 2010, when it was trading at ₹ 55, to end at ₹ 17.90 on Monday. This compares with a 30.65% rise in BSE’s benchmark Sensex, which closed at 24,684.85 points on Monday, from 17,118.74 on 13 June 2010.
SpiceJet was also hurt by the weakness in the rupee, which slumped 11% against the dollar last year. Most of the airline’s costs are dollar-denominated. Since hitting a record low of 68.85 per dollar in August, the rupee has recovered to 59.11 (on Monday).
Recently, ICICI Securities raised its rating on the SpiceJet stock to “hold" in the belief that things can’t get any worse for the airline.
“This is the worst situation we have seen. Nothing can get worse than this. So from here on, we can hope to see only improvement," Shah said.
In April, SpiceJet’s board designated COO Sanjiv Kapoor as the new CEO, subject to regulatory approvals, Mint reported on 16 April. Because he is an American citizen, the appointment needs to be vetted by the home ministry. Kapoor, who was based in London, is a former CEO of Bangladesh’s GMG Airlines, which closed down in 2012. He has also worked with consultancy Bain and Co. in the past.
This is Kapoor’s first assignment as head of an airline with more than 50 aircraft, and he faces a career-defining challenge.
GMG Airlines co-founder and managing director Shahab Sattar said he does not want to go into the details of Kapoor’s stint there. “It’s a sensitive matter," he said without disclosing further details.
Since joining SpiceJet in November, Kapoor has made several key management changes to improve operations and cut costs. Chief technology officer Virender Pal, one of the oldest employees of the airline, was asked to leave. So was CFO Sam Isaac and other senior managers. Some saw their portfolios shuffled.
Kapoor then built a “buddy team" even though some of them didn’t have enough experience, according to an executive at the firm who spoke on condition of anonymity.
This new team included chief commercial officer Kaneswaran Avili and a dozen others were brought in.
Kapoor also asked Bain, the consulting firm where he had worked earlier, to restructure the airline’s network. Almost six months and ₹ 12 crore later, Bain suggested paring flying routes, an advice the company followed, according to a former SpiceJet executive who declined to be named.
New York-based Bain and Co. spokesperson Cheryl Krauss declined comments citing “client confidentiality".
This additional expense was incurred at a time when the airline had no money to pay vendors to buy nose-wheels for its aircraft.
In the last few months, Kapoor’s and Avili’s turnaround efforts have focused on two fronts. Kapoor has focused on marketing, branding and advertising, things close to his heart, while Avili has worked on revenue management.
The airline’s website has been brightened with crew members announcing various services. The food menu has been improved and is in some ways better than its rivals. Legroom has been increased in the first few rows in aircraft. The airline has also increased its ad spending.
Not only has the airline’s branding and recall increased after Kapoor’s efforts, it has also given sleepless nights to rival IndiGo on on-time performance, beating it in many of the last six months despite engineering issues, said a person with knowledge of the matter, who declined to be named.
Avili’s revenue management strategy didn’t do as well. The airline has announced at least 10 ticket sales in the past four months, offering cheaper tickets to passengers, including some starting at ₹ 1.
The practice is popular internationally with low-cost airlines. But the firm misunderstood the dynamics of the Indian market.
These discounts were offered in the hope that SpiceJet will sell cheap seats to passengers booking tickets two-three months in advance, but will be able to near-double fares for passengers booking closer to the date of travel. Internationally, tickets are more expensive for travel in the immediate week or the fortnight.
Although the airline sold the forward seat inventory cheap, it could not raise prices later as other airlines that had offered similar cheap fares did not increase theirs. SpiceJet, IndiGo and GoAir typically price their tickets nearly at the same levels.
“We are helpless. We don’t have a product or network to match IndiGo. So our sales bring more benefits to IndiGo than us, but we still have to keep the buzz on to get more revenue and passengers," said an airline official, referring to the increase in load factors for IndiGo every time SpiceJet announced a sale. He requested anonymity.
IndiGo matches SpiceJet fares immediately and, because it offers more choices of same-day return flights on prime routes, it tends to get more customers.
While in the past six months, SpiceJet has posted record losses under Kapoor, the current quarter will be a test case for him. Another loss could create severe problems and mar hopes of further investment.
On 20 May, SpiceJet said it was in advanced negotiations with an overseas investor for a possible infusion of capital to help fund its expansion plans and pare debt.
“Raising funds will be very difficult in the current circumstances, but cannot be ruled out," said Kapil Kaul, South Asia CEO for aviation consulting firm Capa.
The airline’s balance sheet already reflects these concerns. Its biggest challenge is financing costs, which have risen from ₹ 115.78 crore in 2012-13 to ₹ 136.61 crore in the year ended 31 March.
This has forced the airline to announce frequent sales to raise urgent cash to pay employees and vendors. It has also started seeking money from travel agents at high interest rates and offering cheaper tickets, a vicious cycle that hurts revenue.
That’s why the airline needs $200 million urgently, Kaul said. “Without this funding, it raises risks significantly and could impact continuation of operations or result in major downsizing," he said.
Maintenance costs have also increased manifold because SpiceJet is running the turboprop Bombardier Q400 aircraft for the first time in India. Multiple problems have surfaced in these aircraft because of India’s hot weather conditions, former CEO Mills had said in May 2013 interview.
The maintenance cost of a below-80-seater plane is more than four times the cost of maintaining a 180-seater Boeing 737-800 that SpiceJet flies, the airline executive quoted above said.
All this boils down to an urgent need for equity infusion. Maran has already invested at least ₹ 545.75 crore into the airline since 2010 by buying a 5% stake every year, the cap set by the market regulator, on top of his initial 37.7% stake purchase. His stake has increased to 58.46%.
Getting a loan with a guarantee from Sun TV, which Maran controls, could be the last resort, but looks difficult at this point.
Last month, Kapoor called a meeting of senior managers and told them all expenses needed to be capped immediately, said a person aware of the matter, who declined to be named. Kapoor asked each departmental head to submit a strong cost-cutting plan within days. The airline would even cut ground staff at the airport, something the former executive quoted above said would not help much, as their pay is low.
Of SpiceJet’s costs, 45% is spent on fuel, 21% on aircraft leases, 16% on engineering and maintenance and the rest on operations and administration. A 12% gap in cost and revenue shown by the airline in 2013-14 may prove to be difficult to bridge.