SpiceJet co-founder Ajay Singh plans three-phased investment for revival4 min read . Updated: 22 Dec 2014, 03:34 PM IST
Singh met the aviation minister and secretary last week to propose a rescue plan for the airline
Mumbai: Ajay Singh, a co-founder of SpiceJet Ltd who had sold his stake in the carrier in 2010, is negotiating with the current owners for a three-phased investment to help rescue the cash-strapped airline, according to two people close to the development.
Singh, who has close ties with the ruling Bharatiya Janata Party and is said to have coined the election catchphrase Ab Ki Baar, Modi Sarkar, had met aviation minister Ashok Gajapathi Raju and aviation secretary V. Somasundaran last week to propose a rescue plan for Spicejet, which is going through a phase of financial turbulence.
Initially, Singh plans to buy a significant minority stake in the airline, followed by investments by two foreign private equity (PE) firms, according to the two people cited above who declined to be named. After cleaning the accounts of the company, the PE firms and Singh propose to seek investments from a foreign airline.
“Singh’s team has started due diligence and has approached promoters. No investment bankers are involved in this," said one of two people.
Singh did not reply to text messages and calls seeking a comment.
Two ministry officials confirmed on condition of anonymity that Singh had suggested a slew of solutions to save SpiceJet, which had to ground its fleet briefly owing to financial crisis.
A spokesperson for SpiceJet, which is now controlled by media baron Kalanithi Maran, declined to comment.
“The proposals are at a preliminary stage," the first person cited above said. He denied newspaper reports suggesting that Singh has agreed to invest as much as ₹ 1,300 crore in the money-losing airline. “SpiceJet had informed the ministry that it has dues of around ₹ 1,150 crore. Singh is studying the current situation and depth of the problem."
On 5 December, the ministry had, through aviation regulator Directorate General of Civil Aviation (DGCA), asked SpiceJet—which was raising some of its working capital through advance ticket sales—to stop sales of tickets more than a month in advance. That restriction came after the airline cancelled around 1,800 flights in December.
This, along with reports of unpaid salaries, prompted the regulator to act fast to prevent a repeat of what happened with Kingfisher Airlines Ltd, the debt-laden airline that was grounded in 2012.
SpiceJet had to briefly ground its fleet for more than 10 hours as oil companies refused to fuel the aircraft citing dues. Amid rumours that the airline was shutting down, the aviation ministry permitted SpiceJet to accept bookings till March-end, asked banks to give short-term working capital loans worth ₹ 600 crore and requested state-controlled oil companies to extend a credit line for jet fuel for two more weeks.
Spicejet’s potential white knight Singh is a technology graduate from the Indian Institute of Technology, Delhi, who studied law from the University of Delhi and did his MBA from Cornell University.
In 2004, Singh had partnered with the London-based Kansagra family to turn around Modiluft. In 2005, the airline was renamed SpiceJet. Singh exited when Maran bought out the company in 2010.
“Singh is keen to return. When Singh left the company, SpiceJet had ₹ 800 crore in cash at banks. He is confident that he can turn around the airline," the second person cited above said. He said Singh believes that with crude oil prices heading south and passenger demand picking up, it is the right time to re-enter Indian aviation. “Singh says that if there is a good story, international investors will be keen to partner with Indian airlines. Some of the international airlines are also keen to join hands," he added, without elaborating.
Indian airlines continue to face a challenging environment for reasons such as overcapacity leading to aggressive pricing strategies, poor financial position of airlines (high debt and poor cash flows), and the lack of a comprehensive and integrated regulatory policy, said Nawal Taneja, professor emeritus at Ohio State University in the US, who serves as an adviser to airlines and governments worldwide.
“In the case of SpiceJet, its financial position is extremely critical. However, despite these major challenges, SpiceJet can survive if new investors not only put up the funds, but also elect experienced and independent business leaders to its board who, in turn, select a visionary and seasoned leader to run the airline," Taneja said.
The current owners of Spicejet are partly to blame as they failed to bring in desired capital to improve liquidity and reduce debt-servicing costs, a major drain on fledgling airlines, said Harsh Vardhan, chairman of New Delhi-based Starair Consulting.
“Maybe their own problems diverted their focus. The future of SpiceJet today is a big question mark. The airline industry as yet continues to be unviable with little hope from the government in providing a rescue package," Vardhan said.
He said that the recent grounding and disruptions have eroded passenger confidence, and critical staff, including pilots and engineers, are leaving the organization en masse.
“The new promoters may help restore market and staff confidence, still they have a tough job at hand. Unless substantial investment in form of equity is made, which can sustain long-term operations, any limited initiative would only increase the quantum of losses. According to my analysis, among all carriers, SpiceJet is the best candidate for revival," Vardhan said.
He endorsed that SpiceJet’s fundamentals are still reasonably good and it has an efficient and lean organization.
“Ajay Singh as promoter would be a good choice, since he is familiar with the working of the organization and can start hands-on the task of a turnaround, but the big question is the size of the war chest needed for such a turnaround," he added. “If the industry situation doesn’t improve, cash infusion may turn out to be an ongoing exercise."