SpiceJet seeks more time to pay for aircraft lease3 min read . Updated: 23 Oct 2018, 06:38 AM IST
A delay in delivery of 737 Max planes by Boeing Co. has caused liquidity issues at SpiceJet, says Crisil
Mumbai: SpiceJet Ltd has sought a three-month extension from a leasing company for making payments on aircraft leases as a delay in delivery of 737 Max planes by Boeing Co. has caused liquidity issues at the budget airline, said ratings agency Crisil Ltd. Crisil also downgraded its long-term rating on SpiceJet’s bank facilities from BBB stable to BB negative. It also downgraded the short-term rating on the bank facilities from ‘A3+’ to ‘A4’.
“Delay in delivery of Boeing 737 Max aircraft further led to liquidity mismatch as the company was to receive healthy profits on sale and lease back transaction," Crisil added in the report.
Instruments with A3 rating are considered to have moderate degree of safety, while those with A4 rating are considered to have a minimal degree of safety regarding timely payment of financial obligations.
“The downgrade reflects Crisil’s belief that SpiceJet’s operating performance will remain under pressure in the near to medium term, driven by significant increase in the operating cost and limited ability to pass on the increased cost to customers because of intense competition," said Crisil.
“Further, SpiceJet was expecting some cash infusion from the sale and lease back transactions that got delayed because of late delivery of the new aircraft. Hence, the liquidity profile has weakened," it said.
Under the sale and lease back method, airlines often sell their new planes at a premium to their buying price to leasing companies and free up cash by leasing them back.
SpiceJet had in January 2017 ordered 205 Boeing aircraft valued at $22 billion at list prices. This was on top of a previous order for 155 Boeing planes.
The airline is expected to fund a large part of its aircraft purchases through the sale and lease back mechanism.
SpiceJet planned to take delivery of 15 Boeing 737-8 Max aircraft by March 2018.
“All the funding for Boeing 737-8 Max that is delivered to be us during 2018 and 2019 has been completed," SpiceJet chairman Ajay Singh said in March, adding that all the aircraft are on sale and leaseback model.
The airline said the ratings downgrade is an industry phenomenon and that it continues to outperform the domestic aviation industry on financial metrics.
“However, with regard to one single lessor mentioned in the Crisil report, we had taken a one-time relief of 2-3 months to better manage cash flows during the lean month of September 2018," SpiceJet said on Monday.
SpiceJet is not the only airline to be subjected to a rating downgrade.
Ratings agency ICRA had in October downgraded Jet Airways (India) Ltd’s long-term borrowing programme, from BB to B. A ‘B’ rating signifies high risk of default on servicing financial obligations, while a ‘BB’ rating signifies a moderate risk of default.
Indian airlines, including SpiceJet, are facing a financial crunch because of rising fuel prices and a weakening rupee, which have swelled the operating costs of airlines as most payments are dollar-denominated.
The domestic aviation sector is facing headwinds. SpiceJet is facing stiff competition from other budget airlines and this has prevented it from fully passing on the increase in operating costs to customers.
“SpiceJet has taken several steps to address its costs and liquidity issues. Ability to pass on the increased cost to consumers, timely infusion of cash from sale and lease back transactions and resultant impact on liquidity profile will remain key monitorables," said Crisil.
The airline, which currently has a fleet of 60 aircraft, had a 12.4% share of the domestic air travel market as of August, according to the latest data from the Directorate General of Civil Aviation (DGCA).