Calculated risks could see SpiceJet beat covid2 min read . Updated: 19 Aug 2020, 07:54 AM IST
- Airline tackles pandemic blues by taking wide-body planes on wet lease
- SpiceJet was in dire need of a capital infusion even before the virus outbreak
SpiceJet co-founder Ajay Singh has the challenging task of ensuring that the no-frills airline conserves cash, even as he renegotiates contracts, recapitalizes its balance sheet, and bags all possible revenue opportunities to emerge from the crisis caused by the covid-19 pandemic.
The pandemic has spelt doom for the aviation sector globally, but SpiceJet appears to be more burdened than many other airlines. Last month, the carrier’s statutory auditors, S.R. Batliboi and Associates Llp, raised doubts about the company’s ability to continue as a going concern as the no-frills airline reported its highest ever quarterly loss during the March quarter at ₹807.07 crore.
SpiceJet’s challenges started with delays in the delivery of Boeing 737 MAX planes, which impacted the airline’s profitability, said Kapil Kaul, South Asia chief executive officer of CAPA-Centre for Aviation, an aviation consultancy firm.
In a first for an Indian no-frills carrier, SpiceJet recently inducted an Airbus A330 aircraft on wet lease (an arrangement through which the lessor operates the aircraft and also provides the crew) for medium and long-haul operations, and an Airbus A340 aircraft for cargo operations. It also announced flights to the UK, after acquiring coveted slots at London’s Heathrow airport. The slots are temporary but come at a very opportune time for the carrier.
SpiceJet’s strategy of inducting wide-body aircraft such as Airbus A330 and A340 under wet lease could be viewed as unfocused if these were normal times, said a senior airline official. However, under the present circumstances, this seems to be a clever move that is likely to result in incremental cash generation.
“Overall demand, especially for international flights, has dropped significantly, but there is still more demand than supply in the market because of the much reduced direct flights and the inability of Middle Eastern or other connecting carriers to ferry passengers or take cargo directly from India to the West under air bubble arrangements," said a senior airline official, requesting anonymity.
“A lot of wide-body aircraft and crew are idle because of the pandemic. So, SpiceJet has likely got a very good deal on the wet lease, possibly paying only for the hours the aircraft is utilized as opposed to paying a monthly fixed rent. However, it’s too early to conclude that these measures alone will help the airline survive. What can be assumed is that they will help the airline keep flying longer despite adverse circumstances," the person said.
Indian airlines will need to raise about $3.5 billion to survive the pandemic, aviation consultancy firm CAPA India said in a report. However, SpiceJet was in urgent need of capital infusion even before the coronavirus outbreak and the pandemic has only accentuated the liquidity crunch, Centrum Institutional Research said in a report on 31 July.
“Covid-19 has further increased risks to strategic levels and concerns expressed by the auditor are logical and on expected lines," said Kaul. “The key to survival and then revival lies in serious recapitalization. However, the promoter of SpiceJet has shown the highest determination to fight and the focus on cargo is an example of this grit and commitment to survive."