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Can Ajay Singh save SpiceJet a second time?

While the strategy of focusing more on the cargo business has paid off for SpiceJet, its chairman and managing director Ajay Singh needs to ensure there is adequate capital for the airline, going ahead.  (Photo: Sonu Mehta/HT)Premium
While the strategy of focusing more on the cargo business has paid off for SpiceJet, its chairman and managing director Ajay Singh needs to ensure there is adequate capital for the airline, going ahead. (Photo: Sonu Mehta/HT)

  • The airline is faced with mounting losses, a clutch of legal challenges and uncertain recovery in travel.
  • The future remains uncertain given the talk of a third wave of covid-19 and emerging variants. Rating agency Icra Ltd expects domestic air traffic to reach pre-covid levels by 2022-23

By December of 2014, SpiceJet Ltd, then controlled by media baron Kalanithi Maran’s Sun Group, was debt-ridden and on the verge of closure. The glide path to bankruptcy had become apparent. One morning, state-owned oil companies refused to refuel their planes. The airline had started gradually grounding planes. Hundreds of flights were cancelled and salaries of employees delayed.

This is when Ajay Singh resurfaced, just in the nick of time for the airline. He had co-founded Spicejet in 2005. Those were the heady days of Indian aviation that saw a sudden spurt in low-cost carriers. IndiGo, Go Air, Kingfisher Airlines and SpiceJet all started services in 2005. In 2010, Singh exited the company and the Marans of Sun Group acquired control in 2010. In January 2015, with the airline teetering on the brink, he bought back the company, ignoring advice from friends. The airline could be turned around, he believed. “There was still great potential in aviation, and oil prices were coming down," Singh, now the chairman and managing director of SpiceJet, told this writer in 2018. “I thought nobody would blame us if the airline died but if it succeeded, we would have stories to tell our grandchildren."

Singh executed an astute strategy aided by declining oil prices that led to several quarters of profits. For a while it seemed like he had managed to steady the ship. But now, after two waves of the covid-19 pandemic that has battered the aviation sector around the world, and oil prices soaring, it’s testing times yet again for SpiceJet. Can Singh save the airline a second time is the big question now.

SpiceJet posted its fifth consecutive quarterly loss of 257 crore in the three months ending March 2021, although that doesn’t reveal the full picture, as we shall see momentarily. In 2020-21, the company lost 1,029.89 crore, up from a loss of 936.57 crore in the previous year. Revenues dived 54% to 6,119.39 crore last year.

Air pockets
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Air pockets

It is nearly a repeat of 2014. The auditors of SpiceJet Ltd, Walker Chandiok &.Co. LLP, have raised doubts about its ability to continue as a going concern—mounting losses have led to a complete erosion of its net worth. By March-end, SpiceJet’s current liabilities exceeded its current assets by 5,185.84 crore; the airline only had cash and cash equivalent of 35.94 crore.

SpiceJet’s trouble, however, needs to be read in the context of the broader downturn in the sector. Most Indian airlines were loss-making ventures even before the pandemic hit. No-frill carriers such as IndiGo and SpiceJet were exceptions. However, restrictions on air travel over the last one year have meant trouble even for India’s top domestic airline—IndiGo. InterGlobe Aviation Ltd, the parent company of IndiGo, posted its biggest quarterly loss in the June quarter (Q1FY22) and this was the airline’s sixth consecutive quarterly loss. The future, meanwhile, remains uncertain given the possibility of a third wave and the risk from new variants. Rating agency Icra Ltd expects domestic air traffic to reach pre-covid levels by 2022-23; international air traffic, on the other hand, may rebound only by 2023-24.

While airlines such as the Wadia Group-operated GoAir, and Tata Group-operated Vistara and AirAsia India, can count on their promoters’ deep pockets to pull them out of the quagmire, SpiceJet has limited options. The firm needs capital urgently to stay afloat. Singh, therefore, faces one of the biggest challenges of his career.

Turbulent skies

SpiceJet faces headwinds that are beyond slumping air travel. Unlike 2015, SpiceJet now has to deal with high oil prices. Global crude prices have shot up from $52.05 a barrel on 31 December, 2020 to $72.17 a barrel by 26 July. Aviation turbine fuel (ATF) or jet fuel constituted about a fifth of total costs in 2020-21 and it may shoot up further this year.

“We remain cautious on SJET (SpiceJet) due to its weak balance sheet (negative net worth) as well as lower yields amid rising fuel costs," a report by BOB Capital Markets stated. “The key to its survival will depend on the availability of liquidity (either through debt or equity) coupled with staying afloat among strong competition from peers who are also raising funds," the report further added.

Besides jet fuel, the firm is also dealing with a clutch of legal cases. Aircraft manufacturer De Havilland Aircraft has moved the Delhi high court to enforce an award from a UK court. The award comprising $42.9 million in damages came after the aircraft maker dragged SpiceJet to court over alleged payment defaults following the delivery of Q-400 turboprops. Then, there is Irish aircraft lessor Goshawk and Asian leasing firm BOC Aviation that have dragged SpiceJet to UK courts for defaulting on lease payments.

“In the Delhi high court matter, SpiceJet is defending its position in accordance with the legal advice. Further, SpiceJet has challenged the order before the Court of Appeal in the UK, which is pending adjudication presently," a SpiceJet spokesperson said. “We are working with all the lessors (including Goshawk) to amicably settle the matter. On the basis of our arrangement with BOCA, the parties have suspended any court proceedings," the spokesperson further clarified.

Meanwhile, SpiceJet is also fighting a dispute with the Marans—the Supreme Court had in November 2020 stayed a Delhi high court order asking SpiceJet to deposit around 243 crore as interest related to a share transfer dispute with the former promoter. The matter is pending legislation.

SpiceJet is also facing stiff competition in the sector, and it could get worse post pandemic, said experts. Deep-pocketed rivals and domestic market leaders such as InterGlobe Aviation can drive out competition in certain routes by discounting ticket prices. Both domestic airlines as well as international carriers are expected to roll out heavy discounts to make up for the smaller passenger numbers today. “SpiceJet, which commands a 9%-12% market share, continues to face challenges that can be traced to cash-flow, costs and the lack of a clear path to profitability," Satyendra Pandey, managing partner at aviation advisory firm AT-TV, said.

In June 2021, IndiGo led the market with a lion’s share of 54.7%, followed by Air India at 16.5%, according to the aviation regulator Directorate General of Civil Aviation (DGCA). SpiceJet with 9% share is the No.3 in the pecking order.

Flight path

So, what can Ajay Singh do to stabilize the airline and hold on to market share?

One, the company needs capital right away. After the March-quarter (Q4FY21) results, the airline’s board of directors announced its approval for raising up to 2,500 crore to bolster its financial health. The board also decided to hive off its growing and profitable cargo operations into a separate entity, a move that analysts said would give the airline avenues to raise cash. As per a SpiceJet spokesperson, multiple options are being considered for raising funds. However, “the information is price sensitive and will be shared in public domain at the appropriate time," added the same person.

A report by ICICI Securities dated 1 July emphasizes that “recapitalization remains the key" as SpiceJet’s “balance sheet position is weak with negative equity of 26 billion and gross borrowing without lease liability of 44 billion as of FY21-end." “SJet (SpiceJet) has approved a fund raise of up to 25 billion through the issue of eligible securities to qualified institutional buyers. If this happens through fresh equity, the shareholding of the current promoter will fall from 60% to 40%," the report added.

The airline, however, denied that the promoters will dilute stake to raise funds.

Meanwhile, SpiceJet is pressing ahead with its cost-cutting measures to keep the burn in check. It is renegotiating its contracts with vendors and has deferred payments to some while initiating salary cuts for employees. The airline has also claimed about 1,100 crore as compensation from Boeing Co. for the grounding of 737 Max aircraft—it is yet to receive the amount. The aircraft was grounded globally by different regulators in 2019 after two crashes that killed 346 people. While SpiceJet is confident of getting the compensation, the auditors of the company noted that the airline would report steeper losses had it not recognized the ‘other income’ (Boeing compensation) during Q4FY21.

SpiceJet may be counting on the compensation but receiving it requires sophisticated structuring and negotiation, said Satyendra Pandey of AT-TV. “Currently, the compensation is being fully recognized as cash. This accounting treatment is debatable," added Pandey.

Another senior industry executive, who has worked for top commercial airlines, said that SpiceJet may not get the full compensation it claims as most aircraft manufacturers don’t prefer a direct/full cash payment. Instead, they prefer other structures that include discounts. When asked about the compensation issue, a Boeing spokesperson said that the company doesn’t comment on conversations with its customers. Nevertheless, the stakes are high for Boeing as well. SpiceJet had 13 MAX aircraft in its fleet in 2019. At the time of the ban, it had placed an order for 205 Boeing aircraft. As of today, SpiceJet’s total fleet comprises 109 aircraft, including Boeing 737 and the Q-400 turboprops. “If SpiceJet walks away from Boeing orders, the US company loses the narrow-body aircraft market in India (most Indian airlines use Airbus A320/321 family narrow-body planes for domestic and short/medium-haul global routes). However, Boeing may still be reluctant to give the entire compensation in cash considering it may lose the entire investment if the airline goes under," the executive added.

The MAX aircraft are yet to be re-certified by the DGCA, although globally, the aircraft has returned to service in many countries.

The strengths

When it comes to the promoters of airline firms, Ajay Singh is one of the most recognizable personalities—after all, he is still standing in a sector ripe with spectacular failures. More storied promoters such as Vijay Mallya (Kingfisher Airlines Ltd) and Naresh Goyal (Jet Airways Ltd) didn’t survive.

Many people, inside and outside the company, do think he can work his magic again. “I would not write off SpiceJet as Ajay Singh has shown an uncanny ability to somehow survive, whether it is by being extremely nimble or getting into new areas of business through new routes," an aviation expert said, requesting anonymity.

Singh’s trusted aides at the airline include the chief strategy officer G.P. Gupta, chief customer officer Kamal Hingorani, and chief commercial officer Shilpa Bhatia. The firm, nevertheless, pivots around Singh, who unlike other airline promoters, involves himself in day-to-day working—negotiating commercial deals and contracts. Some of his strategies have worked. Singh’s foray into the cargo business has been profitable. In fact, during the pandemic, SpiceJet reconfigured the planes to cater more to the cargo business. During Q4FY21, cargo revenues jumped to 416.5 crore from 67.8 crore in the year-ago period. The airline has also aggressively expanded its network, often to smaller towns and cities. As a result, SpiceJet is now the largest regional operator with 63 daily flights under the government’s regional connectivity scheme UDAN.

“SpiceJet is strong when it comes to regional networks. If you want to go to places such as Darbhanga, Rajkot, or smaller cities in Gujarat, SpiceJet is an option. Effectively, it can command higher fares here unless IndiGo gets into these regional routes," said an industry executive. On the international front, SpiceJet operates in routes such as Kabul—not many airlines are interested in flying there.

Singh will be hoping he can keep rivals at bay. He will also be hoping that air passenger traffic returns to pre-pandemic levels sooner than later. That may help shore up the bottom line. If the company indeed turns around again, he will have a more exciting story to tell his grandchildren.

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