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Max pain for SpiceJet as Boeing likely to delay deliveries

The 737 Max grounding has weighed on SpiceJet’s ability to reap benefits of the better fuel efficiency of the planes at a time when it is struggling with rising costs amid slowing air traffic growth.Premium
The 737 Max grounding has weighed on SpiceJet’s ability to reap benefits of the better fuel efficiency of the planes at a time when it is struggling with rising costs amid slowing air traffic growth.

  • SpiceJet ordered as many as 205 of the 737 Max planes in 2017, out of which 13 have been delivered so far
  • The 737 Max grounding has weighed on SpiceJet’s ability to reap benefits of the better fuel efficiency of the planes at a time when it is struggling with rising costs amid slowing air traffic growth

New Delhi: SpiceJet Ltd is likely to face added financial pressure next year amid increasing uncertainty over deliveries of Boeing 737 Max aircraft that India’s second-largest airline has ordered, analysts said.

On Monday, The Wall Street Journal reported that Boeing may consider suspending production of 737 Max planes or reducing the output until clearances from the US Federal Aviation Administration’s (FAA) are obtained. Boeing’s 737 Max planes have been grounded since March following two fatal crashes in Indonesia and Ethiopia that killed a total of 346 people.

SpiceJet ordered as many as 205 of these planes in 2017, of which 13 have been delivered. The planes are, however, grounded due to the ongoing FAA safety review.

The development does not bode well as “continuous delays have impacted and will continue to impact SpiceJet", said Kapil Kaul, chief executive officer for India and the Middle East at aviation intelligence firm CAPA.

The delays have impacted the airline’s business strategically and financially, he added. The airline has taken some planes on lease to tide over capacity constraints caused by the grounding of 737 Max, but Kaul said these were not enough.

“Short-term capacity induction, with older aircraft with different specs, has not been able to compensate for Max," said Kaul.

A Boeing India spokesperson said the airplane maker was doing its best regarding production and certification of the Max aircraft.

“We continue to work closely with FAA and global regulators towards certification and the safe return to service of the Max. We will continue to assess production decisions based on the timing and conditions of return to service, which will be based on regulatory approvals and may vary by jurisdiction," the spokesperson said in a written statement.

SpiceJet did not respond to emailed queries on the expected impact of Boeing’s reported curtailment or suspension of production of the 737 Max aircraft.

In the September quarter, SpiceJet reported a consolidated loss of 461 crore, partially on account of the impact of grounding of the 737 Max aircraft.

The grounding has weighed on SpiceJet’s ability to reap benefits of the greater fuel efficiency of 737 Max planes, at a time when the company is struggling with rising costs even as air traffic growth has slowed. SpiceJet is the only major airline in India to have inducted Boeing 737 Max planes in its fleet.

“SpiceJet needs new aircraft to save on fuel, which would help them reduce their overall costs," said Mayur Milak, an analyst for IndiaNivesh Securities. “If something goes down at Boeing’s end, it would be a negative for SpiceJet."

The airline may have to look at other options if there is a further delay in delivery, he added.

FAA chief Steve Dickson has expressed concern that Boeing Co. is pursuing a return-to-service schedule for the grounded 737 Max aircraft that is “not realistic", according to a report by Reuters news agency.

The US-based aircraft maker had already cut production of the 737 Max planes by a fifth in April and shelved plans to boost output in mid-2019, following the grounding of the aircraft globally.

In September, Bloomberg reported that SpiceJet was considering buying about 100 Airbus A320 planes, which are not part of its fleet as of now, due to delays in delivery by Boeing.

Some analysts, though, said Boeing’s delays were expected and may not upset its own financial estimates for SpiceJet. This problem of delays has been there for some time, Anshuman Deb, an aviation analyst at ICICI Securities, said, adding that the Max planes should reach the airline latest by next December. If the delay extends beyond 2020, then the financial estimates for SpiceJet will likely change, he said.

“SpiceJet really wanted modern and fuel efficient airplanes because of the boost their business could get, and that is why this delay hurts them. Plus, when they get the aircraft they get an additional revenue stream from sale and leaseback," a sector expert said on condition of anonymity, adding that even if Boeing compensates the airline for the delay, it won’t be enough to compensate for the business hit.


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