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What can help SpiceJet’s excess baggage of woes?

A Dubai-bound SpiceJet Boeing 737 Max aircraft, which landed at Karachi airport on 5 July following a fuel indicator malfunction. (Photo: PTI)Premium
A Dubai-bound SpiceJet Boeing 737 Max aircraft, which landed at Karachi airport on 5 July following a fuel indicator malfunction. (Photo: PTI)

  • Amid high aviation turbine fuel prices and mid-air incidents, the airline’s cargo business is a ray of hope
  • Since 1 May, at least nine mid-air snags have been reported from flights operated by SpiceJet. These troubles are the latest in a long list of woes the airline faces

NEW DELHI : On 2 July, 30-year-old Saurabh Chhabra and his wife boarded a Bombardier Q400 plane in New Delhi, operated by budget airline SpiceJet. They were travelling for a family wedding to Jabalpur and had chosen SpiceJet over Indigo because of the former’s early morning (6.15 am) departure.

The flight took off on time. After about 10 minutes, Chhabra’s wife detected a smell and soon, an alarm near the cockpit started beeping. The cabin crew first tried to stop the alarm and then checked if the smell was due to a passenger smoking. Soon, smoke was visible towards the front of the cabin.

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“I was seated in row 12. Some kids and the elderly started coughing. The crew started distributing water bottles, saying we should sprinkle water on our face masks to breathe easily. By then, I guess they realized what was going on," Chhabra said.

The flight turned back and made an emergency landing in Delhi around 7 am. “When I was disembarking, I saw smoke billowing from the left side fan," Chhabra said.

This was not the only mid-air glitch. Since 1 May, at least nine such snags have been reported from flights operated by the airline. These include engine failure due to bird hits, cabin pressure issues, fuel indicator fault, weather radar malfunction, and windshield cracks, among others. The frequent snags have raised uncomfortable questions about the airworthiness of SpiceJet’s fleet. On 5 July, the Directorate General of Civil Aviation (DGCA) sent a showcause notice to the airline, mentioning that “on a number of occasions, SpiceJet aircraft either turned back to the originating station or continued landing to the destination with degraded safety margins". The airline has been asked to respond in three weeks.

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These troubles are the latest in a long list of woes the airline faces. Operational data for the last few months underline frequent cancellations and delays in domestic operations. Data from DGCA show that at 1.22%, SpiceJet had the second highest percentage of flight cancellations among scheduled airlines in May this year; its on-time performance was the second lowest (at 70.9%) among scheduled carriers.

The nub of the problem lies in scant cash to run smooth operations.

For the nine months ended December 2021, the company’s net loss totalled 1,267.49 crore. It had negative retained earnings of 5,453.43 crore and negative net worth of 3,830.7 crore. SpiceJet hasn’t yet declared its March quarter results.

Negative networth denotes that the company has excess liabilities versus assets. The numbers indicate that its balance sheet remains weak and this could be impacting the maintenance and engineering spends needed to continue operations, experts said.

“SpiceJet is a cash flow centred airline, where income directly moves to expenditure without any investment being made into the business by promoters except for working capital or cash operating cost," said Mark D Martin, CEO of Martin Consulting, an aviation and safety consulting firm.

So, how can the company turn around? SpiceJet’s move to hive off its cargo business into a separate entity could be a game changer. It could support the repayment of debt and also provide near-term liquidity for smooth operations. More of this later. First, a look at the industry-wide headwinds that have pegged back the aviation sector.

ATF turbulence

SpiceJet, like other Indian airlines and indeed, airlines across the globe, suffered losses during much of the covid-19 period when travel restrictions forced it to halt operations. In India, when flights did resume last year, they were expected to follow a price band for tickets and coupled with initial low aircraft occupancies, ensured all airlines suffered considerable financial pain. And now, airline companies are grappling with high oil prices.

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In June, after oil marketing companies announced yet another increase in the price of aviation turbine fuel (ATF), SpiceJet’s chairman and managing director, Ajay Singh, spoke of the need to hike fares by 10-15%, saying ATF prices had increased by 120% in 12 months.

Fuel accounts for up to 40% of an airline’s total costs. Simultaneously, a weakening rupee has merely added to the airlines’ pain since payments to lessors and foreign airport operators are usually dollar denominated.

For SpiceJet, rising fuel costs will squeeze margins, thus leaving even lesser funds for routine maintenance activities. Brokerage Reliance Securities, in a recent note, stated that despite higher traction in the cargo business, the sharp rise in the fuel cost would impact SpiceJet’s profitability. Fare hikes, however, would improve its margins to some extent.

The cash route

In short, SpiceJet needs cash to tide over the current turbulence. Where will the money come from?

Between April and December 2021, SpiceJet was able to raise 147 crore under the Emergency Credit Line Guarantee Scheme (‘ECLGS’) scheme, Ajay Singh said in notes accompanying the Q3 results. He also said that the company is in discussions with banks/financial institutions to raise additional funds and was seeking board approval for raising fresh capital through issue of eligible securities to qualified institutional buyers.

When asked about a funding delay—shareholders had approved 2,500 crore of fund raising exercise via qualified institutions placement in September 2021—a spokesperson said “the fund raising is not stuck. Your information is wrong and denied".

The company, meanwhile, has been clearing debt aggressively. Many contracts have been restructured and these settlements with aircraft manufacturers and lessors have significantly reduced its cost burden and older dues, the spokesperson said. The company is also working with banks on government-backed schemes and will be inducting additional MAX aircraft into its fleet.

Meanwhile, SpiceJet is likely to run into human resources problems, with Jet Airways and Akasa preparing to take off and Air India hiring aggressively. According to a report in The Hindu, the airline has failed to pay employees’ and employers’ contributions towards the provident fund scheme for pilots since April 2020. The airline has denied these allegations but Captain Sam Thomas, president of the Airline Pilots’ Association of India, said that many pilots have confirmed that “salary cuts have never been fully restored and the payment of dues is unlikely to be done in the near future".

The SpiceJet spokesperson said that the information around large arrears for pilots is wrong. “Dues, in a majority of cases, of all employees and not just pilots, have already been cleared by the company. A few smaller payments relating to salary and overtime may be pending in some cases and are being cleared in the normal course," the spokesperson said.

Last week, some 40-odd pilots wanted to call in sick, protesting the salary backlog. However, SpiceJet clarified that all pilots reported for duty.

Cargo’s chances

In June this year, SpiceXpress, the cargo division of SpiceJet, transported 100 tonnes of lychee fruit from Darbhanga in Bihar to various parts of the country. This was about four times the quantity carried last year. And last June, SpiceXpress had carried large quantities of covid-19 vaccine—about 133 tonnes—between January and June 2021.

Amid all the noise around passenger operations and staff salary, the company’s cargo growth is a ray of hope. In one year, cargo has grown nearly 10-fold, generating $350 million in revenues. This operation spans southeast Asia, China, north Asia, the Middle East and Europe. Besides fruits and vaccines, the cargo division transports goods from e-commerce, retail, auto, tech and telecom industries.

In September 2021, the airline received shareholders’ nod for transferring its cargo and logistics services business to a subsidiary company, SpiceXpress and Logistics Private Limited.

A SpiceJet spokesperson explained that the logistics business has been valued at 2,555.77 crore based on an independent valuation exercise carried out by the company. “The transfer of the logistics business to SpiceXpress will reduce SpiceJet’s negative net worth by 2,555.77 crore and strengthen our balance sheet significantly. Post the transfer of the logistics business, the new company will be able to raise capital independently of SpiceJet to fund its growth," the spokesperson said.

The last leg of approvals for the hive-off—no objection certificates from banks—has been completed.

While the plan sounds good, the outlook for air cargo growth is not all that rosy in the near future. President of the Air Cargo Forum, Yashpal Sharma, said that growth this year would be slow due to softer demand in the EU and US. “There is now a demand correction around the world due to inflation and high inventory levels but I do expect revival by September this year," he said.

But the Boeing 737-700 aircraft, which SpiceJet operates for cargo, has a comparatively smaller range, raising questions over their competitiveness and fuel efficiency. Sharma believes a correction in fleet type for freighter operators is needed due to current global fuel price levels. “All operators need to have a good mix of small and long-haul aircrafts to have a very agile operating strategy," he said.

SpiceJet will also have to contend with growing competition. IndiGo is expected to launch dedicated freighters next month employing the Airbus 321 aircraft.

Time for audit?

Back to the safety concerns. The airline insists its flights are “absolutely" safe.

“SpiceJet has been running a safe airline for 17 years. The kind of incidents being talked about are routine across industry and do not compromise on safety and airworthiness. In fact, the DGCA has, on record, told the media that on average, about 30 incidents do take place, including go-around, missed approaches, diversion, medical emergencies, weather, technical and bird hits. Most of them have no safety implications," the spokesperson quoted above said.

“Safety experts would corroborate that a bird hit isn’t the airline’s fault. It happens all the time with all airlines. Similarly, an outer windshield crack isn’t a safety hazard as there are multiple layers of windshield that allows the aircraft to carry on with its journey," he added.

Some aviation safety experts, however, aren’t that sure. They insist the airline needs to be audited by the regulator again, since the last audit was months back. Some have asked for the airline to be grounded till the audit is completed.

In the end, it is a vicious circle—if the airline is grounded, it cannot earn from ticket sales and thus invest in fleet maintenance. If it continues to fly, mounting safety concerns could keep flyers away, thus impacting sales. Perhaps, a quick and credible audit coupled with timely infusion of funds is the way forward.

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