Home >Markets >Mark To Market >After Covid-19 spread, SpiceJet’s life hangs on a wing and a prayer

According to news reports, US airlines are seeking a $50 billion bailout as the industry struggles in the wake of the Covid-19 pandemic.

Back home, listed budget airline SpiceJet Ltd is among the most at risk among Indian airlines. Data from the Directorate General of Civil Aviation shows SpiceJet’s domestic passenger load factor at 91.5% in January. While analysts expect February load factors to be fairly resilient, March numbers are expected to be hit badly.

“By the end of May this year, most airlines in the world will be bankrupt," said consultancy firm Capa-Centre for Aviation in a statement.

As the chart shows, profit spreads have been extremely low at SpiceJet even when load factors have been very high. As such, with an expected sharp drop in load factors, the airline could plunge into high losses.

Graphic by Santosh Sharma/Mint
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Graphic by Santosh Sharma/Mint

“Under normal circumstances, airlines generally need load factors of 70-75% to break even," said an analyst, requesting anonymity. In SpiceJet’s case, high load factors have not guaranteed robust profitability, as yields, a pricing measure, have been under pressure. The situation has worsened on this front as well, because of the drop in demand.

The robust balance-sheet strength of market leader InterGlobe Aviation Ltd, which runs IndiGo, means it has more cushion to deal with the current trying times. The same is not true for SpiceJet, which had cash and cash equivalents of about 93 crore as on 30 September and a negative net worth of 850 crore.

Sure, SpiceJet’s December quarter net profit was 73 crore. But if it weren’t for the compensation of 246 crore for its 13 grounded Boeing 737 Max planes, it would have reported a loss in the quarter.

With the outlook turning bleak, SpiceJet is in dire need of funds. “I don’t know where SpiceJet will get the capital to sustain operations for some time. Perhaps, as a last resort, they can request Boeing to release some cash in the interim," said another analyst, also requesting anonymity.

The substantial drop in crude oil prices offers some comfort, but lower prices will only help so much when demand itself is the problem and outlook on passenger yields is muted. Unsurprisingly, the SpiceJet stock is currently 73% lower than its 52-week trading high on BSE.

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