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A SpiceJet passenger Boeing 737-800 aircraft takes off from Sardar Vallabhbhai Patel international airport in Ahmedabad. (REUTERS)
A SpiceJet passenger Boeing 737-800 aircraft takes off from Sardar Vallabhbhai Patel international airport in Ahmedabad. (REUTERS)

SpiceJet investors banking on a bailout that secures their interest

  • The government may need to go beyond providing guarantees to lenders  and  infuse equity if keen on airline’s survival
  • Even after the lockdown lifts, airlines will be operating at far lower load factors and generating cash will be a challenge

In the past four trading sessions, shares of SpiceJet Ltd have risen by more than 21%, even as shares of its much larger rival InterGlobe Aviation Ltd, which runs India’s biggest airline IndiGo, have fallen about 4%. It does look like investors believe a bailout for the industry is on the way in some form.

As pointed out in this column earlier, InterGlobe Aviation had cash of 9,400 crore on its books as of end-December, based on which analysts say it can meet fixed costs even if revenues are hit for about six months. SpiceJet has no cash to speak of, which means that any bailout will benefit it the most.

An analyst tracking the sector says on condition of anonymity, that help is likely to come in way of credit guarantees given by the government to lenders. This is unlike what some governments are doing.

In the US, for instance, aviation companies are being offered assistance in exchange for an equity stake. Some companies such as Boeing Co. have baulked at the prospect of existing shareholders getting diluted, and have suggested they will look at alternative means to raise funds.

Hope floats.
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Hope floats.

The fact that SpiceJet shares are rising on expectations of a bailout suggests its shareholders aren’t quite worried about the government or a fund created by it getting a large equity stake.

However, even after the lockdown lifts, airlines will be operating at far lower load factors and generating cash will be a challenge. Domestic air traffic is expected to fall from an estimated 140 million passengers in FY20 to around 80-90 million in FY21, consultancy Centre for Asia Pacific Aviation India Pvt. Ltd said in a report. As a result, losses and cash burn are expected to continue even after the lockdown lifts.

At some point, the government may need to go beyond providing guarantees to lenders and infuse equity, if it is really keen on the survival of the airline. Shareholders, then, need to price in the prospect of being massively diluted, or even face the prospect of their investments being written-off.

In the recent bailout of Yes Bank Ltd, existing equity shareholders were not only massively diluted, but also faced a lock-in on 75% of their shares. SpiceJet shareholders should realize a bailout needn’t protect existing shareholders.

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