Difficult to see SpiceJet flying out of trouble
As if it wasn’t enough that Kingfisher Airlines went bust, leaving bankers with dues of close to R8,000 crore and no collateral to speak of, SpiceJet now appears to be on the brink of bankruptcy. If media reports are to be believed, a few vendors have already put the low-cost carrier in cash-and-carry mode and the Airports Authority of India (AAI) may soon do the same. This means the airline, which has run up accumulated losses of R3,000 crore, and whose net worth has been eroded, must clear its dues before a flight takes off.
The airline has been in trouble for a while now and, therefore, has been delaying payments. While it has pulled out flights from
loss-making routes, it has also been discounting fares on some portion of the seats, leaving it with smaller revenues than it would have otherwise earned. With the aviation regulator having barred the carrier from accepting bookings beyond 30 days, cash flows could be further crimped. While the promoters have recapitalised the firm—Kalanithi Maran has infused R600 crore after he bought it for R940 crore in 2010—it is unlikely they are going to be able to bring in more money. Also, given the state of the industry, it is not surprising no private equity player or foreign airline has come forth to pick up a stake despite rock bottom valuations and the relatively low level of debt, of some R3,000 crore. With the sharp fall in the price of crude oil and, more important, the expectation that it could drop to levels of below $50 per barrel, there would appear to be a compelling reason for a global airline to buy into SpiceJet. India sells the costliest aviation turbine fuel anywhere in the world, a huge drag on the bottom line and the primary reason for the precarious situation that the Indian aviation sector is in—R8,000 crore of losses and R80,000 crore of debt last year. In SpiceJet’s case, fuel, as a share of costs, was as high as 45% in Q1FY15; although it has dropped since then, there is no saying when the government will hike the taxes on the fuel.
However, the more important reason why a fall in fuel-costs alone may not be enough to make the airline consistently profitable is the keen competition in the low-cost carrier space that SpiceJet faces from Indigo, Go Air and Air Asia. Given Indigo’s expansion plans and Air Asia’s ambitions, the competition is unlikely to subside in a hurry. Indeed, although Jet Airways has wound down its low-cost operations, the overall supply of seats remains high and is tipped to grow at 5-6% annually. Even if passenger traffic grows at these levels, yields will remain under pressure. Unless there is a strong pick-up in the economy resulting in a dramatic jump in traffic, it is hard to see SpiceJet making money anytime soon.