As 2014 comes to a close, it is difficult to imagine the folks at SpiceJet looking forward to a happy new year.
For starters, the Indian low-cost carrier posted massive operating losses in the first half of 2014, losing Rs9.19 billion ($158 million) in its first quarter and Rs3 billion in the second quarter. The previous year also saw a net loss of Rs10 billion, a more than five-fold increase from 2012.
In a November report, SpiceJet’s auditors warned that its total liabilities exceed its assets by Rs14.5 billion – a figure they say “may cast significant doubt about the company’s ability to continue as a going concern”.
SpiceJet’s woes were compounded when it cut nearly 50 daily flights from over 345, amid reports of delayed salary payments to staff. The trimmed schedule saw a reduction in its Boeing 737-800 fleet from 31 to 24 aircraft.
SpiceJet’s financial health took a further beating when the Airports Authority of India (AAI) was reported to have withdrawn credit terms following an accumulation of Rs2 billion debt – a situation the airline has denied. It maintains they have not been placed on any “cash and carry” terms by the AAI.
The country’s Directorate General of Civil Aviation (DGCA) also instructed SpiceJet to halt bookings beyond 30 days, limiting cash flows, as well as to “share a payment plan” to clear a further debt of Rs16 billion to its stakeholders and suppliers. Again, SpiceJet denies the figure, saying the true amount is “significantly less”.
However, a recent tweet by SpiceJet’s chief operating officer says they did not submit a financial plan on clearing its dues, but rather discussed the financial impact of the 30-day booking limit.
It does not take much to see that poor financial figures coupled with government interference don't bode well for SpiceJet in 2015.
"It’s not rocket science, they (SpiceJet) are in a situation where they are unable to show the government the money needed to maintain operations. Like Kingfisher, they have not been transparent on their cash-flow,” says an industry source from an unnamed lessor.
Given SpiceJet's travails, a number of market players are probably concerned.
Amber Dubey, partner and India head of aerospace and defence at KPMG, says that a SpiceJet closure “will impact multiple parties in the long run”.
Dubey says SpiceJet’s lessors might expect a delay in lease rentals. But more pertinently, lessors will have even more reason to charge higher rental rates to India's airlines in the future, leading to greater overheads for airlines.
In addition, the airline could delay deliveries of the aircraft it has on order, specifically 50 Boeing 737s, of which eight -800s are due to arrive in 2015. The remaining 42 are the Max 8 variant, and only due to arrive from 2018 onwards. Dubey believes that “it will not be critical to Boeing” should SpiceJet make some cancellations.
“Boeing is already sitting on a very large order book and a difference of 50 aircraft will not affect them much,” adds Dubey.
SpiceJet's troubles, however, have a silver lining for its rivals.
India domestic market share - Dec 2014
FlightMaps Analytics
FlightMaps Analytics show that SpiceJet occupies the second largest market share in the Indian domestic market, in terms of seat capacity and ASKs.
Any SpiceJet closure would benefit its closest rivals, namely IndiGo and Air India. The pair could easily absorb SpiceJet’s demand and increase their own frequencies.
Dubey expects that in the short term SpiceJet’s competitors can enjoy greater market share should the former cease operations. “They (other airlines) can charge (airfares) at higher premiums of between 2-10% more.”
Despite the possibility of improved yields for other airlines, Dubey says that it will come with a price: “The ability of a common Indian (to travel) is restricted, and the gap between the various income groups in terms of purchasing power will increase.”
He feels that a rise in airfares will especially hurt leisure travel.
SpiceJet, however, remains defiant about its future. It says it is seeking “various options for raising fresh capital.” It contends that it has been approached by various parties about fresh funding, but that talks are in the preliminary stage.
Latest reports indicate that SpiceJet has received some reprieve from the Indian government. The ministry of civil aviation is said to be making a request to local banks to extend loans to keep SpiceJet afloat.
“At this point, only a white knight investor can reinstate confidence,” says Dubey.
Meanwhile, the industry source reveals the embattled carrier had intended to lease more 737s, but has since cancelled discussions owing to a lack of capital. This hurt its capacity in the second half of 2014.
“Traditionally, the third quarter is a strong season for airlines due to year-end travel. The sudden cut in their 737 fleet has resulted in under-capacity, but SpiceJet just do not have the financial means to get more planes to bump up (their capacity),” he says.
Flightglobal’s Ascend Fleets database shows that SpiceJet operates a fleet of 22 737s, and 15 Bombardier Dash Q400s. It also has nine 737s in storage.
Ascend shows that all of SpiceJet’s 737s are owned by lessors or special purpose vehicles. Lessors exposed to the troubled carrier’s 737 fleet include Air Lease Corporation, AWAS, BOC Aviation, GECAS, and BBAM LLC.
Although SpiceJet has vowed to keep fighting, its financial challenges are daunting. Perhaps more daunting is its public relations battle. The carrier is being badly mauled on social media, and regaining the public's good feeling will be a tall order indeed. SpiceJet management faces a tough 2015.
Source: Cirium Dashboard
