Free Falling: Will Cash-Strapped SpiceJet Follow Jet Airways’ Route?

Three years ago, India witnessed the crash of Jet Airways, one of its leading private airlines, owing to insurmountable financial troubles. Now, clouds of uncertainty seem to be hovering over SpiceJet as the low-budget airline is grappling to deal with its own money matters.

Today, SpiceJet, with no cash reserve, is walking a tightrope and is in dire need of fund infusion. Its daily operational loss has been mounting since the pandemic hit. While other players with deep pockets could withstand the onslaught, SpiceJet is still struggling with the price dilemma in a hugely price-sensitive market. 

Even with the festive season rolling in and things looking up for the aviation industry, cash-strapped SpiceJet is staring at a lean season as it is being forced to operate with a fleet half its strength over safety concerns which has only added to its woes.

So, what has brought the airlines, which looked promising around 2017-18, to its knees today? The answer lies in the company’s overambitious expansion plan, say aviation experts. Much like Jet Airways’. 

Mission Expansion

SpiceJet’s ambitions have come at the cost of profitability coupled with unforeseen circumstances such as Covid-19 and the grounding of Boeing 737 MAX, experts add.

In March 2019, after a global ban on MAX operations when two air crashes led to the death of 346 people, it had to ground 13 Boeing 737 MAX. Despite the setback, SpiceJet continued its aggressive capacity expansion plan and procured 30 Boeing 737 NG from Jet Airways.

“It appears that the airline took the path of aggressive expansion when Jet Airways collapsed without looking at its finances and a proper business plan in place. Most airlines in India have ventured to grow at the expense of profitability and SpiceJet has been no exception,” says Jitender Bhargava, former executive director, Air India.

Before its expansion plan yielded the desired outcome, Covid-19 and subsequent countrywide lockdowns paralysed the sector. 

Bhargava suggests that things were still manageable for the airline when operations were partially resumed and then increased in a calibrated manner by the government. However, when 100 per cent deployment was allowed, competition became intense once again and the question of survival started haunting the financially weak airlines like SpiceJet.

“If the number of passengers flying in proportion to the capacity deployment is analysed, we are still about 15 per cent short of the pre-Covid level. It will be apparent that only airlines with deep pockets and a sound business plan can sustain operations,” he adds. 

The history of the aviation sector reflects that when an airline gets into a financial mess, it cuts down expenses, even essential ones, to carry on its daily operations. So, as it cuts corners, competition also forces it to undersell its seats.
 
“Notwithstanding the numerous operational incidents in recent months, SpiceJet continues to log the highest occupancy factor. Is the airline offering a lucrative fare (read: underselling) to compensate for the perception of attracting passengers? This is a question that begs an answer,” says Bhargava.

Clipping Its Wings

In four years, SpiceJet's market share has dipped from 13 per cent to less than 8 per cent. Looking at the direction in which it is heading, it seems like it is only going to get worse. 

On July 12, just a fortnight after SpiceJet celebrated seven years of flying with the highest occupancy in India, the Indian aviation regulator, Directorate General of Civil Aviation, slapped a restriction on it, reducing its total number of departures by 50 per cent for eight weeks. The restriction came in the wake of eight air incidents that were reported in SpiceJet flights between June and July.

The aviation watchdog found that the airline did not have sufficient technical support, leading to safety concerns. On September 21, the restrictions were extended till October 29.

“With full-capacity deployment came the issue of retaining the salaries and perks of employees of pre-Covid level which SpiceJet could not do,” says an aviation expert who does not wish to be quoted.

Of late, the airline has sent 80 pilots on leave without pay, terming it “a temporary measure to rationalise the cost”.

“The DGCA action is a clear indicator that the company is in such a poor financial condition that it cannot afford to have adequate technical support,” he adds. 

Caught In Legal Tangles

Adding insult to injury is a notice from the National Company Law Tribunal to SpiceJet that threatens initiation of insolvency proceedings for an alleged default in payment of Rs 3.25 crore to an operational creditor, Acres Buildwell Private Limited, a Delhi-based construction company. In its defence, SpiceJet says the insolvency application is a malicious and baseless allegation with an intent to mislead and malign the airline.

“The fact is that Acres Buildwell has delayed and failed to complete the work within the specified period causing severe loss to SpiceJet. There is no amount legally due or pending to be paid by SpiceJet. It is an attempt to blatantly force SpiceJet to pay additional money that is neither legally due nor contractually payable. The allegations are completely false and the matter is being contested by SpiceJet,” says a SpiceJet spokesperson.

However, this is not the first occasion when the airline has come under insolvency threat. 

In December last year, the Madras High Court had ordered the liquidation of the company’s assets as SpiceJet had failed to pay dues of Rs 180 crore to Credit Suisse AG. The two parties arrived at a settlement in the Supreme Court in August 2022.

In Survival Mode

With the operation costs of airlines further increasing due to an increase in the price of air turbine fuel and the depreciation of the rupee against the dollar, aviation experts say that SpiceJet has limited options for survival.

Some draw a parallel with Jet Airways and say that Naresh Goyal took a late decision to sell its stake to Etihad Airways and the deal did not work out because he wanted to continue as chairman.

Due to a plethora of issues, SpiceJet is not in a commanding position to sell stake. So, its promoter-owner will have to choose either their survival or the airline’s, an aviation expert says, not wishing to be quoted.

Agrees Bhargava. “This has been a problem with owner-promoter-driven commercial entities. The promoters usually do not want to lose control or dilute their stake unless the time comes when they are left with no option. It happened in the case of Jet Airways, too. Naresh Goyal did not step down while looking for funding, selling stake even as the airline was sinking, till the financial institutions thrust their decision on him,” he explains. 

He adds, “You (SpiceJet) are ready to sell your stake, but do you have people to take your offer at the price that you are quoting? The airline's beginning was good; however, its future looks unpredictable. Air India, too, had the same story. When it commanded a much higher market share, had a better public perception in 1999-2000, the government, as its promoter, did not pursue the disinvestment process to its logical end. Finally, it had to sell it at a much cheaper price to Tatas earlier this year.”

Damage Control

Despite all the financial setbacks and a net loss, excluding forex restatement impact, of Rs 420 crore in the second quarter of 2022, the airline has put up a brave front.

“SpiceJet has weathered the difficult Covid period and is right now on the course of recovery. We have demonstrated great resilience and successfully worked through adversities to emerge as a much stronger airline. All key departments are adequately funded and all partners and vendors are being paid as per mutually agreed timelines,” says the company’s spokesperson, adding that when some of the biggest airlines folded up during Covid, SpiceJet has grown stronger.

There were zero retrenchments at SpiceJet in the last three years, 100 per cent of employee appraisals are done for FY23, a new ESOP scheme is being considered for mid-level and critical resource employees among other welfare measures, the spokesperson further adds.  

The airline states that it has taken many measures for its employees which include a life insurance cover of Rs 15 lakh to Rs 3.5 crore for families of employees over and above the company’s mediclaim policy benefits, job to one immediate family member of Covid victims, top-up on insurance cover over and above the existing plan, among other things.

Additionally, the spokesperson says that the proposed hiving off of SpiceXpress is proceeding as per plan and separating the logistics business will result in a one-time gain of Rs 2,555.77 crore, wiping out its substantial net worth.

“The company has already announced plans to raise $200 million. This is over and above the Rs 225 crore that it will receive as part of the Emergency Credit Line Guarantee Scheme (ECLGS),” he says.

In what might have come as a relief to the beleaguered airline, the Ministry of Finance modified the ECLGS on October 5 to increase the maximum loan amount eligibility for airlines, making them eligible to get 100 per cent of their fund-based or non-fund-based loan outstanding or Rs 1,500 crore—whichever is lower.

In March 2022, the scheme was extended till March 2023. Earlier, the eligible borrowers were permitted to avail up to 50 per cent of their highest total fund and non-fund-based credit outstanding, subject to a maximum of Rs. 400 crore per borrower. 

“The modifications introduced are aimed to give necessary collateral-free liquidity at reasonable interest rates to tide over their present cash flow problems,” the Ministry of Finance press release said.

SpiceJet has already availed a loan under this scheme and the modification will make it eligible for a loan of Rs 1,000 crore more to deal with its financial constraints.

However, a section of experts feels that the government should have some mechanism in place to make the airlines accountable for their spending.

“Will Rs 1,000 crore of taxpayers' money be justified for a mismanaged airline?” asks Amit Singh, an aviation consultant who runs an NGO called Safety Matters Foundation. The government should have appointed consultants on the board of SpiceJet to make sure they spend the money well, adds an apprehensive Singh.

While these damage-control measures will pump some fuel into the troubled airline, SpiceJet’s return to its former glory will depend solely on the choices it makes going forward.