What can help with the additional burden of SpiceJet’s crisis?

The flight took off on time. After about 10 minutes, Chhabra’s wife detected an odor and soon, an alarm sounded near the cockpit. The cabin crew first tried to stop the alarm and then checked if the smell was due to a passenger smoking. In no time, smoke started appearing in the front of the cabin.

“I was sitting in the 12th row. Some children and the elderly started coughing. The crew started distributing water bottles and said that we should sprinkle water on our face masks to breathe easily. By then, I think they understood what was happening,” Chhabra said.

The flight turned back and made an emergency landing in Delhi at around 7 am. “When I was getting down, I saw smoke coming out of the left side fan,” Chhabra said.

It wasn’t the only mid-air glitch. Since May 1, at least nine such malfunctions have been reported from flights operated by the airline. These include engine failure due to bird hit, cabin pressure issue, fuel indicator fault, weather radar fault and windshield crack. Repeated interruptions have raised uncomfortable questions about the airworthiness of SpiceJet’s fleet. On 5 July, the Directorate General of Civil Aviation (DGCA) sent a show-cause notice to the airline, which noted that “on several occasions, SpiceJet aircraft either returned to the originating station or landed at the destination with poor safety margins”. The airline has been asked to respond within three weeks.

These problems are the latest in a long list of problems facing the airline. Operational data for the past few months highlights the frequent cancellations and delays in domestic operations. DGCA data shows that at 1.22%, SpiceJet had the second highest percentage of flight cancellations among scheduled airlines in May this year; Its on-time performance was the second lowest (70.9%) among scheduled carriers.

The root of the problem lies in less cash for smooth operations.

For the nine months ended December 2021, the company’s total losses were 1,267.49 crore. it had negative retained earnings 5,453.43 crore and negative net worth 3,830.7 crore. SpiceJet is yet to declare its March quarter results.

Negative net worth indicates that the company has assets versus additional liabilities. Experts said the figures suggest that its balance sheet remains weak and this could impact the maintenance and engineering expenses required to continue operations.

Marc D Martin, CEO, Aviation & Safety Consulting, Martin Consulting, said, “SpiceJet is a cash flow oriented airline where the proceeds go directly into expenditure excluding working capital or cash operating cost without any investment made by the promoters in the business. ” strong.

So, how can the company turn around? SpiceJet’s move to split its cargo business into a separate entity could prove to be a game changer. It can support repayment of loans and also provide near-term liquidity for smooth operations. More about that later. First, a look at the industry-wide headwinds that have overtaken the aviation sector.

atf unrest

SpiceJet, like other Indian airlines and in fact, airlines across the world suffered losses during the Covid-19 period, when travel restrictions forced it to halt operations. In India, when flights resumed last year, they were expected to adhere to a price band for tickets and, with the initial low aircraft occupancy, ensured that all airlines suffered considerable financial pain. Had to face And now, airline companies are grappling with high oil prices.

In June, after oil marketing companies announced another hike in the price of aviation turbine fuel (ATF), Ajay Singh, chairman and managing director of SpiceJet, spoke of the need for a 10-15% hike in fares. ATF prices had increased by 120% in 12 months.

Fuel accounts for up to 40% of the total cost of an airline. Simultaneously, the weakening rupee has added to the pain of airlines as payments to lessees and foreign airport operators are usually in dollar denominations.

For SpiceJet, rising fuel costs will reduce margins, thus saving even less money for routine maintenance activities. Brokerage Reliance Securities, in a recent note, said that despite high traction in the cargo business, a sharp rise in fuel cost will impact SpiceJet’s profitability. However, the hike in fares will improve its margins to some extent.

cash route

In short, SpiceJet needs cash to tide over the current turmoil. Where will the money come from?

Between April and December 2021, SpiceJet was able to raise 147 crore under the Emergency Credit Line Guarantee Scheme (‘ECLGS’) scheme, Ajay Singh said in the notes along with the Q3 results. He also said that the company is in consultation with banks/financial institutions to raise additional funds and is seeking Board approval for raising fresh capital by issuing eligible securities to eligible institutional buyers.

When asked about the delay in funding—shareholders approved 2,500 crore fund raising exercise through placement of eligible institutions in September 2021- a spokesperson said, “Fund raising is not stuck. Your information is incorrect and rejected”.

Meanwhile, the company is aggressively paying off debt. The spokesperson said several contracts have been restructured and these agreements with aircraft manufacturers and lessors have significantly reduced its cost and past dues. The company is also working with banks on government-backed plans and will add additional MAX aircraft to its fleet.

Meanwhile, SpiceJet is likely to run into human resource problems, with Jet Airways and Akasa preparing to fly and Air India recruiting aggressively. According to a report in The Hindu, the airline has failed to pay the contributions of employees and employers to the provident fund scheme for pilots since April 2020. The airline has denied the allegations, but said Captain Sam Thomas, president of the Airline Pilots Association. India said several pilots have confirmed that “the pay cuts have never been fully reinstated and arrears are unlikely to be paid in the near future”.

SpiceJet spokesperson said that the information about the huge dues of the pilots is wrong. “In most of the cases, the dues of all the employees and not just the pilots, have already been cleared by the company. In some cases, some minor payments relating to wages and overtime may be pending and are being cleared in the normal course.”

Last week, some 40-odd pilots wanted to call in sick, protesting the pay backlog. SpiceJet, however, clarified that all the pilots reported for duty.

possibility of cargo

In June this year, SpiceJet’s cargo division, SpiceExpress transported 100 tonnes of litchi fruit from Darbhanga in Bihar to different parts of the country. This was almost four times the volume done last year. And last June, SpiceExpress carried a large quantity of the Covid-19 vaccine – about 133 tonnes – between January and June 2021.

The company’s cargo growth is a ray of hope amid the ruckus over passenger operations and employee salaries. In one year, cargo has grown nearly 10 times, generating $350 million in revenue. The operation extends to Southeast Asia, China, North Asia, the Middle East and Europe. Apart from fruits and vaccines, the cargo division transports goods from the e-commerce, retail, auto, tech and telecom industries.

In September 2021, the airline received shareholders’ approval to transfer its cargo and logistics services business to a subsidiary, SpiceExpress and Logistics Pvt Ltd.

A SpiceJet spokesperson said the valuation of the logistics business has been 2,555.77 crore based on an independent valuation exercise conducted by the company. “Transfer of logistics business to SpiceXpress will reduce negative net worth of SpiceJet 2,555.77 crores and strengthens our balance sheet significantly. After the transfer of the logistics business, the new company will be able to raise capital independently from SpiceJet for its growth,” the spokesperson said.

The final stage of approval for No Objection Certificate from Hive-of-Banks has been completed.

Although the plan sounds good, the prospects for the development of air cargo in the near future are not as good. Yashpal Sharma, president of the Air Cargo Forum, said growth will be slow this year due to soft demand in the European Union and the US. “While demand has now improved across the globe due to inflation and higher inventory levels, I expect a revival by September this year,” he added.

But the Boeing 737-700 aircraft, which SpiceJet operates for cargo, have a relatively short range, which calls into question their competitiveness and fuel efficiency. Sharma believes there is a need to improve the fleet type for freight operators due to current global fuel price levels. “All operators need to have a good mix of short and long range aircraft to have a very agile operating strategy,” he said.

SpiceJet will also have to deal with increasing competition. IndiGo is expected to launch a dedicated freighter employing Airbus 321 aircraft next month.

Audit time?

Back to security concerns. The airline says its flights are “absolutely” safe.

SpiceJet has been running a safe airline for 17 years. The kind of incidents being talked about are regular across the industry and do not compromise on safety and airworthiness. In fact, the DGCA has, on record, told the media that on an average there are about 30 incidents, including go-arounds, missed approaches, diversions, medical emergencies, weather, technical and bird hits. Most of them have no security implications,” the spokesperson quoted above.

“Safety experts will confirm that a bird hit is not the airline’s fault. It happens all the time with all airlines. Similarly, external windshield cracks are not a safety hazard because there are many layers of windshields that protect the aircraft from its own faults.” Allow the journey to continue.”

However, some aviation safety experts are not sure. They insist that the airline needs to be audited by the regulator again, as the last audit took place months ago. Some have asked the airline to remain closed till the audit is completed.

In the end, it is a vicious cycle – if the airline shuts down, it cannot earn from ticket sales and thus invests in fleet maintenance. If it continues to fly, rising safety concerns could keep passengers away, which could affect sales. Perhaps, timely investment of funds along with a quick and reliable audit is the way forward.

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