What’s Going Wrong With The Low-Cost Air Carrier SpiceJet? Will It Again Be Able To Fly High In The Skies?
For a long period of time, the condition of SpiceJet is not good. SpiceJet is facing severe financial challenges and is looking for funding in the midst of a cash crunch. Also, the aviation regulator placed the airline under "enhanced surveillance" earlier this year. Many lessors have been asking for repossession of aircraft leased to the low-cost carrier, and few of the cases have been solved by the airline. About a fourth of their fleet has been grounded in fierce competition in the industry.
Last weekend’s stock market surge was fueled by news that IndiGo co-founder Rakesh Gangwal was attempting to buy a stake in competitor airline SpiceJet. A day later, sources citing a banker close to Gangwal stated that no such proposal was being considered. While formal explanations from IndiGo, SpiceJet, and Gangwal are pending, investors and market analysts are left confused by the emergence of conflicting news reports.
Last weekend, it was reported that Gangwal was in talks with SpiceJet about acquiring a “sizeable stake” in the financially struggling carrier, citing sources who claimed to be privy to the development.
The two parties were in advanced talks for the stake sale, implying that negotiations were underway. The news lifted SpiceJet’s stock, which increased by 20% throughout the day’s trading session and closed at 43.60 on the BSE. This was a 19.39 per cent increase over the previous day’s close. Bankers linked to Gangwal, on the other hand, denied the rumours, claiming that they had no intention of buying a part in the struggling airline. According to the banker, Gangwal was furious because retail investors were “misled by rumours,” and he would like the SEBI to investigate the matter.
Apart from being the airline’s co-founder, Gangwal is also its former promoter. He and his wife hold 16.22 per cent of the company. Another 13.5 per cent of the corporation is owned by Gangwal’s Chinkerpoo Family Trust.
But why these rumours were born? Why the news of the purchase of stakes in SpiceJet were circulated? Let’s try to know this by learning the present situation of SpiceJet.
For a long period of time, the condition of SpiceJet is not good. SpiceJet is facing severe financial challenges and is looking for funding in the midst of a cash crunch. Also, the aviation regulator placed the airline under “enhanced surveillance” earlier this year. Many lessors have been asking for repossession of aircraft leased to the low-cost carrier, and few of the cases have been solved by the airline. About a fourth of their fleet has been grounded in fierce competition in the industry.
SpiceJet has had numerous issues, ranging from owing dues to plane lessors to a delay in depositing employees’ provident funds with the Employees’ Provident Fund Organisation to defaulting on tax deducted at source. Furthermore, it is embroiled in an array of legal cases.
Legal cases against SpiceJet.
SpiceJet V\S Aircraft lessers.
Many lessors have moved pleas to start insolvency proceedings against the airline before the NCLT. For nonpayment of dues, four aircraft lessors have filed five insolvency petitions against SpiceJet in 2023. Aircastle Ireland Ltd, Willis Lease Corporation, Wilmington, and Celestial submitted applications with the NCLT, requesting that SpiceJet be admitted to the insolvency process so that they might recover their debts.
In March, Aircastle and Wilmington used irrevocable de-registration and export request authorisations to successfully deregister aircraft from the DGCA. During the proceedings, SpiceJet argued that, according to the agreements filed in court, Willis Lease Finance and Wilmington are not direct lessors of the company.
Willis Lease Finance responded that it is a service provider on behalf of the actual lessors named in the agreements and, hence, must be recognised as lessors in this circumstance. Similarly, Wilmington argued that because they are trustees of the lessor Aircastle, they should be able to proceed with the insolvency petition against SpiceJet.
SpiceJet V\S Kalanithi Maran.
SpiceJet is also embroiled in an arbitration award execution litigation with former owner Kalanithi Maran over 397 crore in debt. However, it paid Maran 100 crore of the 397 crore it owed him last month. The airline was ordered by the Delhi High Court on August 24 to pay Maran 100 crore by September 10.
SpiceJet V\S Credit Suisse.
Meanwhile, SpiceJet and investment bank Credit Suisse have been involved in a legal battle for unpaid dues of around $24 million since 2015. Following this disagreement, the Madras High Court issued an order to liquidate the airline in 2021. Credit Suisse, based in Switzerland, petitioned the Supreme Court in March to begin contempt proceedings against SpiceJet and its chairman and managing director, Ajay Singh, pointing to alleged deliberate and intentional non-compliance with court orders and inability to settle a $3.9 million debt as stipulated in a prior settlement agreement between the parties.
On September 22, the Supreme Court granted the airline permission to make monthly payments of $1 million to the Swiss bank over the following six months to repay its debts.
The weight of cash crunches.
SpiceJet’s outstanding total payables had risen to INR3,300 crore as of March 2023, up from INR3,200 crore the previous year. The amount of other current liabilities has increased from INR1,800 crore to INR2,200 crore. Money generated from the sale of advance tickets typically appears in current liabilities.
Indeed, SpiceJet has lost a significant amount of market share over the last three years, falling from a peak of over 16% before the pandemic to around 4% as of July, according to data from the DGCA. It now operates only 23 of its approximately 30 Boeing jets and nine 21 Q400s in its reduced fleet. Due to low demand, SpiceJet and other airlines have announced an “Independence Day” deal, with tickets available as far out as March 2024 with “free vouchers” and the opportunity of “free seat selection.”
What does the airline have to say about all these headwinds?
The airline stated that it is working on the following in order to establish consistent and profitable operations and funds flows in the future.
- Improving selling and distribution.
- Revenue management.
- Fleet rationalization.
- Optimising aircraft utilisation.
- Redeploying capacity in key focus markets.
- Revising management and employee compensation.
- Renegotiating contracts and other cost control measures.
SpiceJet has negative retained earnings of 7,211 crore and a negative net worth of 3,026 crore as of the end of June. The airline stated that the negative retained earnings are mostly attributable to adjustments for the introduction of Ind AS I 16 in FY20, unfavourable foreign exchange rates, fuel prices, pricing pressures, other business variables, and the impact of the pandemic in recent years. The airline has stated that the sum under dispute with aircraft lessors is not considered debt, and the firm is optimistic about the outcome of the ongoing legal proceedings.
SpiceJet has received money totalling 211 crore under the emergency credit line guarantee scheme (ECLGS) until December 31, 2022. Furthermore, for the quarter ended March 31, 2023, the company got 91.3 crore under the ECLGS plan. In the current fiscal year, the airline reported receiving additional funding of 541.3 crore as eligible under the ECLGS plan. It has also begun the process of issuing new equity/equity warrants to the promoter group for a total value of Rs 500 crore and is considering raising additional capital through the issuance of suitable securities to qualified institutional buyers in compliance with applicable law.
How the overall Indian Aviation Industry is working- An expert opinion.
While some airlines have sufficient liquidity and/or financial support from a strong parent, bolstering their credit profile, the credit metrics and liquidity profile of others will remain stressed in the near term, despite some improvement relative to the last few years,” rating agency Icra Ltd. said in a recent note on the Indian aviation industry.
Conclusion.
Meanwhile, multiple lawsuits in the NCLT and the Supreme Court, a contempt notice issued to promoter Singh in a Credit Suisse case, and the INR400-crore payment owed to the Marans, combined with provident-fund and income-tax backlogs, may continue to haunt the airline. We wish a speedy recovery for the low-cost air carrier so that it can rise high in the skies.
