SpiceJet! Was it a ‘Rare’ mistake to invest?

Its troubles have stirred memories of Vijay Mallya's Kingfisher Airlines. Rakesh Jhunjhunwalla buying stake had skyrocketed the stock for few days. But questions now arise on their survival. Things might just work out for the better…

Dec 12, 2014 11:12 IST IIFL Subhkirti Sinha |

For a long time, ‘Good times’ are not what goes for aviation industry. One after the other, airline companies are hovering on the brink of collapse. The recent addition to the list is the budget airlines, SpiceJet, as it battles the directives of DGCA, frail financial health and low infusion of funds.

Its troubles have stirred memories of Vijay Mallya's Kingfisher Airlines, which, after running up huge debts, had ceased all its operations in 2012. However, the similarities end with the financial crunch both companies faced during its operation. While Mallya’s Kingfisher Airlines operated in the premium segment, SpiceJet has a low fare model, and the offering of low discounts on different routes have contributed to its decline.

Even as the company’s revenue doubled in the last three years culminating in Rs. 6356.3 crores, the losses accrued as well to Rs. 1600 crores. Moreover, rupee-dollar rate conversion also had its impact on the finances of the firm.  

Now, faced with a severe financial crunch, Spice Jet has cancelled over 1,800 flights in a month as it shrinks its fleet to 37, down from 57. Last week, DGCA (Directorate General of Civil Aviation) issued a notice to the budget carrier to cease taking advance bookings, refund money to passengers whose flights had been cancelled, and furnish an explanation by 15 December on its strategy to pay off vendor dues of at least Rs.1,600 crore. The move to stop Spice Jet from taking advance bookings has resulted in an increase of price by 10% from the last week of November, as confirmed by many travel aggregator websites like Yatra.com.  

Adding to their woes, Government has ruled out any bailout measure to SpiceJet. The company’s total liabilities exceeded its total assets by Rs.1,459.7 crore on 30 September, which is also a source of concern for the authorities involved. Besides, the Airports Authority of India (AAI) is said to be considering putting SpiceJet on cash-and-carry mode soon if it does not furnish a bank guarantee against its dues to the airport operator, which stand at around Rs 200 crore, although the deadline for this payment has now been extended to Monday, bringing a slight relief to the troubled airline.

Union Civil aviation minister Ashok Gajapathi Raju said, “We are running through a lot of turbulent weather... SpiceJet seems to be giving us heart attacks as far as airlines are concerned”

Aviation experts are of the view that the government should find ways to support the airline. Capt. Gopinath, pioneer of the low budget airlines in India, opined that DGCA should not rush Spice Jet into taking quick decisions which might backfire. He added that the airlines needs to be given a ‘breathing space’ to find investors.

Aviation expert and South Asia chief executive of aviation consultancy Centre for Asia Pacific Aviation (Capa) Kapil Kaul said “I don’t approve of DGCA directive on immediate cancellation of slots and forward-booking restricitons as this will seriously hurt the airline’s recovery chances.

However, DGCA stated that they wouldn't soften tough stand on Spicejet unless it produces a "concrete plan."

Not everyone seems hopeless though. A few weeks back, RARE Enterprises (Rakesh Jhunjhunwala) acquired 75 lakh shares of SpiceJet for Rs 13.4 crore through open market route. The move moved the stock higher for the next couple of days.

Even Ajay Singh, former director of Spice Jet believed that the airlines would come out of its worst crisis to date, owing to its strong promoters who will be able to fund the deficiencies. In an interview to CNBC TV 18, he said, “Spicejet has 20 percent market share somewhat reduced now because of the reduction in flights and planes. They also have a strong promoter so they will eventually find the way out of their current problems.”He had a more concerned approach towards DGCA, saying that the regulator is in a difficult position as they are supposed to protect their passengers and they are supposed to ensure that the airlines remain strong and healthy.

The one thing that might just work in the favour of SpiceJet is the low debt it has on its order books and the fall in the crude oil prices. If there comes a strategic investor and fresh infusion of capital, the company might just wriggle out of the mess that it is currently. The company has already started offering heavy discounts on several routes, some as much as 50% of their original ticket price, However, the fares on major routes like Mumbai-Delhi remain largely unaffected. 

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