Is SpiceJet attractive enough for investment? 

The last few months have been turbulent for SpiceJet. Multiple incidents in the skies later, a safety probe was initiated by the regulator. For the first time the regulator said that there were issues with safety and directed SpiceJet to operate only 50% of its approved schedule. While typically this would have meant cutting flights, the airline came out to say that it was operating less than that in any case! Not always would one like to admit that you are not utilising half the allotted slots in a market where a new carrier has recently launched and is hungry for expansion.

This was followed by a request from the lessor to deregister aircraft. The response? Similar! The airline said it would always want to get them out of the fleet for fleet renewal reasons and won’t be impacted.

While the cap on flights continues for 8 weeks for SpiceJet, it has started telling the market that it is actively scouting for investors and is in talks with foreign as well as domestic players for investments. The tune of investment is unclear though. The airline has not declared financial results for two consecutive quarters, citing a ransomware attack, and will declare those results next week.

The company had a negative net worth of Rs. 3,830.7 crore at the end of Q3-FY22 with the auditors repeatedly raising concerns over its ability to remain a going concern.

Indications of a sale?

Due diligence is part and parcel of any stake sale or fund raising activity. The last few weeks have seen the airline settle many outstanding issues. These include those with lessors, Original Equipment Manufacturers (OEMs) and efforts to resolve the longstanding dispute with the Marans -- erstwhile owners of the airline.

All of this, if unsettled, stands out as potential liability on the balance sheet and could turn off a potential investor or reduce the extent of investments.

When the going was tough, cargo got going

The airline invested significantly in cargo operations pre-pandemic and it helped the airline during the pandemic. An announcement was made to hive off the cargo subsidiary SpicXpress on a slump-sale basis but like many of its earlier announcements, the exercise is yet to fructify.

What saved the airline in the pandemic now sees a lot of competition. QuikJet cargo is reviving itself with two aircraft, BlueDart is expanding its fleet and IndiGo will induct its A321 freighters very soon which could make the competition in cargo as cut-throat as in the passenger segment. So where does the company get its valuation from?

Bilaterals, slots, assets and human capital

The airline has approval for 4,192 slots per week in the current schedule. This is 16.56% of total approved slots. While traditionally market share follows capacity share, the airline is deploying only half of its approved capacity and thus its market share is hovering between 8% and 9%. Most of these are not between metros and that is how the airline has differentiated itself. This has helped the airline maintain the highest Load Factors all along. While it has lost market share in July, reaching the fifth spot, it remained on top when it came to load factors.

Slots are invaluable till the airline is operating. The country has seen what happened to the slots of Jet Airways, even when the government repeatedly said that those were being protected.

The airline also has the order for MAX with Boeing along with a trained workforce, which is not easy to build. Interestingly, when Jet Airways saw investments from Etihad, there was a revision in bilateral rights between India and Abu Dhabi. Will the same model be given on a platter to some other airline willing to invest? Is the outbound Indian traffic still very lucrative post-pandemic?

Challenges

The last two years have been challenging for everyone but especially so for the staff of SpiceJet. While most other airlines have restored salaries, there has not been a word on that front from SpiceJet.

Social media is full of tales about the salary cuts. The airline, like many others, had seen protests by its staff near the airports. With Akasa Air opting for Boeing and Air India Express likely to expand under Air India, the Boeing pilots have other avenues opening up soon. Not just pilots, all other ranks could also find new jobs soon.

The real challenge will be valuation. While it may all be nice on paper to see how much the stake is valued for, the real question to answer would be how much money flows towards repaying debt and is infused for operations. This one-time activity is essential since there otherwise is no hope of making so much profit that the airline can repay debt.

As of now the airline is stuck between a rock and a hard place. In Indian aviation, quite a few airlines have gone down during the investment discussion phase. The inertia that sets in with focus on investments rather than operations has been the bane. How will SpiceJet defy it?