Marans capable of funding SpiceJet deficiencies: Ajay Singh

As on March-April 2014, SpiceJet needed capital infusion to the tune of atleast USD 250 million, says Kaul. Going forward, the third quarter won’t be a good one for the airline, he adds. According to him, the promoters must announce immediate measures on recapitalization and send a strong message across that mean business and are committed to it.

Below is the verbatim transcript of Kapil Kaul & Ajay Singh's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: You have been a part of this organisation. Since you left you must have noticed the way the organisation has deteriorated both in the form of financials stress on the balance sheet as well as what is happening on the grounds with respect to flight cancellations etc. What is your assessment of what the way forward for SpiceJet could look like now?

Singh: Firstly, 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.

What they need to do is to focus and get back to the low cost model which is what Spicejet was known for. Basically get to one class aircraft flying to few destinations, flying frequently to those few destinations, work very hard to bring down costs again and focus on profitable routes, concentrate on increasing the yields and make sure that they desist from fire sales. So, the answers are not that difficult. You just need to get back to the basics of low-cost line. I feel that the current management has probably understood that by now.

Latha: Is the government making things worse? Analogy with banks is very close in this case. Once the regulator says that a bank is questionable for any reason then there is a run on the bank and it implodes. Is it that the Directorate General of Civil Aviation (DGCA) is working in the wrong direction? How can an airline survive if you don’t allow it to book forward? Is it actually accelerating the fall should it have worked behind the scenes with the SpiceJet Management? Given some very strong talk is the approach wrong?

Singh: DGCA is in a difficult position. They are supposed to protect their passengers and they are supposed to ensure that the airlines remain strong and healthy. So, DGCA has a role to play but clearly that role should have first been played behind the scenes rather than going out and making announcements which cause greater problems for the future.

As you pointed out that if they restrict an airline from booking advance beyond one month then that severally impairs an airline. It severally impairs confidence in that airline and this whole business is built around confidence. If I feel as a passenger that I cannot fly tomorrow on this airline then I will not book so leave alone booking beyond one month even the one month bookings will be difficult to find. The regulators need to find the way in which they can address their concerns but do it within the four walls of own offices and with the airline personnel and not try and make these things public unless they absolutely are forced to do so.

Sonia: One thing that will bail SpiceJet out and something that most investors are hoping it will come through is funding or a stake sale, recapitalisation etc. However, that process is taking longer than anticipated and many on the street believe that is because the Maran’s does not want to see it controlled at all. Do you think we should completely rule out the possibility of any stake sale or recapitalisation for SpiceJet in the neat future?

Singh: I don’t think so, firstly, I feel that the Maran’s themselves are financially extremely strong and I do not think they will just allow an airline to go under their control because that will have an impact on the entire Sun TV Group. So, the Maran’s themselves are capable of funding this. In terms of external funding I feel that SpiceJet is one of the few carriers that is publicly listed and has a significant market share and for foreign airlines looking to get into a market where the general atmosphere is pretty strong now in terms of lower crude oil price, in terms of this government and the positive direction to the economy. There are plenty of tail winds there and if foreign airlines want to get into India, SpiceJet is still a good bet. This challenge actually has an opportunity to try and bring down their cost significantly and become an important player again.

Latha: Is there something wrong with the way this industry is being run? The government owned carrier Air India is perennially an oxygen, Jet has survived only because of doses of capital one big player has already imploded Kingfisher and the other one is following suite. Something is wrong in the way it is run you think this sector?

Kaul: I was very surprised with the DGCA’s action. What should have been commercial and confidence was played out through newspapers. I have never believed that the intended action is not for the airline to straighten up its act. I thought it was more for public consumption. I felt extremely dissatisfied with the response of the regulators. Agreed with them on the safety issues on integrity of passenger flights, may be even staff salaries.

However, immediately cancelling slots and making sure that you can not do forward booking was intended that the government doesn’t seem to be interested to have this airline continue which was unfortunate. Coming to your point, the whole sector has been challenged for the last seven-eight years especially for last four-five years and I don’t think that the government has done enough to basically bring structural reforms which are required to get the sector back on a fundamentally stronger sense. So, my sense is that the whole act of the government so far has been extremely poor and with the result that the operating environment which the airlines find themselves is pretty dismal as well.

Sonia: How much do you think SpiceJet will need to stay a float now because one it can not do any advance booking, two it’s cancelled more than 1,800 flights and we have seen every quarter it is posting Rs 300-400 crore losses. So in terms of the numbers or to stay on float how much do you think SpiceJet will need?

Kaul: Our assessment of March 2014 was they required minimum USD 250 millions to clean up their books. That was an assessment we did in March-April 2014. So my sense is last year they required about USD 250 million and there were first six months of losses which were over Rs 400 crore and going forward if you see the next two quarters, Q3 is going to be pretty bad for them .What was supposed to be potentially a profitable quarter or a quarter which could get you to the breakeven level will prove to be disastrous and Q4 is traditionally very low.

So, they need some recapitalisation much beyond USD 250 million. I am not counting that once they get their act together they would need working capital; they would need money for fresh leases so the amount of recapitalisation that the airline requires is much higher than the numbers that normally are quoted at present.

Latha: Ajay Singh was saying that if they got back to what they know best and what they did best the low cost model then that is the way out for the company. What is your own sense, is it merely this change in strategy, is this workable change in strategy as of now? What chances would you give for the survival of SpiceJet?

Kaul: If the money doesn’t come now to be honest with you this will deteriorate further. The stage of restructuring and getting the cost based more comparative and to look at revenue increase and yield increase, my sense is a second stage issue. The first stage issue is immediate recapitalisation. It is the time for promoters to take some bold decisions one on further demonstrating their commitment to the business and that can not be piecemeal. That has to be a one-time large recapitalisation and initiate what I call that enterprise wide restructuring.

First, more important is their very large recapitalisation. If the money doesn’t come now and if they are still waiting for the strategic investor, the performances, the financials would deteriorate and chance of a come back or revival will get very remote. So, if the news from Chennai in the next few days is not a very strong recapitalisation from the promoters, I would think that going forward it is going to be very tough for the airline to survive.

Sonia: You speak to a lot of people in the industry are there any global airlines that are still interested in the SpiceJet? There were talks about 5-6 months ago but those have died down are they still any suitors?

Kaul: My sense is that the interest from the Middle East carriers could be there but that interest is not in a domestic market. Their interest is primarily to basically have traffic shift to their hubs. Once that are possibly could be interested is Emirates and I don’t see Emirates investing in India. There was a chance the FlyDubai could but I don’t see that happening and Qatar to some extent I am not sure the kind of complexities that the domestic market is in or SpiceJet is in would interest something like Qatar as of now.

In the near term it is possible but I am not very sure given the size and scale of SpiceJet given the complexities of their problem that any Middle East carrier as of now would be interested. Then it leaves the financial investor but my sense is that it might also take a while but it can only happen provided the promoters show a stronger commitment in the business.

If the news form Chennai comes that the promoters are going to put in say roughly couple of USD 100 million or closer to that over a period of next few weeks then there is a possibility of a financial investor or strategic investor coming on board would happen but stage one is for the promoters to demonstrate their act.

Latha: Any international suitors?

Singh: International suitors yes but not in the immediate short run. Clearly first SpiceJet need to get exact together as Kapil said promoters need to be able to come up with the money or some body needs to be able to come up with the money to create some confidence both within the organisation and outside the organisation.

If that happens in the medium-term certainly SpiceJet is an attractive airline for foreign investor not only these airlines from the Gulf but also airline also in the South East of Asia. Lot of these airlines are looking to take traffic from India take it to the US or to Europe and create hubs in their own hometowns. So, for them SpiceJet represents a great opportunity but clearly that is on a medium-term. First SpiceJet needs to survive this current situation. It needs to work with the government as well very intensively to ensure that once there is some recapitalisation committed either by the promoters or by some investor they can start getting back on track in negotiations both with the government so that there is no more bad news which comes out from government as well.