SpiceJet dismisses concerns over future earnings, performance

SpiceJet reported a net profit of Rs 23.28 crore in the third quarter, following IndiGo, the domestic market leader, which posted a profit of Rs 129.8 crore. Both airlines made a profit after seven consecutive quarters of losses.

However, many attribute SpiceJet’s profit to the compensation received from US aircraft maker Boeing for the grounding of its 13 Boeing 737 Max planes. The MAX aircraft were grounded worldwide in 2019 after two fatal accidents caused by a design flaw. They were allowed to fly again in 2021.

SpiceJet was the only Indian carrier that flew the MAX aircraft at the time. It has ordered 205 Boeing 737 MAX aircraft, of which 155 are firm orders and 50 are on option.

“We deserve and are legitimately entitled for losses which were sustained by us due to grounding of these aircraft for no fault of the airline,” a SpiceJet spokesman said, adding that the results reflected “our true performance and these have been drawn with full transparency.”

The spokesperson said while there was a component of compensation from Boeing, it was also reflective of the recovery of losses incurred while the MAX aircraft were grounded.

“We have been suffering losses all these years and how can this recovery be viewed negatively?” the spokesperson asked.

Going concern

However, this isn’t where SpiceJet’s problems end. Auditors Walker Chandiok & Co LLP has repeatedly raised concerns over SpiceJet’s ability to continue as a going concern.

The auditor said the company’s accumulated losses of over Rs 5,453 crore as of December 31 have completely eroded its net worth. Along with uncertainties related to the impact of the pandemic, there exists “a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern,” the auditor said.

The airline spokesperson dismissed these concerns, saying they “are accounting policies/concepts and hence should be read and understood strictly in the same context.”

“The transfer of the logistics business will result in a one-time gain of Rs 2,555.77 crore for SpiceJet, wiping out its substantial negative net worth,” the spokesperson said. “The settlement with Boeing will assist the airline to have a younger fleet, which will increase operational efficiency and support cash-profitable operations. It will also significantly reduce and eliminate our past dues occasioned on account of grounding of these MAX aircraft. Settlements with lessors will significantly reduce our cost burden and older dues.”

Besides financial problems, SpiceJet faces major legal hurdles. First, there is the winding-up petition filed by Credit Suisse AG, which claims SpiceJet owes it more than $24 million.

A division bench of the Madras high court had upheld a single-judge bench order to wind up the airline and directed the official liquidator to take over its assets in December. The court gave the airline three weeks to challenge the order, which SpiceJet is pursuing in the Supreme Court.

The matter pertains to an agreement of November 2011 between SpiceJet and SRT Technics for engine maintenance services, for which the payments are due to Credit Suisse, as an assignee of SRT. Experts said the winding-up petition could affect the airline’s credibility in the international markets.

“Foreign suppliers and lessors are likely to view this as a negative event, resulting in additional cash outflows,” an airline financing expert said.

The spokesperson said SpiceJet is “confident” of settling the winding-up petition matter at the earliest.

Former promoters

In another case, SpiceJet’s current promoter, Ajay Singh, is fighting the airline’s previous promoters, KAL Airways (promoted by the Marans). KAL Airways has rejected a Rs 600 crore one-time payment offered by SpiceJet to settle a pending case.

The airline refutes speculation about the airline’s profitability because of these two cases. The spokesperson said it would be wrong to speculate that the company will not pay KAL Airways if the court directs it to because the principal amount has “already been secured.”

SpiceJet shares gained 0.8 percent to Rs 63.20 on the National Stock Exchange at 1:30 pm on February 18. The stock has declined 28 percent in the past year.

Experts are clear that although SpiceJet has made a profit in the latest quarter, it is still not out of the woods financially.

In the latest quarter, SpiceJet passenger business continued to improve with a domestic load factor of 85.2 percent, while revenue in the logistics business grew 74 percent, the spokesperson said.

According to Satyendra Pandey, managing partner of aviation advisory firm AT-TV, SpiceJet faces challenges on numerous fronts.

“In addition to the immediate legal challenges, there is also the weakness of the balance sheet and an intensely competitive market that will lead to lower margins. Credit is constrained and if this was not challenging enough, input costs, especially those of fuel and forex, have been rising,” Pandey pointed out.

He said the latest results have been helped by Boeing’s compensation and strong cargo yields, but cautions that “both are short term in nature.”

Pandey added that the freighter and logistics division now accounted for 25 percent of SpiceJet’s revenue mix. Revenue from the freighter and logistics segment was Rs 583.5 crore, while the airline’s total revenue was Rs 2,259.3 crore in the third quarter.

“Our estimates of inter-segment allocations indicate that this revenue involves activities other than flying, such as warehousing and last-mile delivery,” he said.

According to the airline financing expert, SpiceJet’s profitability will depend on the Boeing 737 MAX deliveries and how the airline can get over the initial hesitation of passengers travelling on the aircraft, which is back in service.

“Then there will be the human resource challenge of training the pilots on the MAX aircraft,” he pointed out.

Sectoral problems

There are also problems that the entire aviation sector is facing, which SpiceJet also will have to address. Nripendra Singh, research director, aerospace & defence practice at Frost & Sullivan, maintains that rising aviation turbine fuel prices and the slow pace of passenger recovery are among the likely challenges.

“The emergence of Air India under Tata Sons, who have a track record of successful turnarounds, Akasa Air’s entry, which can further cannibalise the market, and the possibility of Jet Airways restarting will also pose a challenge for SpiceJet,” Singh said.

SpiceJet countered this, too.

“It would be purely speculative now to comprehend how the competition will look like in the times to come and we feel the market will adapt to the changing travel requirements,” the spokesperson said.

One other factor, according to the airline financing expert, will be the upcoming hike in US interest rates, which will likely increase dollar-related expenses like fuel and leasing and could hurt the airline financially.