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SpiceJet well positioned to gain from 737 MAX reinduction

The settlement with Boeing is a positive for the airline and is expected to help in its cash flow and retiring of the older models, thereby bringing in efficiency all across and in the operating costs.

November 25, 2021 / 04:15 PM IST

Civil Aviation Minister Jyotiraditya Scindia; Salil Gupte, head of Boeing Company in India; and Ajay Singh, chairman and managing director of SpiceJet, flew from Delhi to Gwalior on Tuesday by one of the airline’s 13 Boeing 737 MAX aircraft to restore confidence in the aircraft that’s resuming flights after being grounded for a long period for safety reasons.

SpiceJet’s resumption of 737 MAX services, grounded in March 2019, followed an agreement between Boeing and SpiceJet to iron out outstanding issues.

The aircraft laid low after two deadly crashes of a Lions Air and Ethiopian Airlines flight crashes leading to deaths of over 300 passengers, with the blame being laid on a faulty sensor.

The settlement details haven’t been revealed; it could vary from compensation for grounding of the 13 aircraft to revised prices or interest on pre-delivery payment, among others. The airline has 155 aircraft on firm order with 50 options. The airline is planning to induct 50 aircraft by December 2023, which makes it two aircraft a month from next month.

SLB to the rescue?


SpiceJet is not new to trouble, having come back from the brink in December 2014. Negative net worth of over Rs 3,500 crore, pending dues, salary cuts and delays in payments to lessors are some of the challenges that are already known.

But the increasing traffic and higher load factors of SpiceJet could mean there is a steady cash flow going forward.

The slump sale of SpiceXpress -- the cargo arm -- will give a major boost in cleaning the balance sheet and get the negative net worth down to Rs 750 crore.

However, that still doesn’t take it towards profitability in the long run by balancing the outgo for current operations. Here comes the income from sale and lease back, or SLB, which has been mastered by airlines the world over and closer home by IndiGo.

An SLB transaction involves transferring the title of the aircraft to the lessor and leasing the same asset. The lessors get the asset at a rate lower than the current market rates with an assurance of monthly revenue flow, and the airline makes money in the sale, giving it the much-needed capital for either operations or retiring past debt.

“Spice is well positioned to take advantage of the MAX reinduction. The settlement with Boeing is positive and will provide Spice with concrete MAX deliveries, thereby helping them achieve a profit of at least $5 to $7 million per aircraft in the near future. This will definitely help in cash flow and also retiring of the older classics thereby bringing in efficiency all across the operating costs for the company,” said Koushik J, partner at AT-TV Aviation, who has worked with leading airlines in India and the Middle East and handled aircraft financing for them.

SLB gains are fluid. There is a likelihood that these gains will slow down as more aircraft hit the market and lessors take a backseat in financing new assets. The airline needs to look at other financing options rather than relying on SLBs alone. With all the financial jugglery within the legal ambit, making profit from operations remains supreme!

MAX benefits

SpiceJet’s new Boeing MAX fleet now has a 14 percent reduction in carbon emissions, 50 percent lesser nitrogen emission and a 40 percent lesser noise footprint.

All of these metrics are great for the environment and its commitment towards combating climate change. The maximum benefit would come from being fuel efficient and the MAX, like its Airbus counterpart, scores well, helping save fuel costs to the tune of 15-20%.

Last quarter, SpiceJet spent Rs 615 crore on fuel, which was 30% of the airline's total expenditure. Because the airline operates Bombardier’s Q400 and the B737, a move to an all-MAX fleet will not reduce this by 20%, but there will be a substantial positive impact on the fuel costs which will help catch up with the competition.

Tail Note

The airline has to close a lot of loose ends. A very high speed of induction will have to be matched with a plan to deploy the additional capacity or working with lessors and creditors to retire older 737NGs from its fleet or a mix of both.

It's a steep path ahead where a mix of SLB income, cargo operations’ profitability and raising funds (the airline has shareholder approval) will help come out of a financial crisis. However, all said and done - what will matter in the end is operational profitability, which has been elusive in the recent past.
Ameya Joshi runs the aviation analysis website Network Thoughts.
first published: Nov 25, 2021 04:15 pm
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