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Negative net worth, cash stress, low demand: It’s 2014 all over again for SpiceJet

The low-cost airline must urgently look at ways to turn the corner.

August 03, 2020 / 01:56 PM IST
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When SpiceJet declared its Q4 and full-year results last week, the focus quickly shifted on the auditor’s remark of “significant” doubt over the entity being a going concern. This was quickly followed by news of the Airports Authority of India pushing the airline on Cash & Carry mode before reversing the decision.

This comes within days of the airline intimating the stock market about being designated carrier for the UK and USA. The continuation of a cap on fares and capacity, along with the lack of demand uptick puts a serious question mark on the industry’s ability to continue as before, with more stress on airlines like SpiceJet who have accumulated losses.

While airlines have looked at ways to reduce costs by Leave Without pay (LWP) and salary cuts, except SpiceJet, every airline is backed by a group which has interests in other businesses. While Air India is backed by the government, IndiGo is partly backed by InterGlobe group, Vistara and AirAsia India has a majority holding with the TATA’s and GoAir is from the stable of Wadia group – which has diverse interests.

A unique airline promoter

Even smaller airlines like Star Air and Trujet have promoter groups with diverse interests. That leaves only SpiceJet—to not have a set of businesses at the back to fund or raise cash when the need arises. While this is worrisome, this could also act as a catalyst for a fight for survival.


Worrisome facts

SpiceJet has a cash balance of less than Rs 50 crore. This is a small percentage of what market leader IndiGo has on its books. The airline has also admitted that it has deferred some payment to various parties including vendors and expressed inability to determine all such cost and penalties. With a low cash balance and unclear revenue stream, the future does look bleak.

In what could be a déjà vu, the company has a negative net worth of Rs 1,579.2 crore as of March 31, 2020. Ironically, the company has nearly been there with a negative net worth of Rs 1,485 crore as at March 31, 2015 - the first quarter after it changed hands, coming out of the near-death experience in December 2014. However, the net worth could further decline by over Rs 700 crore if the Boeing compensation is left out.

What could be the way out?

If the airline has to take a path which doesn’t end up as it did for Jet Airways, it would require sustained efforts to attract investors or raise cash. There have been airlines that have raised cash even during COVID times and have come out of administration! But this only solves half the problem. The other half is to reduce cash to ensure that the current levels of cash burn are taken care of and the airline doesn’t land up in the same situation, again!

Network re-jigs: With pressure on revenue and yields, the obvious area to focus on is the network. The airline has the approval to fly to 48 stations in India as per summer schedule, of which eight are such where there are only one or two departures a day. SpiceJet operates 113 aircraft in passenger service.

Compare that to IndiGo which operates 250+ aircraft, to nearly 60 airports in the country with nine of them seeing one or two departures a day. The focus clearly should be on strengthening the presence and letting go of places where the airline has a limited presence. This helps in reducing costs, improving market presence and attracting more business.

Focus on cargo: For every airline in the country, the competition from IndiGo is for real. With little to differentiate and IndiGo’s cost structure getting more and more difficult to match, the mantra could be diversification. The airline, only recently, started bifurcating revenue from cargo and passenger on its balance sheet. But there already is four-fold growth from freighter services in Q4-FY20 as compared to Q4-FY19. While the cargo revenue was less than a percent in Q4 last year, it stands over 2.5 percent in Q4 this year.

The airline already claims it is the largest cargo operator in the country. Cargo comes with its own benefits. It doesn’t complain about red-eye, needs no service and gives more revenue than what a passenger gives. However, IndiGo has tasted success in this lately and there is no reason to believe that IndiGo would not aggressively chase this segment and give Spicejet a run for its money.

Shrink! With capacity capped and demand at new lows, the airline could look at returning planes and reducing liabilities. The airline has a mix of B737-700s/800s and 900s in addition to the Q400s. While the uncertainty over the B737 MAX continues, it would look at reducing the Boeing fleet and operating only the 800s for fleet commonality.

Tail Note

From the codeshare with Emirates to seaplanes and a hub at Ras Al Khaimah – the airline has had grand plans but little has materialised. From March onwards, everything can be blamed on the pandemic but the past record does put questions on the ability of the airline to execute the grand plans!

With the Boeing compensation already factored in and the market for sale and lease-back not being as attractive as before, there won’t be a steady stream of revenue being generated from Sale & Leaseback when the delivery for the B737 MAX resumes. While Jet Airways monetised its frequent flier program at some point of time to raise cash, there isn’t anything similar for SpiceJet.

The going is definitely tough for the airline, but the next few quarters will tell is SpiceJet tough enough to get going. Another fall is definitely not what the Indian industry should look at, but the longer the COVID-19 crisis continues, the recovery for every airline in the country starts looking bleaker by the day.

Ameya Joshi runs the aviation blog Network Thoughts
Ameya Joshi
first published: Aug 3, 2020 01:56 pm

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