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Spicejet is flying on cargo and a prayer

Spicejet’s finances are worse than they were six years ago, when its balance sheet seemed about to crashland. Its income is propped up by assumptions of hefty compensation from Boeing for grounding of aircraft, and it is operating in a tough, pandemic-hit environment, but its small and rapidly growing, cargo business offers a ray of hope

July 06, 2021 / 05:11 PM IST

When Spicejet declared its earnings for FY21 last week, all eyes were on two things: the compensation it is budgeting from Boeing for grounding of its B737 MAX aircraft and the funds it plans to raise from the market.

Over the past two financial years, the airline has claimed a compensation of Rs 1232.25 crore for the grounding of B737 MAX aircraft. The company is confident of getting the compensation, but it disclosed that its auditors had qualified their report in this regard.

The auditors have again red-flagged the company’s finances as current liabilities exceed its current assets by a staggering Rs 5185.8 crore and accumulated losses have piled up to Rs 4,190.6 crore. The airline approved a fund raise of up to Rs 2,500 crore in the same board meeting.

Its finances are much worse than at the end of December 2014, when the airline was about to go belly up and saw its current promoter take charge -- accumulated losses were Rs 3,233.3 crore while the current liabilities exceed current assets by Rs 1,635.53 crore.

The going gets tough


The highest profit the airline recorded in the last five years was Rs 557.2 crore in 2017-18. It would require many such years to erase its accumulated losses, but this seems unlikely with the kind of restrictions, market dynamics and travel patterns that one is seeing right now. The only option left hence is to raise funds and repay the expensive debt first which will help reduce its finance costs.

But raising funds is a one-time activity and the company still needs profitable operations to stay afloat. While passenger numbers have been growing steadily, profitability hasn’t. Even IndiGo reported losses in some quarters after the suspension of Jet Airways. In such an environment, Spicejet seems to be betting on something else!

Cargo gets going

The airline has said it would hive off its cargo business, which is now a separate entity. Last fiscal year, its revenue jumped 518 percent to Rs 1,117.5 crore. This helped it bounce back with a profit of Rs 131 crore against a loss of Rs 134 crore in the previous year. While this looks minuscule, everybody seems to bet on cargo these days.

The airline has upped its cargo game with a fleet of 20 aircraft. This includes wide-body aircraft (Passenger aircraft converted to carry cargo) on wet lease, a far cry from just five aircraft a year ago. The wide-body aircraft which it has wet leased from Hi-Fly have been flying across the continents -- from Lagos in Africa to Brussels and Frankfurt in Europe and to Kabul, Tashkent and Almaty, closer home.

The airline said it operated over 20,000 flights carrying 1,68,976 tons of cargo since March 2020. Data released by regulator DGCA shows that domestic cargo fell 30% in 2020 as compared to 2019 on the domestic front while International cargo halved.

Yet cargo comes with benefits: It does not complain for not getting a window seat or poor service; it is okay to fly at night and does not mind minor delays. The market is primarily B2B unlike the cut throat market of passengers, and the distribution channels are much more organised and limited than the umpteen ones in the passenger segment.

The ability to broker long-term deals and having ready availability of aircraft for disposal at short notice could help Spicejet differentiate itself to the domestic market and in the region. Yet, being in India alone won’t help and the airline would have to expand its offices or sales agents to have a steady flow and share of the inbound cargo market as well.

Competition is not far off

IndiGo is joining the competition soon. It is expecting four A321-PCF aircraft in its fleet in the next few years. The airline has already converted a few of its A320s to carry cargo on seats, on the lines of Spicejet.

The future of Spicejet still hangs in balance. Is Spicejet attractive? It probably is. The order for new airplanes, the open spot for No.2 position in the domestic market, the much talked about codeshare with Emirates and profitability on the cargo fleet good reasons to invest. Yet, the airline has open issues with the past owners of the airline and Bombardier has filed a case against it, seeking damages.

With cargo hived off in future, how will the passenger airline still sustain? The industry does not have a magic wand for a turnaround and the passenger segment could well scale down and make the most of the international segments allocated to it and vacate other domestic markets to remain a niche player with a large presence in Dubai to make the most of the codeshare
Ameya Joshi runs the aviation analysis website Network Thoughts.
first published: Jul 6, 2021 05:11 pm

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