Moneycontrol PRO
UPCOMING EVENT:Watch leaders discuss the biggest issue of our times at the Sustainability 100+ Summit. Register now!
you are here: HomeNewsBusiness

SpiceJet stays afloat on ‘broken wings’ of Boeing 737 MAX

Projected compensation from Boeing for grounded jets helps Indian carrier cushion losses. The airline’s other income in 2020-21 has risen nearly six times on the provision for damages. Over the past two years, the airline has reported Rs 1,232.25 cr as compensation for the grounding of 737 MAX

July 01, 2021 / 01:26 PM IST

Even as COVID-19 hit the Indian civil aviation market, SpiceJet has found a silver lining in other income, which has increased more than six times in 2020-21, compared to 2018-19 and 2017-18.

The airline’s other income in 2020-21 has risen to nearly Rs 9,831 crore as compared to Rs 8,351 crore in 2019-20, Rs 1,490 crore in 2018-19, and Rs 1,312 crore in 2017-18.

The reason for this, as the airline itself said in its January-March quarter earnings statement on June 30, is the provision it made for the compensation due from Boeing Corp due to the grounding of Boeing 737 MAX aircraft.

While SpiceJet only had 13 Boeing 737 MAX 8 aircraft flying over Indian skies in March 2019, the airline had already signed an agreement for around 142 more such aircraft, whose deliveries were halted.

In March 2018, SpiceJet had signed a $12.5 billion order for around 155 Boeing 737 MAX planes.

Close

COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more
Show

Thought the airline was first hit by the grounding of the 737 Max in March 2019 and then by COVID-19, SpiceJet has cushioned the fall in its bottomline in the last eight quarters through the rising other income.

SpiceJet, in its result for the quarter ended March 31,2021, said that due to the grounding of the 737 Max fleet, it was seeking compensation from 'the aircraft manufacturer towards cost and losses, which are currently under discussion.'

Compensation

Collectively, over the past two financial years, the airline has reported Rs 1,232.25 crore as compensation for the grounding of 737 MAX.

Spice Jet 0107_002

The airline added that it has reached the compensation value, based on an interim offer of accommodation from the aircraft manufacturer, its own assessment, and legal advice.

The budget airline's management is also confident of the ultimate collection of the income recognised by the airline upon the conclusion of discussions with the aircraft manufacturer.

The auditors have qualified their audit report in this regard, the airline said in its notes.

On March 13, 2019, the Directorate General of Civil Aviation (DGCA) had ordered to immediately ground the Boeing 737 MAX 8 aircraft, days after an Ethiopian Airline crash killed 157 people. In October 2018, a Lion Air-operated 737 Max had also crashed, leaving 180 people dead in Indonesia.

Calculations done by Moneycontrol show that the airline would have reported a net loss of Rs 1,558.75 crore in 2020-21 and Rs 1,606.5 crore in 2019-20, if the compensation booked by the airline from the grounding of its Boeing 737 MAX 8 aircraft is taken away.

SpiceJet, in its financial results for the whole year 2020-21, has reported a net loss of Rs 998.3 crore and a net loss of Rs 934.76 crore for 2019-20.

Spice Jet 0107_001

In 2020, media reports had quoted Boeing as saying that the costs associated with the grounding of the 737 Max were likely to surpass $18 billion.

The aircraft maker, in its financial results, had said that it would cost around $18 billion to return the Max to service, compensate airline customers and restart the shuttered 737 factory.

Will the Boeing 737 Max return to service?

Will the Boeing 737 Max return or will SpiceJet continue to book compensation for the grounded jets?

By the end of 2020, Boeing had received clearance from the Federal Aviation Administration and the European Union Aviation Safety Agency to operate the 737 MAX, once Boeing and the operating airlines update the flight control software and rerouted some electrical wiring, among other changes.

In India, while the DGCA has allowed Boeing to fly its 737 MAX over the Indian airspace, it still continues to ban Indian airlines from flying the aircraft to and from Indian airports.

The DGCA, at the end of last year, had said it will study the FAA's decision and take some time before taking a final call on allowing Boeing 737 MAX planes to fly again.

Boeing likely to compensate SpiceJet

As of July 1, another quarter has passed and the jets continue to remain grounded, thus giving SpiceJet another quarter of compensation dues.

"Boeing is likely to compensate SpiceJet for the grounding of the 737 MAX, similar to the way IndiGo was compensated for by P&W/Airbus for engine issues,” Vijayant Gupta from Edelweiss Securities said.

Over the last two years, the provisions made for compensation by SpiceJet from Boeing have helped prevent the airline's earnings from a major breakdown, he said.

Similarly, SpiceJet is expected to remain cautious in its attempt to operate the 737 MAXs over Indian skies as this could be seen as a strategic opportunity for the airline.

“They (SpiceJet) are likely to not push for more deliveries of jets anytime soon since COVID-19 has wiped out demand. Even if the DGCA clears the 737 Max planes and allows for their commercial operations by Indian carriers, SpiceJet will not be in a hurry to take deliveries of the jets," a Mumbai-based market expert said on condition of anonymity.

He added that domestic airline traffic over Indian skies is likely to remain subdued for another quarter at the least, and airlines are already operating at lower than 50 percent capacity utilisation.

"Indian airlines will only need new deliveries (of jets) in the last quarter of 2021-22 if the pandemic situation is under control by then," another market expert said.

He added that taking deliveries of new aircraft at a time when capacity utilisation is limited will only add to the cash burn of airlines, even though the newer jets may be more fuel-efficient and airlines further lease them.
Yaruqhullah Khan

stay updated

Get Daily News on your Browser
Sections
ISO 27001 - BSI Assurance Mark