MC Explains | Why SpiceJet is hiving off its cargo business to subsidiary SpiceXpress

SpiceJet, which has been in the news for its precarious financial position, has decided to transfer its logistics business to its subsidiary SpiceXpress and Logistics. This is on a slump sale basis, along with all related assets and liabilities, including knowhow, trademark, licences, franchises, customer contracts, distribution network etc. The sale will be subject to the approval of shareholders and such other approvals as may be required.

Recently, SpiceXpress had applied for a No-Objection Certificate, which is the first of many steps to get an Air Operating Permit (AOP). SpiceXpress has a fleet of three B737-700 and two B737-800 freighter aircraft. A couple of Q400 turboprop aircraft have been converted to carry freight by removing the seats and utilising that space for cargo. The airline also operates cargo-on-seat flights. These aircraft currently operate under the “SG” code for all flights. SpiceXpress also has more aircraft on wet-lease, including the A340, A330, B767 and B777. These wet-lease aircraft operate under their respective IATA codes.

Cargo operations have come to SpiceJet's rescue, so to say, with Q1-FY22 seeing the cargo arm reporting a net profit of Rs 30 crore. This is a considerable amount, considering the fact that the airline ended Q4-FY21 with free cash of Rs 35.5 crore and restricted cash of Rs 140 crore. The cargo operations have provided some solace to the airline, which is otherwise struggling to cope with the fall in passenger traffic due to Covid-19. Moreover, there is no certainty on whether it will get damages from Boeing, which the airline has included in its balance sheet for every quarter since the grounding of the B737 MAX aircraft in March 2019.

What is a slump sale?

A slump sale is the sale of a business as a going concern on an AS-IS basis for a lumpsum consideration, without values being assigned to individual assets and liabilities.

Such a sale, in order to constitute a slump sale, must satisfy the following criteria: the business is sold as a whole and as a going concern; the sale is for a lumpsum consideration; and materials available on record do not indicate the item-wise value of the assets transferred.

Why is the airline doing this and what is its significance?

The airline has been facing litigation from multiple parties. There remains an unsettled dispute with M/s KAL Airways, the former owner of SpiceJet, from whom Ajay Singh, the current Chairman, bought the airline after the December 2014 crisis. De Havilland Canada (DHC) has also filed a case in the Delhi High Court against the airline, asking for payments for the aircraft (Q400) it had ordered but never paid for. DHC has now stopped production of the aircraft.

While the board has taken approval to raise funds to the tune of Rs 2,500 crore via a QIP, the litigation and material uncertainty in the passenger business means that raising funds could be a challenging proposition.

SpiceXpress has been valued at Rs 2,555.77 crore and SpiceJet will get shares in SpiceXpress equivalent to this amount. Looking at the profitability of SpiceXpress, any dividends paid by the company would work out well for SpiceJet given its current financial woes. And while SpiceXpress will operate as a separate entity, SpiceJet will continue to provide certain transportation services, ground and logistics support, management services, sharing and provisioning of resources etc. to SpiceXpress. This translates to assured business for SpiceJet.

A separate entity with a separate air operating permit could mean the airline can hive off this business and possibly look at scaling down SpiceJet’s passenger arm to ensure that it can be sustainable. By not competing with IndiGo on every route, in a scaled down version of what it is now, operating majorly on the subsidised RCS-UDAN routes and feeding the international network of Emirates, with multiple destinations in India via a codeshare pact, SpiceJet will definitely have a better chance of survival than it does in its current form.

For SpiceXpress, this could mean the possibility of partnerships with global players. DHL has invested in Blue Dart and the field is wide open for FedEx or UPS for a market that is growing by leaps and bounds, thanks primarily to e-commerce. Currently, these players would not want to invest in SpiceXpress as it is not a separate entity. This could see SpiceXpress invest in last-mile delivery, similar to what Blue Dart does.

The hiving off looks like a win-win for both SpiceJet and SpiceXpress.

Tail Note

SpiceXpress started in September 2018. The pandemic gave the cargo subsidiary some much-needed scale. Previous operators — Deccan 360, Aryan Cargo and First Flight — that had ventured forward with their own aircraft had not been able to make a mark in the market. This meant that only Blue Dart kept going strong, year after year.

With IndiGo getting ready to induct dedicated freighters, which will arrive next year, SpiceJet has to scramble right now. The airline is already fighting a battle with IndiGo in the passenger market and it has to ensure that this does not happen in the cargo market as well!