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BL Research Bureau

The infusion of $80 million (Rs 345 crore) into SpiceJet by private equity firm WL Ross & Co LLC is positive for the airline, as it may help fund sustained operations amid mounting losses and rising fuel prices. The company has made a preliminary announcement regarding this on Tuesday, after weeks of speculation about a possible stake sale to Kingfisher as well as other domestic business groups.

While escalating fuel costs have been adding to expenses for airline companies, growth in domestic passenger traffic has flagged significantly in recent months. This has exerted pressure on the load factors of operators, leaving them with lower flexibility on fare increases. With losses set to continue for the next few months, low-cost operators such as Spicejet may require steady infusions of cash to sustain operations amidst these challenges. The presence of a recognised global name like WL Ross, who specialises in turnaround and restructuring of beleaguered companies, may also stand the company in good stead when it comes to restructuring operations or negotiating with other investors.

However, the deal may have little to cheer for investors in the SpiceJet stock in the near term. Indications are that the deal may involve an infusion of cash by way of debt rather than equity. This effectively quells any expectations of takeover of the airline by another aviation player, which may have helped “consolidation” in the domestic airline space and endowed SpiceJet with better pricing power. This investment by WL Ross also appears unlikely to attract open offer requirements. Though reports suggest that the infusion is by way of subscription to foreign currency convertible bonds, which are due for conversion in 2010, the specifics of the deal are not yet out.

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