‘Consequences of not hiving off SpiceJet could have been a lot worse’

SL Narayanan, Chief Financial Officer of the Sun Network group that owns SpiceJet, is in a relaxed mood when we meet in his office. The Chennai-headquartered media conglomerate entered into the aviation industry by acquiring budget carrier SpiceJet in 2010. After running it for four years and running up accumulated losses in excess of ₹2,600 crore, the company recently filed a proposal with the Ministry of Civil Aviation to sell the loss-making airline to its original promoter Ajay Singh. Narayanan says Sun group Chairman Kalanithi Maran will be incurring a substantial capital loss on the deal. But “the consequences of not hiving off SpiceJet could have been a lot worse”, he said in an exclusive interview to BusinessLine. Edited excerpts:

After months of speculation, you finally exited the airline. How do you feel about the deal?

This is not perhaps the best deal. We were in serious talks with two blue-chip investors from the US till about August last year, which would have allowed us to retain control. Unfortunately, those discussions had to be suspended for totally extraneous reasons. But given our situation, we believe the consequences of not hiving off SpiceJet could have been a lot worse.

But it happened at a time when the operating environment is starting to look considerably brighter on the back of cheaper crude, a steady rupee and consistent growth in passenger traffic for last several months…

Yes, it is a matter of considerable regret for all of us that after nurturing SpiceJet through several challenging periods, and supporting it by regular injection of additional equity, we are compelled to divest at a time when the tide is turning and the entire sector is looking more viable.

The lone reason for our withdrawal from SpiceJet is lack of adequate liquidity in the group; we simply could not fund the losses in addition to meeting the investment needs of other businesses such as FM radio and DTH sectors, for which we have ambitious growth plans that cannot be compromised.

You acquired the company at ₹48 a share. Considering that the following issues were at lower prices, the breakeven price should have been ₹30-35. At what price have you agreed to sell the shares?

I am afraid I cannot disclose those details at this stage since the whole transaction is part of a revival package that is currently being reviewed by the Civil Aviation Ministry.

Will that be at a loss?

Yes, the existing promoters will be incurring a substantial capital loss on the transfer of these shares. However, since the Group will continue to hold about 18 crore shares at a strike price of ₹16.30 per share that underlie the warrants, there is a reasonable chance that we will make some gains if the stock price moves up in the near future with improving prospects for the sector.

So the Marans will still be invested in the airline?

Yes. The existing promoters hold warrants that convert to equity in April 2015 and 2016. As part of the revival plan submitted to the MoCA, the current promoters will be investing about ₹80 crore more into the company ahead of the new investors, to make the warrants fully paid-up.

That will leave us with about 18 crore shares, which represent about 23 per cent of the fully diluted equity. Once the new investors come on board, our stake will stand further diluted, and we shall be a passive investor.

Do you see the Sun Group staying invested in the company for the long term?

It is too premature to say anything. If the civil aviation sector in India turns very attractive with strong trends of growth and profitability, I guess the promoters may want to stay invested.

Would you have a board seat?

No, we will not.

Will there be any retrenchment?

Yes, belt-tightening will be inevitable as the ratio of employees per aircraft is a key operating metric for efficiency. Also, since we have already returned several B737s to lessors, some separations have already happened. We have approximately 100 employees per aircraft. So, if the fleet comes down by 20 planes, at least 2,000 jobs will go. But that is not such a bad thing if we want the company to remain viable and survive; there are also a lot of ancillary workers employed by our contractors, who depend on SpiceJet for their sustenance.

Do you anticipate any senior level changes?

I cannot comment on it. The new leadership team and the new board will take a call on it. But, as far as I know, the current Managing Director Natrajhen will resign.

Apart from the liquidity crunch, what the other factors that made you exit?

It is unfortunate that the banking sector did not want to come forward when we approached them. Even a good word from the highest echelons of the Government failed to evoke any positive response. I think the issue really is the aviation sector is in a bad shape and is not attractive for investors. That needs to change.

Unless the sector turns healthy and the service providers are profitable, there is no way it can attract investments. But I am glad that the Government has realised that and is taking corrective steps.

Why didn’t Maran make any attempt to pledge his Sun TV shares to raise funds to keep the company going till a turnaround happens?

That was unacceptable since the minority shareholders of Sun TV — they include some of the global giants in emerging market equity investing — would have never forgiven us.

Don’t you think that your pricing strategy was wrong?

No, not at all. SpiceJet, like any other airline around the world, sells its future capacity at attractive prices to ensure that load factors are high. As the date of travel approaches, you will find that fares keep rising. Perhaps, our ad campaigns were a bit ‘in your face’ and that may have created a perception that we were selling seats cheap. If you looked at any travel website today, you will see that some of our flights are priced higher than full-service airlines.

What’s your take on the Directorate-General of Civil Aviation’s move to set a minimum price and cap the maximum?

I don’t think it’s a practical idea, and will never work. With all due respect to the DGCA, I think it is impossible to prescribe a minimum price because cost structures are very different across airlines. I can bet that the break-even price for an economy class ticket on Air India will be much higher than comparable classes on other carriers.

I think price control and other distortions have played havoc with Indian trade and commerce generally in the past; it is about time the policymakers realise that market forces need to prevail.

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