Low-cost carrier, SpiceJet, has flown right into severe turbulence due to stressed liquidity , a ratings downgrade, and to top it all, a $43-million case against the company by Bombardier for failing to honour contractual commitments.
SpiceJet has also failed to extract compensation from Boeing for the grounded B737 Max 8 fleet, though it has already accounted for a sum of ₹246 crore as income in the December 2019 quarter, the last quarterly results declared by the company.
SpiceJet had placed an order for 25 Bombardier aircraft with options for 25 more. Having taken delivery of five aircraft, the airline declined to acquire the rest citing “non-performance” as the reason.
Bombardier has now dragged the airline to court in the UK for $43 million against 20 aircraft (DHC-8Q-402) yet to be delivered.
Charges ‘unfounded’
A spokesperson for SpiceJet claimed that the charges are unfounded. “SpiceJet will defend its stand, and as the matter is now sub-judice, we would not like to comment further on the same,” he said. “The claims of the Canadian manufacturer are unfounded and completely denied by SpiceJet. SpiceJet has already fulfilled its contractual obligations and remains committed to its performances under its arrangement. SpiceJet, in turn, has a counter-claim for certain non-performance by the Canadian manufacturer, which is actively pursued by us,” the spokesperson said.
The legal wrangle with Bombardier comes even as the airline is grappling with liquidity issuesdue to low cash reserves and weak revenues that come mostly from its cargo operations rather than the main business of ferrying passengers.
Rating agency Crisil has downgraded its letter of credit facility which might make it difficult for the airline to raise additional funding. The downgrade factors in deterioration in SpiceJet’s liquidity profile, as reflected in the invocation of standby letter of credit , which remained unpaid for more than 30 days as on June 29. SpiceJet’s liquidity deteriorated because of disruption in operations, Crisil said in its note.
The airline has delayed declaration of results for the fourth quarter of FY20 and has bought time from market regulator SEBI until July 31 for the same. No timeframe has been given for the declaration of the Q1 results.
A spokesperson for SpiceJet told BusinesLine that the airline is unable to comment on the cash reserves as it is in the silent period ahead of the Q4 results. “All we can share is that at present our operations are generating adequate cash flows.”
With nearly 52 per cent of the promoter shares already pledged, it will become difficult for SpiceJet to raise further cash to sustain its operations for the next two years.
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Banking on cargo operations
SpiceJet has more non-aircraft debt which is of concern. The airline has been banking on its cargo operations to run its airline but with high competition in the market, the cargo rates are at their lowest.
Compared with IndiGo, which has cash reserves of around ₹9,000 crore and ₹11,000 crore of restricted cash which was accumulated over a period of time, SpiceJet is in a weaker position. As per the 2018-19 balance-sheet, its cash and equivalents were ₹77.9 crore which would have depleted further due to the lockdown.
According to industry estimates, pre-crisis, SpiceJet was generating average sales of ₹1,000-1,200 crore a month but this has reduced to about ₹100- 140 crore. The spokesperson pointed out that the airline now gets most of its revenues from cargo operations. “SpiceJet is now the biggest air cargo company in India and the only domestic airline which has a dedicated fleet of freighters. This has added to our cash flow substantially,” he claimed.
Awaits compensation
Meanwhile, the company is yet to receive compensation from Boeing for the grounding of its 13 737 MAX aircraft. The amount of ₹246.41 crore receivable from the aircraft manufacturer has already been recognised as other income in the December 2019 quarter results. “We are in active and advanced negotiation with Boeing and are unable to comment further,” the airline said.
Independent airline consultant Satyendra Pandey, a former head of research and advisory at aviation consultancy firm CAPA, said SpiceJet is constrained on liquidity similar to its LCC peers with the exception of IndiGo. However, on cash flow, it has some green-shoots. “Specifically cargo, UDAN routes and now re-patriation flights. The compensation from Boeing will also help,” he said.
“Consolidation in the industry is inevitable but the extent of consolidation is not clear as yet,” Kapil Kaul, CEO, CAPA India, said.