Too ‘hot’ to handle

Anand Kalyanaraman, BL Research Bureau | Updated on March 12, 2020

SpiceJet, the only operating Indian carrier with 737 MAX, hopes for reimbursements from Boeing

Unlucky 13 — at least, it seems to be for SpiceJet. Among Indian carriers, SpiceJet has been the only one impacted by the grounding of the Boeing 737 MAX aircraft; the airline has 13 MAX aircraft in its fleet.

This has disrupted SpiceJet’s operations and expansion plans, and put paid to its plans to reduce costs by using the fuel- and operationally efficient aircraft. This has impacted the airline’s financial performance for more than four quarters now.

The troubles seem set to continue, at least until mid-2020 when the MAX is expected to resume operations globally. But the proof of the pudding will be in the eating — Boeing has already missed several deadlines over the past year to get the MAX flying again.

Early, hopeful days

When the trouble first hit in March 2019 and led to the overnight grounding of the MAX, SpiceJet scrambled; it mounted additional frequencies, inducted planes on wet lease (leasing an aircraft with its crew) and optimised the use of its existing fleet to minimise flight cancellations and passenger disruptions.

Like many other patrons of the MAX, SpiceJet was hopeful of an early resolution and expected the aircraft to return by July 2019. In the March 2019 quarter results, the airline did not account for reimbursements or compensation on the grounded aircraft, though it was in discussions with Boeing on the same.

Passenger disruptions and re-accommodation due to the grounding of the MAX continued into the June 2019 quarter, too, and limited SpiceJet’s ability to improve its yields, while also increasing fixed costs. It was a double whammy — the airline continued to incur various costs on the MAX without being able to undertake revenue operations. SpiceJet’s results during the quarter would have been vastly better but for the “painful” grounding of the MAX, Chairman Ajay Singh had said.

To make good its loss, SpiceJet, in the June quarter, started recognising “other income” towards aircraft and lease rentals. This, the airline said, was part-recognition of the total reimbursements towards various costs and losses (including opportunity losses) incurred on the MAX, on which it was working with Boeing. it accounted for “other income” of about ₹114 crore in the June quarter.

With the MAX continuing to remain grounded and disrupting its operations, necessitating alternatives and increasing costs in the subsequent quarters, too, SpiceJet accounted for such “other income” of ₹177 crore in the September 2019 quarter and ₹246 crore in the December 2019 quarter.

Compensation income

The airline’s auditors though have frowned upon this seemingly aggressive accounting practice and qualified their reports in this regard. They say there is no virtual certainty to recognising such other income, as required by the relevant accounting standard (IND AS 37). But SpiceJet’s management is confident of a favourable outcome with regard to these reimbursements.

This other income has contributed significantly to SpiceJet’s financials. If not for this, the airline’s profit would have reduced in the June quarter, its losses would have widened in the September quarter, and it would have posted a loss in the December 2019 quarter.

That said, it is not just SpiceJet that has recognised such expected compensation income. Other carriers such as American Airlines and flydubai have also accounted for this.

Published on March 12, 2020

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