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SpiceJet must urgently salvage its worsening financial woes

Forum Gandhi Mumbai | Updated on December 25, 2020

SpiceJet needs to address its worsening financial health quickly to prevent a repeat of 2014, when it ceased operations temporarily, according to aviation experts.

Between Q2 FY15 and Q2 FY21, SpiceJet’s total liabilities have jumped by a whopping 223 per cent, a review of the airline’s financial statements shows.

In September 2014, SpiceJet’s total liabilities were ₹4,457 crore. Its current and non-current liabilities were ₹2,982 crore and ₹1,475 crore respectively. The airline started deferring payments to vendors, lenders and other creditors, and within two months of Q2 2015, SpiceJet had to temporarily cease operations in mid-December 2014.

According to reports, the airline then sought a working capital of ₹300 crore from banks, which was declined.

Eventually, in January 2015, Sun Group’s Kalanithi Maran sold his stake to Ajay Singh, who is now the Chairman and Managing Director of the no-frills carrier.

The Group had a negative networth of ₹1,485.2 crore as of March 31, 2015, after which it was profitable up to 2017-18.

A similar trend is now playing out.

Growing liabilities

The airline has posted losses in the last two fiscal years. The Group’s negative net worth stands at ₹2,286.63 crore as of Q2 FY21.

For the quarter ended September 30, 2020, on a standalone basis, SpiceJet’s total liabilities stood at ₹14,379 crore. Its non-current and current liabilities stood at ₹6,398 crore and ₹7,981 crore respectively.

The total liabilities, thus, have increased by 223 per cent — non-current liabilities up by 334 per cent and current liabilities by 168 per cent.

A SpiceJet spokesperson said that since “the size of operations have increased, so has the balance sheet.”

Earlier this week, BusinessLine reported that SpiceJet had sought a one-time debt restructuring and additional working capital of ₹500 crore from YES Bank.

As per the company’s FY20 annual report, it has dues pending towards GST, Customs, and Employee Provident Fund.

To be fair to SpiceJet, the industry was going through a downturn in 2019-2020.

“The rupee was depreciating, oil prices were going up and there was a general economic slowdown,” said Shakti Lumba, Former Executive Director at Alliance Air, Vice-President of ICPA, and V-P, operations at IndiGo.

Jet Airways fallout

Nonetheless, some argue that SpiceJet has some peculiar issues operationally, commercially, and financially.

Koushik Jagathalaprathaban, Partner, AT-TV, a consultancy firm, said that operationally, SpiceJet competed too aggressively. After Jet Airways’ temporary suspension of operations in 2019, without a clear strategy, SpiceJet leased many of Jet’s aircraft. This was a fresh burn for the airline, he said. Around the same time, it had to ground 13 B737 Maxes, which continue to be grounded.

SpiceJet said that “taking over the B737s on lease was a direct fallout of the grounding of the 737 Max”. The airline needed to operate its full schedule and avoid cancellations; it needed aircraft on an urgent basis, and the aircraft were available at an attractive rate, Spicejet said.

The grounding of Jet Airways also helped SpiceJet get prime slots at key metro airports and propelled it into a major player — especially at the Mumbai airport.

“There was no deviation from the core business strategy. SpiceJet’s strategy of quickly inducting 737s resulted in multiple long-term advantages for the company,” the spokesman added.

Then, the Covid-19 pandemic came like a fresh blow to the airline.

Staying afloat

Vimal Kumar Rai, founder and MD at TRACE Consulting Services, said SpiceJet has a weak balance sheet with a liquidity ratio lower than 1 and low free cash flows.

The airline, however, explained that since it has a prepaid business model, it collects money in advance against ticket sales, hence the current ratio is generally less than 1.

In the short term, cargo and vaccine contracts can help the airline. “In the long term, the airline needs ₹1,200-1,500 crore to survive. This again is difficult, because most of the promoters’ shares are already pledged,” Jagathalaprathaban explained.

The pandemic is acting as a shield for SpiceJet. “As soon as the things start to ease out, lenders, lessors, and creditors will start knocking on the doors of SpiceJet for dues. If the financial woes are not salvaged now, it may face a similar situation it went through in 2014,” an aviation expert said, requesting anonymity.

Published on December 25, 2020

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