Why SpiceJet’s and its boss’s bravado after investor lifeline must be taken with a pinch of salt

SpiceJet, which recently raised ₹3,000 crore from multiple investors, is back in buoyant mode. Ajay Singh, the Chairman and Managing Director, is back to giving interviews, even though his stake has been pared to 35%. The airline, in its preliminary placement document, laid out its statutory dues at ₹427 crore, which would go up to ₹794 crore when the disputed ones are added.

The new lease of life helps the airline and passengers, who are otherwise devoid of options in what is increasingly a duopoly in Indian skies. Additionally, as and when the airline clears dues of employees, vendors, airports and lessors, it will pave the way for positive sentiment across the industry.

It blamed two black swan events–the worldwide grounding of MAX aircraft and COVID–for its current downfall. The airline has lost ₹4,611 crore in the four years since the pandemic started and would likely need a lot more than what it has right now to sustain over the next decade. A lot of that will have to be generated via profits.

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What is the plan?

The airline broadly plans to use ₹601 crore to repay statutory dues, ₹750 crore to settle liabilities, ₹410 crore to unground planes, ₹370 crore to add to the new fleet, and ₹268 crore to pay pending airport and employee dues. That still leaves about ₹600 crore with the airline.

By its own admission, it has 36 grounded planes, which include 17 Q400s, 6 MAX8s, three freighters and ten 737 NG of various series. The airline lists the security deposits for planes, ranging from ₹6.25 crore security deposit for three months for 737NG to ₹8.32 crore for the MAX, with similar conditions. These are not dynamic lease costs. In the case of SpiceJet, where lessors are at loggerheads for dues, it is a case of once bitten, twice shy. Will the lessors agree to offer more planes?

The airline is looking to become five times its operational size right now by 2026. In an environment where supply chain constraints continue to haunt airlines, even getting the grounded aircraft back on its feet is a challenge. The airline had similar plans during its last fundraiser, but more planes were subsequently grounded. Combined with the strike at Boeing, the market for leased planes is going strong, and the planes are available at higher lease rentals.

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The airline must then hope to get all its 36 grounded planes back in the air, ensuring that the fleet crosses the half-century mark before it can talk of reaching 100 planes by 2026. This would mean operationalising and inducting 80 planes in 27 months from here on, a rate similar to what Air India Express had announced but now uncertain to meet due to quality issues, strikes, and the FAA-mandated delivery schedule at Boeing.

Profits, the ultimate truth

The additional money has come at a time when fuel costs are going down, rupee is stable and passenger numbers are reaching new highs. With a negative net worth and accumulated losses, but having ₹3,000 crore at its disposal, what will SpiceJet do? It cannot now tell the courts that it does not have money and wants to use engines to avoid passenger inconvenience.

The next big question is what the airline will do to be profitable. The market is now divided between two large groups, and there is no guarantee that these players will not undercut pricing to push SpiceJet away from the market.

Not long ago, SpiceJet had a reputation for having a large portion of its routes as monopoly routes. That is not the case anymore. While a mix of UDAN routes on its portfolio is good, the airline isn’t operating them either. A plethora of bilateral rights with the airline could mean nothing if it cannot mount profitable operations.

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The airline is currently well poised to rethink its fleet strategy. It may move towards a typical LCC model of single fleet type, and, if needed, a new fleet type, and press the reset button.

While profit remains the ultimate truth, the other truth is that SpiceJet, predicted as an inevitable casualty of COVID-19, is here to stay and scale up in the immediate term.