In this week's Finshots Markets we see why investors have been jittery about SpiceJet

The Story

SpiceJet is having a horrid time. Everything’s gone wrong for the company of late. The low-cost airline has had to deal with 9 safety incidents in the past month. On one occasion, an engine failed. Another time, there was smoke in the cabin. Then there was a weather gauge malfunctioning and pilots had a hard time telling if they’d been navigating clear skies or turbulent weather.

Everything’s gone wrong.

Now, you can imagine that the folks at the Directorate General of Civil Aviation (DGCA) weren’t exactly happy with these developments. So they sent a notice on July 5, outlining the fact that “M/s SpiceJet Ltd has failed to establish a safe, efficient and reliable air services”

They even followed it up with a surprise audit and noticed something missing — 25 life jackets on a flight from Mumbai to Srinagar.

And all this bad press has had a veritable impact on the company’s stock. Investors have been fearing the worst, selling the stock aggressively. As a consequence, the value of SpiceJet shares has dropped by over 12% in the past month. For comparison, its rival Indigo has seen its share price rally by 2% during the same period.

But that’s not where the problems end.

If you jiggle your memory a bit, you’ll remember that SpiceJet lost 40% of its value in 6 months. Indigo, in comparison, has slumped by only 18% — a little more than the index. And this doesn’t make a lot of sense at first. The post-pandemic travel boom was supposed to offer the likes of SpiceJet a massive reprieve.

So what went wrong exactly? Is it just plain old aircraft issues?

Well, not quite. There’s a bigger problem here — Money.

The airline has been racking up debt and its bottom line isn’t looking pretty.

The notice from DGCA explicitly spells it out:

“financial assessment carried out by DGCA in September 2021 has also revealed that airline is operating on Cash & Carry and Suppliers/Approved Vendors are not being paid on regular basis leading to shortage of spares and frequent invoking of MELs.”

We know you didn’t follow that fully. So we will take it from the top.

First, there’s this “cash & carry” business. When you’re running an airline, you know the running costs are going to pile up. And no, not just fuel and salary. Airlines also pay a monthly fee to the likes of the Airports Authority of India to obtain the right to fly in and out of airports. But sometimes, the AAI simply doesn’t trust an airline’s commitment to pay monthly. Instead, it asks for daily payments. And that’s called “cash&carry.” Now, needless to say, this puts an added burden on the airline’s finances and SpiceJet has been under C&C since July 2020….and it’s still stuck there. The situation was so precarious that they even failed to make daily payments back in August 2021.

So yeah, it’s bad.

Next, we discuss MEL — Minimum Equipment List. See, sometimes even if a few aircraft equipment remains inoperative, pilots can still take to the air. And this assessment is based on a minimum equipment list . Now this doesn't mean that the aircraft isn't safe. But if an airline is reporting to the regulator that most aircraft they own is currently flying on MEL, it can potentially be a source of concern. For instance, it could mean that the airline is cutting cost by postponing maintenance on a few spare parts. Is this what's happening at SpiceJet? We don't know. But the regulator seems to be a bit concerned.

Also, there’s the ominous take from credit rating agencies. These good folks assess a company’s financial position and tell prospective lenders if they are creditworthy. They do this by assigning a grade. Anyway, back in November 2021, CRISIL didn’t even bother to rate SpiceJet. Instead, it branded the company as “non-cooperative”. That's them saying that the company was unwilling to furnish financial information that could have secured a rating.

Even more unsettling statements came from the company’s auditor. Back in December, the renowned Walker Chandiok & Co LLP said and we quote,”… the existence of a material uncertainty that may cast significant doubt about the group’s ability to continue as a going concern.”

They’re basically saying that the uncertainty casts doubt on whether SpiceJet can continue to do business.

To make matters worse, it hasn’t yet filed its financials for the January to March 2022 period. The reason? Well, SpiceJet had to deal with a ransomware attack in May. And since they were busy trying to sort out the IT situation, they’ve been arguing that they couldn’t pay enough attention to the audit.

And when you add it all up, it’s not hard to see why investors have been quite jittery about the airline’s prospects.

So, the big question is — can the airline somehow pull itself out of this mess?

Well, maybe, but it needs money. For over a year now, it has talked about raising ₹2,500 crores by issuing new shares to a select set of investors. But that plan still hasn’t seen the light of day. And for now, it has planned to hive off its cargo and logistics arm SpiceXpress by August. This won’t bring in cash, but it could help the new entity raise cash independent of SpiceJet.

But in many ways, SpiceJet will need more than money. It will need to regain passenger confidence.

A few months ago, Vistara overtook the carrier to grab the second spot in the battle for market share. Now GoAir is already nipping at its heels for third place. And in the meantime, SpiceJet’s market share has dropped from 17% in 2020 to 9% today. Alongside this, you also have Air India (under the Tata Group) that’s looking to recapture its former glory. And not to forget, Rakesh Jhunjhunwala-backed Akasa Air, that’s likely to enter the market very soon.

As you can see, SpiceJet has an uphill battle ahead. The only positive perhaps is that this isn’t the company’s first rodeo with this kind of thing.

In 2015, SpiceJet was going through a tumultuous time under Sun Group’s Kalanithi Maran. And then, in a spectacular turnaround, the current MD Ajay Singh managed to turn around its fortunes. But 7 years later, SpiceJet is down and under once again. Will it make another spectacular comeback or will it just crumble under pressure?

You tell us...

Ditto Insights

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Until then...

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Correction: The definition of Minimum Equipment list has been updated for more clarity. The error is regretted.