Marans’ Many Woes
Marans’ Many Woes
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The winter season—September to January—is normally insanely busy for all airlines. But for India’s low-cost carrier Spicejet, this has been a period of stress and uncertainty. In the last two months, the airline has steadily lost aircraft and pilots, and last week, the company’s COO sent an e-mail to employees stating that salaries would be delayed. In the last few weeks, a number of Spicejet flights have been cancelled. Customers are unhappy. Between July and November, Spicejet lost four of its Boeing aircraft and officially suspended 45 daily flights. In fact, the airline, which had about 50 operational aircraft earlier this year, is today left with just 31 Boeing aircraft. And just 24 of these are flying.
It is clear to see that all is not well with India’s once most successful budget airline. “The pulling out of flights in the peak months of November-December is an ominous sign that things do not bode well for the airline,” confirms a senior aviation sector expert with direct knowledge of developments. The lack of action from the promoters—The Sun Group promoted by Kalanidhi Maran—has strengthened the belief that India’s popular budget airline may slip into sunset a la Kingfisher.
Normally, investors and aircraft lessors are the first ones to sniff trouble in an airline and they have learnt a lesson with Kingfisher. Aviation sector sources say many of Spicejet’s lessors have moved court and are reclaiming aircraft because of non-payment of dues. “Although they could have given it another year to turn around, no one wants to take a chance,” says Mark D. Martin, founder of aviation consulting firm Martin Consulting. Spicejet’s lessors like Australia’s Babcock & Brown Aircraft Management, GE Capital of the US, Singapore’s BOC Aviation and ILFC have either gone to court or started recovering aircraft, he says.
What is surprising is that in such difficult times, its owners, the Maran family, has been holding back instead of putting in the much-needed fresh capital. The Marans, who rose spectacularly in the last two decades in the DMK and AIADMK regimes in Tamil Nadu and the UPA’s rule at the Centre, have seen their political fortunes tumble of late. This, say political insiders, is one of the reasons for their quiescence on Spicejet affairs. Unfortunately, they are also at the wrong end of the enforcement stick, with the authorities getting after them in the Aircel-Maxis case as well as the BSNL case where a virtual exchange was allegedly running from Dayanidhi Maran’s house when he was Union minister.
Says Chennai-based chartered accountant M.R. Venkatesh, who is said to be close to AIADMK, “The reverence for them in Tamil Nadu is slipping as the Marans have attained (the status of) a political pariah. They have become politically untouchable. So their fund flow has stopped. Now that they are grounded, their businesses are also getting grounded.” This has fuelled rumours that the Marans want to exit the capital-intensive airline business and that the inaction could be an obvious ploy to ground the airline, much like what happened to Kingfisher. Many feel much of Spicejet’s serious deficits came about because of lack of timely capital infusion and wrong decisions.
Of course, things have not been well financially. The carrier showed profits in end-2009 and in 2010, but saw fortunes turn in the following years. In late 2010, Wilbur Ross, one of its investors, exited and The Sun Group took over the reins. In the last year-and-a-half, the financial pinch has been particularly severe and the carrier is in desperate need of fresh capitalisation. This is because while it is doing well operationally, its debts, loans and interests and legacy financial obligations are adding a tremendous burden, and banks have been putting pressure to pay up. Spicejet reported losses for five consecutive quarters, and in the last quarter, its losses were at Rs 310 crore. It had accumulated losses of around Rs 2,958 crore at the end of September 2014.
According to market estimates, the airline will need at least $250 million or around Rs 1,500 crore to jumpstart a revival. But that would be difficult to get considering that selling equity, with the company’s stock hovering around Rs 14-19, will not get them much. And with 49 per cent FDI allowed in aviation, it is easy for global players to set up operations afresh. So while there were rumours of a sellout to Tiger Airways and Air Arabia, nothing has shown up on the horizon. On November 24, though, the airline responded to a query regarding a takeover or a stake sale from the Bombay Stock Exchange (BSE) saying that it was indeed in talks with some parties to raise fresh capital. “We wish to clarify that a few parties have approached us and evinced interest in making investments into Spicejet Limited...as the Company has been exploring various options for raising fresh capital...,” it told BSE.
Many airline experts have already started discounting the airline and think its fate is all but sealed. Says former Air India executive director Jitender Bhargava, “It was clear 8-9 months ago that Spicejet would be the next airline to go. When they started the discounting practice, it was clear that they were financing today’s expenses with money from the future. It has been on an extension because both Air Asia and Tata-Singapore Airlines’ Vistara have not come in yet.”
Says Martin, “All of Spicejet’s problems are self-inflicted. The decision to go for 15 Bombardier Q400 aircraft is inexplicable. Why use a regional aircraft that has the same cruise speed as a Boeing 737-400 for ultra short sectors? When funds were difficult to come in, they went for a costly ad campaign and repaint exercise.” Says a senior aviation expert, “You cannot mix aircraft. It leads to a huge drain of capital for separate maintenance and ground services.”
The carrier’s deep discounts and flash ticket sales have also found critics. Spicejet had brought in Kaneshwaran Avili from Tiger Airways as its chief commercial officer, to promote sales. Avili introduced the discounting schemes, which improved its seat load factor and operational revenue, but not overall numbers.
Many also point out that the airline’s COO, Sanjiv Kapoor, had a similar run in Bangladesh when he was CEO of GMG Airlines in Bangladesh. The carrier was eventually grounded. Despite attempts, Kapoor did not speak to Outlook for this story. In crisis, it is standard practice for carriers to trim aircraft strength to cut costs but that might not help Spicejet much as most of its fixed costs will remain the same. What might help is the recent reduction in the price of aviation turbine fuel, as fuel costs constitute over 40 per cent of its expenses.
To be fair, despite cancellations, Spicejet has scored brownie points on operational performance and high seat load factor. For the last quarter, it also claimed reduced expenses as compared to the previous year. The next few months would be crucial. If it manages to get an investor on board, it may be able to pull through. But that’s a big if.
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