Why must one be skeptical about SpiceJet’s Rs 3,000-crore investor lifeline?

SpiceJet recently raised $3,000 crore from multiple investors is back on the upswing. Chairman and managing director Ajay Singh is back for interviews, although his stake has been cut to 35%. The airline listed its statutory dues in its preliminary placement documents: $427 crore, which will come to Rs. $If disputed ones are included, it comes to Rs 794 crore.

The new lease of life helps airlines and passengers who otherwise have little choice in the growing duopoly of Indian skies. Additionally, when airlines clear dues of employees, suppliers, airports and lessors, it will pave the way for positive sentiment across the industry.

The company blames its current decline on two black swan events – the global grounding of MAX aircraft and the COVID-19 pandemic. The airlines have lost $In the four years since the outbreak, the figure has reached Rs 4,611 crore and may require more funds to sustain over the next decade than now. A large part of this must be generated through profits.

Also read: DGCA says Air India has completed inspection of Boeing 737 MAX aircraft

What’s the plan?

The airline roughly plans to use $601 crore for repayment of statutory dues, $750 crore to clear debt, $Rs 410 crore for ungrounded aircraft, $3.7 billion rupees for new fleet, and $Rs 268 crore to pay pending airport dues and staff dues. That leaves about $600 crore for airlines.

According to its own admission, there are currently 36 grounded aircraft, including 17 Q400s, 6 MAX8s, 3 freighters and 10 737 NGs of various series. The airline lists margins for aircraft ranging from $737NG three-month guarantee of Rs 6.25 billion $MAX is Rs 832 crore, with similar terms. These are not dynamic lease costs. In the case of SpiceJet, the lessor had a dispute over dues. This is a case of being bitten once and fearing the rope for ten years. Will lessors agree to provide more aircraft?

The airline plans to expand operations to five times its current size by 2026. Even getting grounded aircraft back in service will be a challenge in an environment where supply chain constraints continue to plague airlines. The airline had similar plans during its last fundraiser, but then more planes were grounded. Coupled with the Boeing strike, the market for leasing aircraft is strengthening and aircraft are being leased at higher rates.

Also read: Overseas air traffic increased by 13% from April to June, and domestic airlines also increased

The airline must then hope to get all 36 grounded aircraft back flying, ensuring the fleet crosses the half-century mark, before it can talk about reaching 100 aircraft by 2026. That means prices similar to those announced by Air India Express from here on out are now uncertain due to quality issues, strikes and FAA-mandated Boeing delivery schedules.

Profit, the ultimate truth

The additional funds come at a time when fuel costs are falling, the rupee is stable and passenger numbers are hitting new highs. Net assets are negative and accumulated losses, but there are $With Rs 3,000 crore at its disposal, what will SpiceJet do? It cannot now tell the court that it has no money and wants to use the engine to avoid inconveniencing passengers.

The next big question is what airlines will do to become profitable. The market is currently divided into two major groups, and there is no guarantee that these players will not lower pricing to drive SpiceJet out of the market.

Not so long ago, SpiceJet had a reputation for being a monopoly on most of its routes. This is no longer the case. While it has a good mix of UDAN routes in its portfolio, the airline does not operate these routes either. Excessive bilateral rights with an airline are meaningless if the airline cannot run a profitable business.

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The airline is now ready to rethink its fleet strategy. It can move to the typical LCC model of a single fleet type and, if needed, move to a new fleet type and hit the reset button.

While profit remains the ultimate fact, another fact is that SpiceJet is expected to be an inevitable victim of COVID-19, but it will stay and expand in the short term.