SPICEJET’S FAIRYTALE TURNAROUND TO BE WORLD’S BEST AVIATION STOCK

• Close to shutting down due to cash srunch in late 2014. Share price at that time was around 15 rupees and today it is around 125 rupees.
• In june, Bloomberg said that it was world’s best aviation stock this yr with 124% gain.
• Value in 2014 = 650 crore ; 2017= 7400 crore
• Rival JET AIRWAYS LTD., with a fleet double that of spice jet, is valued at 6,200 crore.

• Past 2 months:
  • The budget airline (low cost) found mention from US president Trump for buying boeing planes(100 planes) as it will create thousands of jobs. {spicejet has placed an order worth $22 billion}
  • It has also got more clearity on legacy issue involving a share dispute with its former owners the Marans.
  • The company now stads poised for expansion
• Current US secretary of commerce Wilbur Rose once held 30% stake in the airlines ( he sold it in 2012)
• Current owner Ajay Singh brought it off Marans at rupees 2 ( for 58.64% of the company’s equity). To be fair, Singh thought it was belleding then:
  • Net worth = -1,329 crore
  • Short term liability over 2000 crore
  • Ended 2014-15 with a loss of 687 crore rupees
  • Debt of 1,240 crore on march 2015
• Ajay Singh:
  • Singh studied at the Indian Institute of Technology Delhi and Cornell University in the US
  • became an aide to the late Pramod Mahajan, one of the most high-profile leaders of the Bharatiya Janata Party (BJP), till his untimely death in 2006.
• Equally remarkable is the alacrity with wich the govt. cleared the deal. ( 7 days as per BloombergQuint). The cicil aviation ministry also exempted the new owners from having to make from having to make an open offer to public sharehoders as required by govt. law.
• Not many have reovered frm where spice jet found itself in late 2014:
  • Vijay Mallya – Kingfisher Airlines
  • M. Thiagarajan – Paramount Airways
  • Mohan Maekin Ltd – Indus Airways
  • And half a dozen others
• They recovered because:
  • Oil prices dropped
  • Controlled costs
  • Improved many things like including on-time performance. The one thing they used to do back then was dirt cheap fare sales which was dragging them down. That has gone to a large extent and has helped too.
• “there was a plan to shut down”, said Singh, chairman of spicejet and the airline’s original co-founder back in 2005 ( he exited in 2008 before returning in January 2015 )
• ANATOMY OF A NEAR COLLAPSE:
  • 15 december 2015, civil aviation ministry got a call from SpiceJet management.
  • They said we have a liquidity crisis and if it continues, we may not be able to fly.
  • 3 critical issues were ther:
    • Aviation regulator Directorate General of Civil Aviation (DGCA) had blocked airline from booking any tickets beyond 31 december 2014, stifling its revenue stream. SpiceJet was raising working capital by selling tickets well in advance and at a discount. This was a good way to ensure that the flight is filled but the regulators were concerned about the potential fallout on customers should the airlines cancel those flight. The regulators claim wasn’t unfounded as it had happened previously when the oil companies have refused fuel to the airlines because their earlier dues weren’t cleared.

• • • AIRPORT AUTHORITY OF INDIA (AAI) , which had burnt its fingers with the kingfisher airlines, was unwilling to allow any flights till SpiceJet payed its dues.

• • • • Aviation minister Ashok Gajapathi Raju and former aviation secretary V. Somasundaran were informed of the airline’s Mayday call.
      • Both took the immediate view that since SpiceJet was a private airline, they couldn’t do much, recalled G. Ashok Kumar(the then joint secretary of Aviation Ministry)
      • Parliament was in session and early in the course of the day, Raju seems to have changed his mind about not interfering.
      • He asked ministry officials to meet him at Parliament building for a meeting with finance minister Arun Jaitley at 10.30am.
      • The finance minister had to leave to meet Prime Minister Narendra Modi.
      • The meeting was deferred to 1.30pm.
      • By then, chief secretaries of Goa, and Andaman and Nicobar were calling up the aviation ministry complaining of mass chaos at their small airports. There was no space to seat stranded passengers.
      • Eventually, the team from the aviation ministry decided to meet Jayant Sinha, the then minister of state for finance and now the minister of state for aviation.
      • By then, Singh had arrived at the finance ministry with his offer to take over SpiceJet.
      • By 2.30pm, there was still no clarity on what would happen to the airline that controlled about 13% of the domestic market, but back-room lobbying by rival airlines was in full swing. Some rivals were pushing aircraft lessors to deregister and take away SpiceJet’s planes so that the airline collapsed, said Kumar. Some executives from these airlines were actually in the ministry checking “whether SpiceJet was getting closed or not”, he added. pushing aircraft lessors to deregister and take away SpiceJet’s planes so that the airline collapsed.
      • The discussion in the aviation ministry revolved around one question: Can the market afford another Kingfisher?
      • Kingfisher had shut down two years back
        • rendering thousands of people jobless.
        • lenders to the airline high and dry.

Kingfisher also could have survived had the then United Progressive Alliance government moved swiftly.

When Kingfisher’s financial stress became visible in December 2011,  the government formed a committee of secretaries to study issues in the country’s civil aviation sector and recommend solutions.

This working group sent its report to a group of ministers headed by finance minister Pranab Mukherjee.

On 7 February 2012, it was decided to allow foreign airlines to invest in Indian airlines. This was the biggest demand of Mallya then.

Curiously, the final order for implementation of this directive from the department of industrial policy and promotion came only in September 2012— a delay of nearly six months.

Kingfisher stopped flights in May 2012 and its licence was suspended by DGCA in October.

If they had done that within a month, Kingfisher would have survived.

The ministry was also worried about the negative publicity associated with the closure of an airline.

And so, it was decided that SpiceJet be given a lifeline, as long as the airline’s promoters were willing to talk to Singh. It was decided SpiceJet should survive.

WHAT DID THE GOVT. DO ?

• At about 4pm, aviation minister Raju wrote to AAI and oil companies asking them to allow credit facilities to SpiceJet and also allow the airline to stagger payments to clear its dues.
• DGCA was asked to lift the ban on sale of tickets placed on the airline.
• On 16 December, the aviation ministry issued a formal press note on steps approved by Raju to help SpiceJet.
• The ministry asked Indian banks to lend Rs600 crore to the airline, to be paid back in about eight weeks. SpiceJet didn’t seek this money from the banks eventually.

And so SpiceJet took over the air again and Singh came in.

• THE TAKEOVER:
  • Minister Raju said in a May interview that SpiceJet’s survival is one of the success stories of the government.
    • The only thing standing between Singh and SpiceJet was stock market regulator SEBI, which required that an open offer be made to shareholders.
    • SpiceJet told the ministry that under special circumstances, this could be waived if the ministry concerned wrote to the regulator.
    • He felt there was nothing wrong in making such a recommendation to the regulator as the airline was on the verge of being grounded.
    • Jet fuel price that hovered at Rs40 a litre in 2010 when the Marans bought SpiceJet, and rose to as much as Rs77 a litre in 2013 and about Rs70 a litre in 2014, fell to Rs46 a litre in February 2015, and then further to Rs35 a litre on February 2016. It’s now hovering at Rs48 a litre.
    • Fuel makes up a third of the cost of an airline in India.
    • Data from SpiceJet’s balance sheet shows this was one of the biggest reasons for the airline’s turnaround.
    • SpiceJet paid Rs2,410 crore to oil firms in 2014-15 but only Rs1,392 crore in 2015-16, a drop of 42%. This was a saving of Rs1,018 crore. The airline clocked a profit Rs407 crore in 2015-16 and has been profitable since. Rival Jet Airways too posted its first ever profit in 2015-16, after eight years.
• FUTURE PLANS:
  • Earlier this year, the airline ordered 100 fuel-efficient Boeing Max aircraft, adding to a previous order of 55 planes which will be delivered over the next decade and bring down its costs by another 5-10%.  It also has options to buy 50 more planes taking its order book to 205.
  • A long term plan was laid down- which it never had due to chane of ownership
  • Boeing, which had helped it during its crisis by returning $30 million paid as booking amount of planes, is now seeing it as a major customer. SpiceJet will gradually return the $30 million, as it is now making profits.
  • The airline has pared its debt.
  • Launched a new advertising campaign to restore consumer confidence.
  • Singh has retained old-time loyal employees who had helped him start in 2005. Instead of moving decisions all day on emails, he keeps his door open and allows senior officer to discuss and take decision on the go.
  • They are working on increasing revenue and decreasing cost bcause oil prices wont remain low forever and they need to be prepared.
  • Tried to be different.
    • There is a new uniform for the crew.
    • It has also tied up with Lufthansa Systems to provide inflight entertainment to passengers on their mobiles and laptops in new planes.
    • The airline may also offer Wi-Fi for a fee next year and experiment with international low-cost flights.
    • It is also opening SpiceJet retail stores to experiment with ancillary revenues.
  • A legacy issue that prevents the airline from raising money through equity and potentially hurt investor sentiments is now closer to being resolved.
  • The transfer of control of the airline from the Marans to Singh—the terms of the deal were not made public and that came up for criticism; the details only emerged from the court filings—became controversial.
  • The Delhi high court on 3 July directed SpiceJet to set aside Rs250 crore as cash and another Rs329 crore as bank guarantee on or before 31 August against this even as the matter is resolved. The airline currently has about Rs350 crore cash on its books. Singh’s nearly 60% stake is worth Rs4,000 crore. 

• INDIGO:
  • Started as equal
  • India’s largest passenger airline run by InterGlobe Enterprises Ltd
  • Now has 136 aircraft and is growing by about two planes a month, adding aircraft from its 400-plane order.
  • It also controls 40% of the domestic market.
  • And in a departure from its strategy of having just one kind of aircraft, IndiGo has decided to order 50 ATR turboprop planes that will ply on routes that bring high yields to SpiceJet.   

• A former aviation secretary who did not want to be named said the ministry had planned to frame a policy for airlines going bankrupt so the same yardstick is there for everyone in the future. That policy should have been crystallized by now. “In the last one-and-a-half years alone three small airlines have shut shop if you notice,” he said. “There should be one rule for all. ” His reference is to Air Costa, Air Carnival, and Air Pegasus that have all been grounded. And his reference is also to the perception that Singh is close to the current government. 

• THE MARAN-SINGH SPAT:
  • The Maran family put in Rs179 crore into SpiceJet as debt in late 2014. They were to be issued convertible warrants against this. Subsequent to the takeover of the airline company that happened in early 2015, SpiceJet agreed to issue warrants against this and also against Rs500 crore that the Marans paid at the time to settle some liabilities. 
  • The share purchase agreement between the two says the Marans would invest Rs679 crore and be issued these warrants and/or redeemable preference shares. 
  • According to details that have emerged in the course of the arbitration, the Marans put in around Rs579 crore but were issued neither the warrants nor the shares. 
  • Although SpiceJet wanted to issue the warrants, the stock market regulator didn’t sign off on it because it was not paid.
  • The Delhi high court has, pending arbitration, asked SpiceJet to deposit Rs329 crore bank guarantee and Rs250 crore as cash in the high court as a security.
  • The matter in arbitration is likely to be decided in the next three months and the amount ordered by the arbitration tribunal will be paid by SpiceJet to the Marans.
  • While the Marans are said to be keen on the warrants, it is unlikely that Ajay Singh will want to issue them and make them a shareholder in SpiceJet again.