Time to tighten the seat belts?

Aviation Industry in India has kicked off 1932 with the first mover in Industry Tata Airlines which later became Air India. By the 1950's new entrants begin to enter the market namely Deccan Airlines & later Jet Airways. Initially it all started as Full-Service Carriers (FSC) i.e. an airline usually charges an all inclusive prices for their services like on-board meals, drinks, seat selections, checkin luggages etc. Then we witness the disruption in the aviation sector led by the new entrants called Low-Cost Carriers (LCC) such as Indigo, Spicejet, Kingfisher, GoAir & Air Asia. Soon these airlines eat the big chunks of market share that was earlier enjoyed by FSC's. Now 70% of market share is being enjoyed by these LCC's since these LCC's are easy on pockets for most Indian's.

Citing an IBEF report - The civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last three years. India has become the third largest domestic aviation market in the world and is expected to overtake UK to become the third largest air passenger* market by 2024^.

Indian Aviation sector is one of the fastest growing yet it's not profitable for most of the airlines. As per a DGCA's official statement - It is not easy for an airline to turn a profit in India and a lot of issues such as fare caps and high taxes on aviation turbine fuel (ATF) have to be resolved. And it makes sense since the the upfront investments is one of the highest and running the aircrafts with low occupancy rates due to increase competition, higher taxes of ATF and then there are parking charges let me correct hefty parking charges that these airlines need to borne in order to operate and hoping to turn consistently profitable one day! Just to give you an idea, during the time of nation wide lockdown, these airlines paid approximately INR 60 crores as parking fees!

We all have witnessed, the rise and fall of two of the most popular airlines - Kingfisher and recently the Jet Airways. But recently another airline have started experiencing some difficulties from past few months. Yes, the 2nd largest domestic player in Indian Aviation holding 13% market share, SpiceJet is facing the difficult time of the year!

Year 2022 has not turned out to be a great year for the airline since there has been some recent major events that have led the airline face pressure. Here are list of recent incidents that took the DCGA issue a show-cause notice to the airline after imposing a penalty amounting INR 10 Lakhs.

• May 4: Chennai-Durgapur aircraft turned back after one of its engines had to be shut down mid-air due to oil filter warning.
• May 28: Mumbai-Gorakhpur flight returned to base after its windshield cracked at 23,000 feet.
• June 19: Jabalpur-bound plane returned to Delhi after cabin pressure did not build up with the gain in altitude.
• June 19: Patna-Delhi aircraft made emergency landing after its engine caught fire due to a bird hit soon after take-off.
• July 2: Jabalpur-bound aircraft returned to Delhi after smoke was seen in cabin.
• July 5: Kandla-Mumbai flight landed at Mumbai airport after the aircraft's windshield cracked.
• July 5: Delhi-Dubai aircraft diverted to Karachi after fuel indicator started malfunctioning.
• July 5: Cargo plane to China turned back to Kolkata after weather radar failed.
• July 11: SpiceJet had surprise audit from DGCA and surprisingly found that 25 life jackets were missing on the flight from Mumbai to Srinagar.
• July 12: SpiceJet had flown from India to Dubai and after landing was discovered to have a technical issue with its nose wheel
• July 14: SpicJet's Dubai - Pune flight leaves behind luggage of more than 50 passengers.

But why exactly there are repeated instances of malfunction happening in SpiceJet. Let's try to find out from financials!

Looking at the graphic representation of the financials, the company is piling up on debt and have racked up approximately INR 10,000 Cr. of debt in Q2 of FY-22. The company is struggling to sustain profits and bearing heavy losses. Also, the Cash position of the airlines says a lot about the recent incidents that took place. Interestingly some of the pilots of SpiceJet has recently called a massive sick leave on 14 July 2022 due to massive pay cuts that have been imposed which amounted to approx. 70% of their pre-pandemic salaries. Furthermore, in Jul 2020, the Airport Authority of India (AAI) puts SpiceJet on Cash & Carry basis since they were not able to honor their dues on time.

Now the question comes what is Cash & Carry basis in the aviation sector. Airlines usually pay monthly fees to airport operators. Under the cash and carry mode, carriers have to pay on a daily basis to avail airport services for their flights. But an year later in Aug 21, SpiceJet defaulted on their daily payments as well for continuous 4 days. The airline also dragged AAI to the Delhi High Court after AAI threatened the airline to encash the bank guarantee provided by the airline. The airlines owes approx. INR 225 Cr back in Aug 21 against which there was shortfall of 70 Cr bank guarantee. Looking at the incidents it is quite evident that the airline is struggling to generate enough cash to fund it's operations, the working capital as on Sep-21 stands INR -1668 Cr.

Now let's have a look on some key parameters that will help in assessing the overall financial position of the company.

Promoter Holding

Promoter holding is an important factor while analyzing fundamentally. Promoter holding above 60% is considered as a good sign as it suggests that the owner have faith over his company and is not ready to sell his stake. Here in case of SpiceJet, promoter holds 59.4% shares which is a good sign however 44.2% of the promoter's holding has been pledged. Pledged promoters holding means the promoters have offered their shares as collateral to obtain a loan.

Altman Z Score

The Altman Z-score is the output of a credit-strength test that gauges a publicly-traded company's likelihood of bankruptcy. A score below 1.1 is considered High Probability of Bankruptcy. Score between 1.1 - 2.6 is considered as Grey Area and can take any direction and score above 2.6 is considered fairly good. The Altman Z Score for SpiceJet stands at -0.03 which is high probability the company is near bankruptcy.

Interest Coverage Ratio

The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay?interest?on its outstanding debt. The interest coverage ratio stands out to be -2.31 which is alarming.

Looking at the above, it is quite evident that the airline has entered a turbulence and to getting out of the situations seems quite difficult. However, the airline was earlier hit by a similar situation in 2014 and we all have witnessed how the company made a fairytale turnaround. Currently, the airline is is in process of raising fresh capital of upto ~2,500 crores through issue of eligible securities of Qualified Institutional buyers (QIBs). Will the airline be able to come out of the turbulence is still that needs to be seen.