✈ Will SpiceJet Manage to Stay in the Skies?
SpiceJet is facing several trials that could put it out of business. Will it manage to survive?
"Failure is the stepping stone to success."
One company could have become a living example of this saying: SpiceJet. It was on the verge of bankruptcy in 2014 and was ready to crash and burn.
It managed to pull through and rose from its ashes like a phoenix.
However, a twist in the tale and once again the company is facing massive troubles: inescapable losses, unhappy employees, and a court order that has asked it to wind up its business.
But how did SpiceJet get to this position once again?
The SpiceJet Story
Thanks to consecutive losses, SpiceJet was just about to shut down in 2014. Companies had refused to refuel its aeroplanes, employees were demanding their salary and most of its flights were cancelled.
Escape seemed impossible.
But then the company's co-founder Ajay Singh came to the rescue. He saw that the company was horribly mismanaged and went about restructuring flight schedules, renegotiating contracts, and overall improving the company's performance.
And it worked. He brought the company to a point where instead of losses it was seeing profits. That too consistently.
But then the pandemic struck.
Travel was banned and flights were grounded.
SpiceJet posted a massive loss of Rs. 593.4 crores in Q2 2020.
But the company managed to beat these odds as well. It managed to cut down costs by almost 60% in just one quarter by reducing employee salaries, and renegotiating lease agreements.
Despite cutting corners, the company's liabilities still exceeded its assets by Rs. 5,185.84 crores and by March 2021 it had only had cash worth Rs. 35.94 crores.
Now, you must be thinking, what's new about this scenario? Most airlines faced losses during Covid, why single out SpiceJet?
That's because these losses are not its only problem.
You see, as the company majorly cut down employee salaries, it had to deal with many unhappy employees. Some employees even held strikes last November to demand that their salaries be increased to pre-pandemic levels. But the airline refused.
This has increased the company's resignation rate, which could pose a big problem for the company in the future. Airlines are a people-intensive business and need specialised and trained individuals. If pilots or the flight crew decided to come together and leave the company at once, it will once again have to stop flights, something which the company cannot afford.
Plus, the company's market share has also dropped from 16.2% in June 2020 to 9.1% in June 2021.
But the company's bad luck spree doesn't end here.
Its biggest challenge right now is the Madras court order, which has called on the company to wind up its business.
Why, though?
Because the company has not paid dues worth Rs. 180 crores to Switzerland-based firm SR Technics for repairing and maintaining its aircraft for 10 years now. The Swiss company has now handed over the headache of collecting payments to Credit Suisse AG, which filed the lawsuit against SpiceJet.
But why didn't SpiceJet pay the company? Well, the airline initially was broke and couldn't afford to pay and after that, it discovered that SR Technics didn't have the appropriate licences to perform the job it was claiming to do.
So, it thought that it could get away without paying the company.
But the Madras High Court thought differently. It claimed that Credit Suisse deserved the payment and SpiceJet should be dismantled to clear off its dues.
So, SpiceJet has taken the matter to the Supreme Court, which also agrees that Credit Suisse should get its dues.
SpiceJet now has around two weeks to come up with an appropriate settlement amount or the court will approve its winding up and its assets will be sold to pay Credit Suisse.
Will SpiceJet be able to escape this fate?
And even if it does, will it be able to run successfully?
Well, Singh has yet another master plan to save the company.
You see, during Covid when passenger flights were shuttered, SpiceJet focused on its cargo business. It now has the biggest cargo fleet in India, which earned a revenue of Rs. 1,117 crores in 2020 alone, up 518% from the previous year.
Singh is now planning to hive off this business to its subsidiary SpiceXpress. And he is not doing so just because demergers are the latest business trend. For the transfer of the cargo business, SpiceXpress will issue shares worth Rs. 2,555.77 crores to SpiceJet.
This will solve the company's cash flow issues and could also help pay off Credit Suisse. How? Once SpiceXpress is free of SpiceJet's negative baggage, it will be able to borrow money easily at low interest rates as the cargo and logistics business is less risky. If this aspect of the business grows and expands further, SpiceJet, who will be a significant shareholder in SpiceXpress will also reap the gains.
Not just that, Boeing is also set to make payments to SpiceJet as compensation.
Huh?
You see, from 2019 onwards several airlines had to ground their Boeing Max 737 flights because of defects that had caused a major accident. This was a major expense for airlines and Boeing is now compensating them for this. Boeing is expected to give around $200 million to SpiceJet as settlement.
So, all in all, it could potentially weather this storm of problems that it is currently facing.
However, newer storms are also brewing up. Many foreign investors including BlackRock, which is the world's largest asset management company, have flagged irregularities in SpiceJet's financial statements. They are not happy with how the company is being run.
Also, with Air India now in the hands of the Tata Group, it faces even tougher competition in the market.
What do you think the future holds for SpiceJet?
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