The glitch in SpiceJet's business!

Spicejet

Indian Market
by 5paisa Research Team Last Updated: 2022-07-21T12:43:19+05:30

Do you have that close friend who exactly knows what is right for you and guides you through your problems?

We all have that friend, right? Just like that, a pilot’s best friend is a weather radar, that guides it and saves it from its worst enemy, “The Turbulence”.

A weather radar is a piece of equipment on an airplane that tells a pilot if there is a storm in the way, it pops up bright red lights if there is a storm that can cause turbulence. But what if one day it stops working and doesn’t inform the pilot about a very bad storm coming it's way?

Well, that’s what happened on May 1 with Spicejet’s flight SG 945 that was traveling from Mumbai to Durgapur, the impaired radar failed to alert the pilot about the thunderstorm, due to which the plane encountered turbulence, and mind you this was not the usual turbulence we encounter in our flights. It was so horrific that it injured 14 people and landed 2 in the ICU. 

Bad things for SpiceJet don’t end here, post this there have been 8 incidents of technical malfunctions with its flights, although no passengers have been harmed until now, but how long before something worse happens? And is it only about the technical glitches or does the rot goes deeper into its business?

Let’s find out!

After the horrific incident Directorate General of Civil Aviation wasn’t really happy with Spicejet and probed into the matter, they issued a show cause notice to it and even made a surprise visit to check its fleet.

Both these things revealed a lot about the ongoing crisis in SpiceJet. 

DGCA in its notice mentioned that “ Whereas the review transpires that poor internal safety oversight and inadequate maintenance actions (as most of the incidents are related to either component failure or system related failure) has resulted in degradation of the safety margins.”

This statement by DGCA clearly implies that the fault was on part of the airline. They failed to keep up the maintenance of the flight components and that resulted in these tragedies. 

And even when DGCA made a surprise visit to check its fleet they found out that the airline was operating a flight without 25 life jackets, since the boarding hadn’t started, they ordered the airline to arrange another flight.

Clearly, Airline was aware that its fleet requires maintenance touch-ups and change of parts but it did not pay heed to it. The question is, why is it not looking after its fleet? Why is it putting the lives of passengers in danger?

Well, the problem lies in the financials. The financial assessment by DGCA revealed where the problem was.

DGCA said “financial assessment carried out by DGCA in September 2021 has also revealed that airline is operating on Cash & Carry and Suppliers/Approved Vendors are not being paid on regular basis leading to shortage of spares and frequent invoking of MELs.”


Now, an airline to operate has to incur a lot of expenses, like they have to pay jet fuel charges, salaries to employees, etc, apart from this they also have to pay a fee to the Airports Authority of India (AAI), for using the Airports. 

Traditionally, airlines pay this fee monthly to the airport operators, but Spicejet defaulted on the monthly payments a year ago and that’s why AAI asked the airline to pay these charges daily. These daily charges are called cash & carry charges. Coming under the cash&carry charges isn’t a thing Airlines like to brag about.

With the pandemic and rising jet fuel costs, things have not been well with airlines. Most of them are cash strapped and are sitting on a pile of losses, and a similar kind of thing happened with Spicejet as well. The things with Airline are so bad that it defaulted on the daily cash & carry charges as well.

Another thing that DGCA reported was that the company has not been paying the vendors and suppliers of equipment due to which there is a shortage of spare parts with the Airline and whenever airlines run out of cash, rather than replacing old equipment, they just take out a good component from one flight and put it in another one that is going to operate.

The next issue raised by DGCA was that the company was frequently invoking MEL - Minimum equipment list. So, sometimes there are certain equipments in the plane that are out of order, but still, the plane can take off without them, that is called MEL. Now, invoking MEL is generally done when some of the equipment in the flight are inoperative and airline is postponing its maintenance, so invoking MEL definitely a cause of concern.

Well, they haven’t been paying AAI, their vendors, even they have been paying one-third salary to their employees, what is really going on with it? A sneak peek into its financials tell you the complete story.

 

Spicjet losses

 

The losses of the Airline have been mounting, it has been sitting on a loss of more than Rs. 1500 crore, on a TTM basis. The liquidity position of the company is even worse, as its current liabilities exceed its current assets by a staggering Rs 5,185.8 crore. In the recent quarter, the company saw a jump in profits, that was because of the rise in other income, the airline accounted for a settlement from Boeing accounted of Rs 415 crore. 

In late 2021, the airline had cash and cash equivalents of just 729 million rupees ($9.1 million) compared with total debt of 97.5 billion rupees.

It has repeatedly mentioned that it will infuse Rs. 2500 crore into the business, but that infusion hasn’t occurred till now. To bring in a bit of cash, it has decided to sell its cargo arm SpiceXpress, but the receipts from it won’t be enough. Seems like SpiceJet is in a lot of trouble.

Well, to make things right, the management would have to first accept the problems, for now, the management has been in complete denial of the ongoing crisis. And it would have to do it fast as the competition in the Airline business is increasing. The new entrants like Akasa Air by legendary investor Rakesh Jhunjhunwala, and rejuvenated Air India backed by Tata's is going to give the low-cost airline a tough fight.

SpiceJet has a turnaround history, the company was deep in debt in 2015, but Ajay Singh the current chairman changed its fortune. Will his luck work this time?

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About the Author

Our research team is composed of some highly qualified research professionals, their expertise range across sectors.

Disclaimer

Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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