SpiceJet faces liquidity crunch, plans to raise Rs 750 crore via QIP

SpiceJet, India’s second-largest airline, is planning to raise around Rs 750 crore by selling new shares, three people aware of the development said.

The airline is considering a qualified institutional placement (QIP) as a prolonged grounding of the Boeing 737 MAX aircraft and a severe fare war have put the airline’s balance sheet under pressure.

QIP is a capital-raising tool by which listed companies can sell shares, fully and partly convertible debentures, or any securities other than warrants to a qualified institutional buyer.

An airline spokesperson denied there was any such move, but multiple sources said the airline management had been holding talks with domestic funds, including Birla Sun Life Insurance Co and Axis Asset Management Co.

“The company has held exploratory talks with the investors but hasn’t taken a final decision. Board approval and selecting a banker are pending. They are probably judging the appetite of the market and compensation from Boeing to finalise the size,” said a person aware of the development.

While compensation from Boeing is yet to be finalised, SpiceJet has reckoned on that Rs 290 crore in the April-September period.

An executive of a domestic fund said there would be good appetite for a QIP in current condition.

“Despite competitive pressure, there is a massive growth prospect. Also with the grounding of Jet Airways, there is little chance of another closure at least in the next five years. All this makes it lucrative for an institutional investor to hold an airline stock but it has to be priced correctly,” he said.

The prolonged grounding of the Boeing 737 MAX aircraft has put pressure on the airline’s cost control because it has stopped the sale and leaseback income for the airline — a popular way for low-cost airlines around the world to bring down operating cost and generate cash. In a sale and leaseback model (SLB), an airline acquires the aircraft at an attractive price and sells the aircraft to a lessor — ideally at a profit — and leases it back for its own use. 

While SpiceJet expects the aircraft to return to service by early 2020, the US aviation regulator recently said it had set no timetable for the return.

In the absence of SLBs, and a fare war with larger rival IndiGo, SpiceJet’s cash flow has reduced to Rs 130 crore in 2018-19, from Rs 941 crore in 2017-18. 

Chief Executive Officer Ajay Singh recently said if fares did not rise, airlines might face bankruptcy.

“The return of MAX planes will bring down the cost of operations and offer some upfront cash in terms of SLB route,” Kiran Koteshwar, SpiceJet’s chief financial officer, recently said.

Brokerage firm SBI Caps noted on November 13: “Absence of fuel-efficient and the brand new MAX aircraft are putting fuel cost per available seat kilometre under pressure. It is imperative for SpiceJet to rein in cost as yields come under pressure due to rising competition on routes vacated by Jet Airways and the regional market once dominated by SpiceJet. Thus, restarting operations of MAX, which offers lower fuel burn and maintenance costs, is the key to profitability”.

Secondly, without the 737 MAX aircraft, the airline has had to take up 30 old Boeing 737 aircraft of Jet Airways, putting pressure on the airline’s maintenance cost, which rose in July-September by 45 per cent because around 11 of those Jet aircraft underwent major maintenance checks.

On a wing & prayer

• While compensation from Boeing is yet to be finalised, SpiceJet has factored in Rs 290 crore on that in Apr-Sep

• Prolonged grounding of the Boeing 737 MAX aircraft has put pressure on the airline’s cost control as it has stopped the sale and leaseback (SLB) income

• In the absence of SLB income and fare war against rival IndiGo, SpiceJet’s cashflow has reduced to Rs 130 crore in 2018-19, from Rs 941 crore in 2017-18