Spicejet bailout would be wrong

After Vijay Mallya of the grounded Kingfisher Airlines, it is now the turn of Kalanidhi Maran of SpiceJet. Both barons have taken air-travelers, creditors, suppliers and the government for a ride. Ironically, there is a lot of similarity between the two southern business barons. Liquor baron Mallya was branded as ‘king of good times’ because of his lavish lifestyle. Media baron Maran has been, for years, India’s highest earning business executive. His remuneration package in 2013-14 was Rs.59.89 crore. Maran’s wife Kavery too got an equal remuneration, taking the combined annual pay package of the Marans to an astounding Rs.119.78 crore from his media enterprise. Sun TV boasts  of some 33 regional channels.

Like Kingfisher, SpiceJet has not suddenly landed in a debt-trap. Maran’s airlines’ combined liability is said to be in excess of Rs 2,000 crore. However,  it is lower than Kingfisher’s Rs 7,000-plus crore liability. Kingfisher collected a lot of money from prospective passengers by advance booking of tickets. SpiceJet was reportedly offering discounted passenger tickets, some six months in advance, to keep its cash box warm.

How serious is SpaceJet’s financial situation? Why were its problems allowed to accentuate? The company’s annual reports of the last three years projected a grim picture of its extravagant operation. Did the company carry out proper cost/ audit and maintain reports on the same over the years? Did the management act on these reports? What did the financial auditors, including internal ones, do? Did they serve the right warning to SpiceJet’s management,  stakeholders, bankers, suppliers and airport authorities about the true health of the company? Maran brothers – Dayanidhi, a former union minister, and Kalanidhi – were allegedly involved in the massive telecom scam during the esrthwile UPA’s reign. The two are the sons of DMK supremo M Karunadhi’s nephew, the Late Murasali Maran.

These questions are important as the government is already playing a ‘White Knight’ to save itself from a big embarrassment. A series of recent flight cancellations by SpiceJet have sent the spot price of domestic air-tickets through the roof and the authorities were subjected to severe public criticism. A Delhi-Kolkata-Delhi economy class ticket turned out to be more expensive than Delhi-Frankfurt-Delhi ticket by Lufthansa. Domestic passengers were robbed by other airlines, while foreign tourists to local destinations got stranded due to flight cancellations. Airports were in total chaos. The government was not expected to be a mute spectator of the chaos and misery of lakhs of air-travelers.

Did SpiceJet engineer the situation with a great calculation? The cost of operations of airlines has substantially fallen as a result of continuing slide in the aviation turbine fuel (ATF) prices in the last few months, driving up the profits of airlines operators. Under the circumstances, SpiceJet’s decision to randomly cancel flights is somewhat puzzling.  Strategically, it would appear that SpiceJet, India’s so-called budget airline, could not have chosen a more opportune time to cancel so many daily flights. Air-travel in India peaks in December-January.  The tourist season starts by September-end and runs through March. After almost a two-year lull, foreign tourists are landing in India in hordes like never before. With the economy picking up and the Christmas-New Year jubilation already  underway following school-college holidays, a heavy domestic air-travel pressure is building up. Another large airline collapse at this juncture could mean a big embarrassment for the new government promising good times ahead to its citizens.

However, a financial bailout for the airline would be a wrong move. A better option would be an immediate takeover of the airline and handing over its operation to a professional body, under the supervision of a non-executive board, comprising some of the most successful bankers and business executives. A bail-out of the Marans would look rather unnatural as, going by the latest Forbes’ estimate, Kalanithi Maran’s net worth alone was $2.3 billion (Rs.15,000 crore). In any other country, such promoters would have faced criminal action from both the government and public, sending those financial offenders to jail.

The Marans do not appear to be short of funds. Even earlier this year, Kalanithi Maran and Kal Airways, the promoters, were reportedly planning to raise their stake in the airline by 10 per cent to 68.42 per cent and pumping in an additional Rs 312 crore by subscribing to a fresh equity issue in two tranches. It planned a special issue of 189.1 million warrants, to be priced according to the Securities and Exchange Board of India’s formula for preferential issues. These warrants will get converted to equity shares in two tranches —-in April 2015 and April 2016.

Maran had acquired SpiceJet rather cheaply for Rs 750 crore in 2010 and invested an additional Rs 550 crore later, by way of equity. Only last year, SpiceJet had inducted seven Boeing 737NGs and redelivered one aircraft, taking its fleet size to 58. It discontinued 26 unprofitable routes and reduced capacity on 14 routes to increase its asset utilisation to produce more seat per km, depending on windows of opportunities. What went wrong in the past few months, especially after the fall of UPA’s and DMK’s political fortunes?

The government-owned AAI has agreed to extend credit facility to the airline for 15 days till 31 December. The airline, which has been buying ATF from state-owned oil companies on a cash-and-carry basis since the time Modi came to power, got a reprieve early this week from the oil companies as well as Airports Authority of India (AAI) after the Civil Aviation Ministry stepped-in, requesting them to offer emergency credit facility to avert the worst. Thanks to these measures, ahead of Christmas, SpiceJet claimed on 19 December that it was able to operate 218 of the scheduled 230 departures. mal operation and old schedule. The mid-winter aerial chaos was scary.