A Rollercoster of Hope and Disappointment
Today we are covering the story of the SpiceJet Ltd and its ongoing turnaround attempt.
The Dawn of Commercial Aviation
It is a well-known fact that the legendary Wright Brothers revolutionized transportation with the invention of the airplane. But did you know the dawn of commercial aviation began in 1914? The first-ever commercial flight took off in the U.S., soaring from St. Petersburg to Tampa, Florida, covering just 17 miles in 23 minutes. It carried a single passenger – marking the humble yet historic beginnings of air travel as we know it today.
Beginning of Commercial Aviation in India
Commercial aviation in India took flight with Tata Airlines, which later became the iconic Air India. Post-independence, the government nationalized airlines, shaping the early aviation landscape. However, the liberalization of the 1990s transformed the skies, welcoming private players like Jet Airways, Sahara Airlines, and Air Deccan. The 2000s ushered in a new era with low-cost carriers such as SpiceJet and IndiGo, revolutionizing air travel and making it affordable for India’s burgeoning middle class. Yet, this wave of deregulation also brought fierce competition, pushing the industry into a battle of razor-thin margins.
Revenue and Cost Structure of Airlines
Let’s delve into the economics of the aviation industry. On the revenue side, airlines primarily rely on ticket sales, with cargo operations serving as a supplementary income stream. However, the cost structure tells a more complex story. The largest expense is fuel, specifically Aviation Turbine Fuel (ATF), which constitutes 30-40% of total costs. Derived from crude oil, ATF prices are notoriously volatile and, in India, are burdened with taxes that make them 60-70% higher than international benchmarks.
Another major cost is fleet leasing, with ~80% of India’s aircraft being leased—significantly higher than the global average of 53%. Aircraft manufacturers like Boeing and Airbus dominate this space in a duopoly, selling planes to leasing companies which in turn lease them to airlines such as SpiceJet and Air India. This dependency on leasing offers operational flexibility but also adds to the financial strain (significant recurring cash outflow), highlighting the delicate balance airlines must maintain to stay afloat in this fiercely competitive industry.
Now that we’ve covered a brief overview of the industry, let’s shift our focus to SpiceJet, which has been making headlines recently.
Journey of SpiceJet
Before we dive into the history of SpiceJet, there’s one name that stands out—Ajay Singh. As we trace the airline’s journey, it will become evident why his role is pivotal to its story.
The roots of SpiceJet trace back to 1993, when an air taxi company owned by SK Modi partnered with Lufthansa, Germany’s flag carrier, eager to tap into India’s growing aviation market. This collaboration gave birth to ModiLuft, which began operations in May 1993. However, disagreements between the two partners led to the airline ceasing operations in 1996. While ModiLuft faded away, its Air Operator’s Certificate (AOC)—a critical license for operating airlines in India—remained dormant.
The Birth of SpiceJet and early success with LCC model
Fast forward to 2004, Ajay Singh envisioned creating one of India’s first low-cost carriers (LCCs). To accelerate the process of launching his airline, Singh acquired ModiLuft’s dormant AOC and rebranded the carrier as SpiceJet. This strategic move allowed him to bypass lengthy regulatory hurdles and get SpiceJet off the ground quickly.
From day one, SpiceJet embraced a LCC strategy that set it apart from competitors. Several key factors contributed to its early success:
- – Single-class fleet: Operating an all-economy configuration allowed for higher seat capacity (189 seats compared to 150-170 in mixed-class fleets).
- – No frills: By eliminating complimentary in-flight meals, SpiceJet significantly reduced operational costs.
- – Efficiency-focused operations: Optimized routes and reduced turnaround times enabled the airline to operate more flights per day.
This cost-efficient model allowed SpiceJet to offer affordable fares, attracting budget-conscious travelers and capturing a significant share of India’s expanding middle-class market. By 2008, SpiceJet had soared to become one of India’s top five carriers—a testament to its strategic focus and execution.
Ajay Singh’s exit and SpiceJet’s Downfall
In 2010, Ajay Singh sold his stake in SpiceJet to Kalanithi Maran’s Sun Group, marking the beginning of a turbulent chapter for the airline. Under Maran’s leadership, ambitious expansion plans were set into motion, including an order for 45 new aircraft. However, the financial strain of leasing such a large fleet was severely underestimated. During this period, the airline faced a two-fold impact on profitability: rising ATF prices significantly increased costs, while intensifying competition led to lower fares, reducing revenue. There came a point where revenue generated per flight often failed to cover operational costs. Because of this situation, the airline deferred payments in hopes of securing external funding.
The anticipated funding never arrived as criminal charges filed by the CBI against Maran scared off potential private equity investors. As unpaid dues mounted, aircraft lessors began repossessing planes, forcing SpiceJet to cancel over 2,000 flights in just two months leading up to New Year 2015. The aviation regulator stepped in, barring the airline from selling tickets beyond 30 days and warning of a possible suspension of operations. Yet, regulators hesitated to let SpiceJet collapse entirely, fearing the ripple effects a major airline’s downfall could have on India’s aviation sector.
Ajay Singh returns to save the day
In January 2015, Ajay Singh re-entered the picture, acquiring a 58.5% stake and taking control of SpiceJet’s operations. His first move was to stop the bleeding—he infused Rs. 100 crore in stop-gap funding to pay overdue salaries and settle some dues with oil companies. Singh then outlined a Rs. 1,500 crore revival plan involving his own capital and private equity investments. His strategy focused on restoring passenger confidence by ensuring flights operated without cancellations, dropping unprofitable routes, and improving fleet utilization—from 11.5 hours to 14 hours per day for Boeing aircraft and from 10.5 hours to 12 hours for Bombardier planes.
While Singh’s leadership was instrumental in stabilizing SpiceJet, an external factor played an equally critical role in its turnaround—plummeting ATF prices. Between October 2013 and September 2015, ATF prices dropped by 47%, from an all-time high of Rs. 77,090 per kilolitre to Rs. 40,938 per kilolitre. This sharp decline reduced fuel costs as a % of total costs for SpiceJet from 44.5% in FY 2013-14 to ~34.7% by mid-2015. This breathing room allowed Singh’s revival efforts to take flight and set the stage for SpiceJet’.
By 2015, SpiceJet had staged a remarkable comeback, returning to profitability with four consecutive quarters of positive earnings. Passenger confidence soared, as reflected in load factors consistently exceeding 90% from May 2015 onward—a clear sign of the airline’s revival. Riding this wave of success, SpiceJet made a bold move in 2017 by placing an ambitious order for 205 Boeing 737 MAX aircraft, aiming to modernize its fleet and fuel aggressive growth plans. While this decision initially symbolized optimism and expansion, it would later become a key contributor to the airline’s mounting challenges.
Soon multiple challenges took flight
Global grounding of Boeing 737 MAX
In March 2019, the global grounding of the Boeing 737 MAX following two tragic crashes dealt a heavy blow to airlines worldwide. Despite being unable to operate these planes, airlines like SpiceJet were still obligated to make lease payments—a significant financial strain. SpiceJet had 13 Boeing 737 MAX aircraft in its fleet of 74, and while this may seem like a small proportion, the aviation industry thrives on precision and efficiency. Even a slight reduction in capacity disrupted operations. Compounding the issue, the MAX aircraft were 15-20% more fuel-efficient than older models. With the fleet grounded, SpiceJet was forced to rely on older, less efficient planes, driving up fuel costs and eroding profitability.
The Covid-19 pandemic
The COVID-19 pandemic brought global aviation to a standstill as lockdowns and travel restrictions wiped out passenger demand. While revenues from ticket sales plummeted, fixed costs such as lease payments, airport fees, and employee salaries continued to pile up. To adapt, SpiceJet pivoted by launching SpiceXpress, its dedicated cargo division, which provided a critical revenue stream during a time when passenger flights were at an all-time low.
Skyrocketing ATF prices
As the world began its post-pandemic recovery, another challenge emerged—soaring Aviation Turbine Fuel (ATF) prices. The combination of surging global demand and the Russia-Ukraine war drove ATF prices to an all-time high of Rs. 1,41,230 per kilolitre—nearly double pre-pandemic levels. For SpiceJet, this spike in fuel costs significantly increased operational expenses, putting further pressure on its already strained finances.
(Source: ICRA, TOI and Statista)
The combined weight of these challenges led SpiceJet to default on its lease payments, prompting several lessors to repossess aircraft. This significantly reduced the airline’s fleet size, and many lessors also initiated legal actions against the company, further compounding its troubles.
How did IndiGo weathered the storm better?
While both SpiceJet and IndiGo operate in the same low-cost carrier (LCC) segment, IndiGo managed to navigate these challenges with far less turbulence. Here’s why:
- – Fleet Composition: IndiGo primarily operates Airbus aircraft, which were unaffected by the global grounding of Boeing 737 MAX planes. In contrast, SpiceJet’s reliance on Boeing 737 MAX aircraft left it vulnerable when these planes were grounded.
- – Strong Financial Reserves: IndiGo entered the pandemic with a robust balance sheet and significant cash reserves, enabling it to meet lease payments and other fixed costs even during periods of low revenue.
- – Fuel Efficiency Advantage: IndiGo’s fleet is newer and more fuel-efficient, helping reduce fuel consumption and operating costs—a critical advantage when ATF prices soared post-pandemic.
These factors allowed IndiGo to maintain stability while SpiceJet struggled to stay afloat amidst mounting pressures.
A bold fundraising plan
Ajay Singh has launched a comprehensive plan to rescue SpiceJet from its financial turbulence. The airline recently raised ₹3,000 crore through a Qualified Institutional Placement (QIP), with an additional ₹736 crore coming from the conversion of warrants into equity by promoters. These funds are earmarked for settling dues with lessors, expanding the fleet, ungrounding aircraft, and clearing statutory and employee obligations.
Settling long-standing disputes
SpiceJet has made significant progress in resolving disputes with lessors who had repossessed aircraft and initiated legal actions. Settlements have been reached with major players like Carlyle Aviation, Horizon Aviation, and Export Development Canada (EDC), resolving disputes valued at approximately ~$420 million which were settled for ~155 million. As part of the EDC settlement, SpiceJet acquired outright ownership of 13 Q400 aircraft, eliminating recurring rental payments and achieving substantial long-term cost savings.
Fleet expansion and ungrounding
To regain capacity and market share, SpiceJet is set to lease seven new aircraft and unground 28 of its 36 grounded planes in the coming months. This includes three Boeing 737 MAX aircraft, whose safety concerns—responsible for their global grounding in 2019—was fully resolved with regulatory approvals in August 2021. The 737 MAX’s advanced fuel efficiency will play a key role in reducing operational costs, especially critical amidst soaring ATF prices.
Clearing statutory dues
SpiceJet has allocated ₹600 crore to clear pending statutory liabilities, including TDS, GST, and Provident Fund contributions.
Closing remarks
SpiceJet faces an uphill battle as it works to recover from years of turbulence. The airline’s domestic market share has plummeted to just 2%, a stark contrast to IndiGo’s commanding 63% dominance in the Indian aviation market. Rebuilding this lost ground will require significant effort, strategic planning, and operational excellence.
Yet, history has shown that SpiceJet is no stranger to adversity. Under Ajay Singh’s leadership, the airline has demonstrated resilience time and again. With proactive measures like fleet expansion, settlements with lessors, and improved operational efficiency, there is hope that SpiceJet can engineer a sustainable turnaround. While the road ahead is challenging, the airline’s ability to adapt and innovate will determine whether it can once again soar in India’s competitive skies.
Disclaimer: This newsletter is for educational purposes only and is not intended to provide any kind of investment advice. Please conduct your own research and consult your financial advisor before making any investment decisions based on the information shared in this newsletter. Bastion Research and its associates do not have any stake in SpiceJet Ltd.
Meme of the Week
Follow us
If you are a diligent investor, you would not want to miss checking out our research platform, where we share insightful research on companies regularly. Gain access to our sample research by clicking on the button below.
