The aviation industry is witnessing the slow collapse of low cost airline SpiceJet as it runs out of money to pay its operating costs. On Wednesday, the airline was refused fuel by oil companies, and so all its flights were grounded till 4pm, leading to thousands of passengers being stranding at airports across the country.
SpiceJet seems to be heading the Kingfisher way if it doesn’t get the funds it needs. On Wednesday it ended up operating only 70 of its 239 daily flights. On Tuesday, only 35 flights had taken off.
The budget carrier, which is on a cash-and-carry basis with oil firms, could resume operations only after paying for the day’s fuel.
Having burnt their fingers with the high-profile implosion of Kingfisher Airlines – which stopped flying in 2012 and left billions of rupees in unpaid debts – oil companies refused to heed the Civil Aviation ministry request to give SpiceJet a 15-day credit line.
The ministry also said that airport operators would be asked to give the airline 15 days to make payments and public sector banks could be asked to lend up to Rs. 600 crore ($100 million) to SpiceJet.
According to the ministry, these measures were aimed at avoiding a collapse, which it said would be a "major setback" for the civil aviation sector.
But the haste with which the government has tried to force state-owned companies to throw good money after bad at SpiceJet will only serve to delay the inevitable. The rot at SpiceJet goes much deeper.
According to Hindustan Times, family interference and poor management has brought the airline to its knees.
Launched in 2005, SpiceJet was bought by media baron Kalanithi Maran in 2010.
“The airline had a professional management in place but after Maran took over things started getting messy. A number of top executives left or were nudged into leaving as the new promoters thought they were too expensive,” a former senior employee of SpiceJet told Hindustan Times.
“The board members, who understood the business and asked the right questions, were replaced by family members,” he said. After this, things just spiralled out of control.
Another operational mistake the airline committed, sources said, was flying to too many destinations with its fleet of 57 planes.
“The business strategy for any airline and more importantly for budget carriers is simple: maximise operations on limited routes, which wasn’t the case here,” said a source.
After many months of bleeding losses, SpiceJet needs at least $300 million to stabilise and recover, according to estimates by aviation consultancy CAPA. But parent company Sun Group said it could not afford to spend this amount.
"We do not have the liquidity to invest large sums at this time, which is why we need bank financing for which the promoters (main shareholders) are willing to provide a guarantee," SL Narayanan, chief financial officer of Sun Group told Reuters. "We cannot do more than this."
SpiceJet owes about 6 billion Indian rupees ($94 million) to service providers such as oil companies and airport authorities, Narayanan said. Its net debt stood close to $230 million at the end of September.
“Without significant and immediate promoter funding, I see no future. Promoter’s inability to fund closes the case,” said Kapil Kaul, CAPA’s South Asia chief executive officer. “I expect things to deteriorate further and see a massive rush for refund claims,” he told Hindustan Times.
Shares in SpiceJet closed down 5.4% on Wednesday and have already lost a third of their value this month.