How SpiceJet's Boeing 737 Max planes are earning money even without flying
SpiceJet seems to be in no hurry to try getting the planes back in the air. There is much more to the story than meets the eye
SpiceJet had a lot of expectations from the Boeing 737 Max. This re-engined and fuel-efficient version of the B737 promised a significant reduction in costs while boosting revenues for the budget carrier. However, the Max failed to live up to the expectations, getting banned across the world for a record period of 20 months after two fatal crashes in a matter of just over four months that killed nearly 350 people.
Even after many countries lifted the ban subsequently, the Indian Directorate General of Civil Aviation (DGCA) has continued to ground the controversial aircraft, compelling SpiceJet -- the only Indian carrier with Max planes currently -- to shelve its grand Max plans. However, that does not mean that SpiceJet has allowed to let its B737 Max planes just sit and gather dust. Even when they are not flying, these planes continue to deliver SpiceJet earnings, helping it trim its losses during the dark days of the Covid-19 pandemic. How? Let us see.
The B737 Max rivals Airbus's A320Neo as a workhorse for airlines around the world. The Max has some distinct advantages that have kept many airlines across the world hooked to it. According to Boeing, the Max delivers big savings in fuel consumption that airlines require for the future. The 737 Max 8 reduces fuel use and carbon dioxide emissions by 14% over the newest B737 NG and 20% over the first B737 NGs. Moreover, the B737 Max 8 uses 8% less fuel per seat than rival Airbus's workhorse, the A320Neo.
At a relatively cheaper price, the single-aisle Max has a flying range that gives airlines the option of using it on long-haul flights, which are normally undertaken by widebody planes, The Guardian reported. The B737 Max 7 has a range of 7,085 km.
A SpiceJet Boeing 737 Max 8 plane. Image courtesy: Flickr/JonPsPICs
SpiceJet had called the Max "highly sophisticated", which would allow it to compete better and increase profits, Business Standard reported. However, the charm of the Max soon faded and according to a Flightglobal report in July 2020, Spicejet had incurred a cost of over Rs 670 crore due to the grounding of the Max. The Indian airline sought a huge compensation of about Rs 950 crore from Boeing.
In no hurry to get Max flying again?
The Indian budget carrier has 12 Max planes in its fleet, according to DGCA data, and Business Standard added that there are firm orders for 142 more such planes. This makes SpiceJet one of the biggest global customers of the B737 Max. Yet, SpiceJet seems to be in no hurry to get these planes back in the air. According to a Business Standard source, SpiceJet has not taken up the matter with India's aviation regulator DGCA, and it would take at least a month after applying to get the requisite approvals.
After the US Federal Aviation Administration (FAA) okayed the Max to fly again, a source told Plane Vanilla that the ungrounding made no difference to SpiceJet, given that the DGCA was yet to give the green signal.
Compensated by Boeing
The reason SpiceJet seems unperturbed by the continued grounding of the Max is not entirely related to the loss of demand and capping of flight capacity post the pandemic. The real reason lies somewhere else. SpiceJet had booked 'other income' of Rs 1,090 crore ($150 million) in seven quarters through December. This is the amount that the company expects to receive from Boeing as compensation for the loss incurred as a result of keeping the Max planes grounded. SpiceJet continues to show compensation for the Max grounding as earnings.
"... Consequently, and without in any manner limiting or prejudicing the legal and the commercial rights of the Holding Company towards its claim in this regard, certain costs (including, inter alia, aircraft and supplemental lease rentals and certain other identified expenses relating to the Boeing 737 Max aircraft) aggregating Rs 141.1 crore and Rs 560.4 crore for the quarter and year ended 31 March 2021, respectively, have been recognised as other income," the airline said in a note.
In the previous quarterly results, the SpiceJet management was confident of collecting the compensation, though auditor Walker Chandiok & Co LLP warned that there was "no virtual certainty" that the 'other income' would be recognised. Chartered accountant Shailesh Haribhakti told Business Standard that SpiceJet has been relying on this accounting method to shore up their results and ensure that there was no need to introduce solvency capital of a magnitude that would dilute the current ownership.
While SpiceJet has announced a plan to raise Rs 2,500 crore, IndiGo will raise Rs 3,000 crore. Image courtesy: Wikimedia Commons/Andrew Thomas
One would recollect that the airline had nearly closed down in 2014 due to a shortage of funds. It was rescued at that time by Ajay Singh, who as chairman, revived the airline by changing its network, renegotiating vendor contracts, diversifying the business to include a dedicated cargo service, retail and healthcare.
Losses cut, capital to be raised
SpiceJet has been able to significantly cut its losses even as the business remains subdued due to the Covid-19 pandemic. Its net loss in the fourth quarter of 2020-21 stood at Rs 235.34 crore, down from Rs 807.1 crore in the corresponding period of the previous fiscal. Its net loss for the entire 2020-21 financial year widened to Rs 998.3 crore from Rs 934.76 crore in the previous fiscal.
The company also announced that it would raise Rs 2,500 crore to fund its working capital requirements. "To ensure our long term growth and sustainable operation we have decided to raise funds of up to Rs 2,500 crore. These funds will be used to significantly strengthen our balance sheet," Singh said, according to The Economic Times. It is the third Indian airline to raise capital. Domestic market leader IndiGo had announced plans to raise Rs 3,000 crore, while budget carrier Go First (erstwhile GoAir) is in the process of launching an Initial Public Offering (IPO).
Not immune from financial troubles
Indeed, SpiceJet has not been immune from financial difficulties. As of January 1, 2021, SpiceJet had the highest dues pending with the Airports Authority of India (AAI). Its dues were Rs 33.74 crore. It was reported to be making a daily payment of Rs 60 lakh to settle the dues.
The AAI had decided to put SpiceJet on cash and carry mode since midnight of July 30, 2020, as the carrier's pending dues crossed Rs 200 crore, according to a Business Standard report. Cash and carry mode means that airlines have to make an instant payment on a per-flight basis to avail of parking and landing facilities at AAI-run airports.
However, the AAI later deferred its order to put SpiceJet on cash and carry and allowed it to operate and pay on normal terms, PTI reported.
The airline had also defaulted on airline lease payments and had been served grounding notices too. Many vendors have also not got their payments on time.
SpiceXpress the silver lining
SpiceJet's cargo business, anchored by SpiceXpress, has "continued to provide a much-required lifeline" even as passenger numbers remained weak. "On a segment basis the revenue from cargo operations increased by 518% aggregating to Rs 1,117.5 crore for FY2021," the company said, adding that it has decided to hive off cargo as a separate subsidiary.
The carrier added on June 30 that it derived revenue of Rs 416.5 crore for the quarter ended March 2021 against a revenue of Rs 67.8 crore in the corresponding period in the previous fiscal, translating to a quarter-on-quarter increase of 514%.
SpiceJet's net profit for the fourth quarter of 2020-21 stood at Rs 40.2 crore against a loss of Rs 59.6 crore for the corresponding previous quarter. Net profit for the year ending March 2021 was Rs 131 crore against a loss of Rs 134 crore in the corresponding previous year. The airline's EBITDA profit in the fourth quarter was Rs 66.5 crore against a loss of Rs 37.5 crore in the corresponding period of the previous fiscal, and EBITDA profit in the entire 2020-21 stood at Rs 225.8 crore against a loss of Rs 76.5 crore in the corresponding previous year.
Big role in Covid battle
SpiceJet has offered stellar support to India's Covid fight. It supplemented the government's Lifeline Udan mission after the nationwide lockdown was imposed in March last year, taking medical and other essential supplies to the country's remotest corners and transporting essential items between India and foreign countries. The airline carried India's first consignment of the Covid-19 vaccine on January 12, 2021. From January to June 2021, SpiceJet has transported 133 tons of the Covid vaccine. It has transported 50.5 million doses of the Covid vaccine to date. SpiceJet has also airlifted 87,170 oxygen concentrators between April 28 and June 15, contributing to mitigating the problems created in the country due to a crippling shortage in medical supplies amid an alarming second Covid wave.
SpiceJet has cut its losses significantly. Image courtesy: Flickr/Alec BHX/KKC
SpiceJet has operated more than 20,764 cargo flights and carried 1,68,976 tons of cargo since March 2020. It carried 39,693 tons of cargo in Q4. The carrier operates a fleet of 20 cargo planes, including eight widebody aircraft. It has introduced widebody cargo planes for long-haul operations to Europe, Africa and CIS countries and added a Boeing 767 and Airbus A330 to its cargo fleet. It has launched scheduled freighter services to Bangkok and Singapore. SpiceJet's cargo network spans over 63 domestic and 111 international destinations.
Passenger numbers weak
On the passenger front, the airline carried 93,89,967 passengers in 2020, and 36,62,413 passengers in the period between January and April 2021, according to DGCA data. According to revised figures of May 2021, SpiceJet carried 1.99 lakh passengers, giving it a domestic market share of 9.4%. It has been pushed by Air India to third place as far as market share is concerned.
It operated more than 1,675 charter flights to repatriate over 3 lakh passengers. It operated multiple charter flights on Airbus 330, Airbus 340, Boeing 777 and Airbus 321 planes. Charter flights were flown to countries including the UAE, Saudi Arabia, Oman, Qatar, Kuwait, Afghanistan, South Korea, the Philippines, Kyrgyzstan, Kazakhstan, Russia, Netherlands, Lebanon, Georgia, Hong Kong, Bangladesh, the Maldives, Uzbekistan, Turkmenistan, Malaysia and Sri Lanka. SpiceJet operated long-haul flights to and from London, Amsterdam, Toronto, Rome and Milan helping Indian and foreign nationals get back home. The airline added Ras-Al-Khaimah in the UAE as its latest international destination, and Darbhanga and Nashik under the government's Ude Desh ka Aam Naagrik (UDAN) scheme.
"With vaccination touching record numbers and travel demand slowly picking up, we hope that the worst is behind us but we remain extremely cautious about the future," Singh said.
(Cover image courtesy Flickr/JonPsPICs)