Stock in Action - SpiceJet 09 September 2024

Stock in Action - SpiceJet

Highlights

1. SpiceJet financial crisis: SpiceJet's financial crisis has been a major concern for investors & stakeholders.

2. SpiceJet debt restructuring: The airline currently focuses on debt restructuring to stabilize its operations.

3. SpiceJet stock price performance: SpiceJet's stock price performance has fluctuated in response to recent financial developments.

4. SpiceJet fundraising efforts: Ongoing fundraising efforts are critical for the airline’s recovery & future growth.

5. SpiceJet grounded aircraft: Several SpiceJet aircraft were grounded due to financial & operational issues.

6. SpiceJet fleet reduction: The company has implemented fleet reduction measures to cut operational costs.

7. Ajay Singh stake sale: Ajay Singh’s potential stake sale has attracted attention as part of the turnaround plan.

8. SpiceJet liabilities & creditors: Managing liabilities & creditors is a significant challenge for airlines.

9. SpiceJet turnaround strategy: SpiceJet's turnaround strategy focuses on restructuring its finances & rebuilding trust.

10. SpiceJet legal challenges: The airline also faces various legal challenges, adding to its financial woes.

Why is Spicejet in the news? 

SpiceJet, once prominent player in India's aviation sector, is currently facing severe financial distress. With issues ranging from defaulted payments, grounded aircraft, legal battles, & mounting debt, low-cost carrier is now actively pursuing multiple fundraising avenues to stabilize its operations. This report delves into SpiceJet's financial challenges, ongoing restructuring efforts, & its future prospects.

Background of Financial Woes

1. Grounding of Aircraft & Shrinking Fleet
SpiceJet's operational fleet has reduced drastically from 74 aircraft in 2019 to just 20 planes as of 2024. Significant number of its aircraft are grounded due to unpaid dues to lessors & other creditors. Global grounding of Boeing 737 Max aircraft in 2019 also deprived airline of fuel-efficient planes, leading to increased operational costs.

2.Decline in Profit & Revenue
In June 2024 quarter (Q1 FY25), SpiceJet's consolidated profit dropped by 19.65% to ₹158.75 crore from ₹197.58 crore in same period year ago. Its revenue from operations also decreased by 14.15%, falling from ₹1,917.43 crores to ₹1,646.21 crores. These figures reflect airline’s ongoing struggle to maintain profitability in face of rising operational costs & dwindling market share.

3. Mounting Liabilities
As of March 2024, SpiceJet's total liabilities stood at ₹11,690.7 crores, slight reduction from ₹12,420.2 crores in December 2023. large portion of this debt is owed to aircraft lessors, engineering vendors, & statutory obligations such as tax deducted at source (TDS) & provident fund (PF) payments. Airline's outstanding statutory dues alone amount to ₹650 crores.

Turnaround Strategy & Fundraising Efforts

1. Proposed Stake Sale by Promoter Ajay Singh
In bid to raise funds, SpiceJet's promoter & chairman Ajay Singh is likely to offload more than 10% of his stake in the airline. According to sources, Singh may sell up to 15% of his stake if favorable conditions arise. As of June 2024, the promoter group held 47% stake in airline. stake sale is part of a broader effort to raise capital to meet various financial obligations.

2. Raising ₹3,200 Crore Through QIP & Capital Infusion
To revive its operations, SpiceJet plans to raise ₹3,200 crores through Qualified Institutional Placement (QIP), warrants, & capital infusion by its promoter. Airline has earmarked ₹2,500 crores for QIP & ₹736 crore through promoter infusion & previous warrants.

These funds will be primarily utilized for:
- Bringing grounded aircraft back into operation.
- Settling liabilities, including dues to lessors & engineering vendors.
- Inducting new fleet to expand operations.
- General corporate purposes.

3. Previous Fundraising Efforts
Earlier in January 2024, SpiceJet raised only ₹1,060 crore through preferential issues against its initial funding target of ₹2,250 crore announced in December 2023. This shortfall has further strained airline’s financial position, making success of current fundraising round critical for its survival.

4. Debt Restructuring Agreement with Carlyle Aviation
SpiceJet has entered into a term sheet agreement with Carlyle Aviation Management Limited (CAML) to restructure certain aircraft lease obligations. As per the agreement, $137.68 million worth of lease obligations will be adjusted to $97.51 million upon settlement. Additionally, Carlyle Aviation will convert part of its debt into equity at ₹100 per share, which is significantly higher than SpiceJet's current trading price of around ₹61.46.

This restructuring also involves issuing compulsorily convertible debentures (CCDs) of SpiceXpress & Logistics, a subsidiary of SpiceJet, worth $20 million. Move aims to ease some of financial pressure on airline & help stabilize its operations.

Operational Challenges & Regulatory Scrutiny

1. Directorate General of Civil Aviation (DGCA) Enhanced Surveillance
In August 2024, the Directorate General of Civil Aviation (DGCA) placed SpiceJet under "enhanced surveillance" following a special audit of the airline's engineering facilities. The audit revealed several operational deficiencies, prompting DGCA to increase spot checks & night surveillance of the airline’s operations. This action underscores regulatory concerns over SpiceJet's safety standards amidst its financial troubles.

2. Legal Challenges & Insolvency Petitions
SpiceJet has faced multiple legal challenges, particularly from aircraft lessors who have filed petitions seeking airline’s bankruptcy. These legal battles have further complicated airline’s ability to secure funding & restructure its debts. Additionally, in recent court orders, Delhi High Court directed grounding of three aircraft engines, move that further reduced SpiceJet's operational fleet.

3. Employee Layoffs
In response to its financial strain, SpiceJet has laid off approximately 1,500 employees, accounting for around 15% of its workforce. Layoffs were primarily due to airline's reduced fleet size & cash flow constraints. Further cuts in staff & operational capacity may be required if airline is unable to raise sufficient funds.

Market Performance & Stock Price Movement

1. Recent Stock Gains Following Debt Restructuring
Despite its financial challenges, SpiceJet's stock price saw notable uptick after announcement of its debt restructuring agreement with Carlyle Aviation. On September 8, 2024, SpiceJet's stock rose by over 5%, reaching intraday high of ₹64.86. This increase was driven by investor optimism surrounding airline’s restructuring efforts & fundraising plans.

2. Long-Term Stock Performance
Over past year, SpiceJet’s stock price has gained nearly 60%, largely due to various restructuring announcements. However, airline’s financial instability & operational setbacks have kept its stock performance volatile.

SpiceJet’s Future Outlook 

1. Focus on International Routes & Ancillary Revenue
As part of its turnaround strategy, SpiceJet aims to expand its presence on international routes, particularly in Middle East. Airline also plans to explore wide-body operations for Asia-to-Europe connectivity. Additionally, SpiceJet will focus on increasing ancillary revenue streams such as cargo services, onboard food & beverages, & security training services for other airlines.

2. Revival of Grounded Fleet & New Aircraft Induction
The primary focus of SpiceJet's fundraising efforts is to bring its grounded fleet back into operation & induct new aircraft to expand its capacity. Airline is also negotiating with existing lessors to restructure its lease agreements, which will allow for greater operational flexibility.

3. Optimizing Operations & Cost Structure
SpiceJet has outlined plans to optimize its operations by renegotiating high-cost capital, improving fuel efficiency, & using advanced technologies for pricing & route management. The airline will also work to streamline its human resources to ensure better cost management.

Conclusion

SpiceJet is at a critical juncture in its journey. While the airline has outlined an ambitious plan to raise ₹3,200 crore & restructure its debt, its future remains uncertain given the numerous challenges it faces. Successful execution of its fundraising efforts, combined with a focus on international expansion & cost optimization, will be key to SpiceJet’s recovery. However, airlines will need to overcome regulatory scrutiny, legal battles, & operational challenges to regain their footing in the highly competitive aviation industry.