Marans exit SpiceJet, Ajay Singh checks in

Former promoter to seek approval for revival plan from aviation ministry

After about a month of uncertainty, troubled low-cost carrier SpiceJet on Thursday informed the BSE that Kalanithi Maran and his associates had decided to transfer the ownership and management control of the airline to former promoter Ajay Singh and a clutch of investors. Singh plans to infuse Rs 1,500 crore into the airline in three tranches, civil aviation ministry sources told Business Standard, after SpiceJet officials submitted a revival plan for the airline on Thursday.

Maran and his associate company KAL Airways will transfer their 58 per cent stake to Ajay Singh, who will replace Maran as the company’s chairman, say sources.

“The Marans have agreed to transfer their entire 58 per cent stake to me. I am confident we will be able to turn the airline around,” said Singh.  

Of Singh’s investment, the first tranche of Rs 500 crore was expected by January 25, subject to regulatory approvals, with two more tranches of equal amounts by March this year, officials said. The new investors, which sources say include JP Morgan, are also expected to seek exemption from an open offer from the Securities and Exchange Board of India (Sebi).

With the airline’s financial position expected to improve in the next few months, the government has also decided to lift the bookings ban on it from Thursday night. In December last year, the government had told SpiceJet not to take bookings beyond March 31, 2015. Also, as reported by Business Standard on Wednesday, the government has offered to extend the credit period for the airline’s dues to the Airports Authority of India till the end of January.

Earlier on Thursday, SpiceJet informed BSE that Kalanithi Maran and his associates had decided to transfer the ownership and management control of the airline to former promoter Ajay Singh and a clutch of investors. The decision to revitalise the airline, which has liabilities of about Rs 1,400 crore and accumulated losses over Rs 3,000 crore, was taken at a SpiceJet board meeting on Thursday.

The airline, which accounted for 14.9 per cent of the domestic market in November last year, has seen its share fall significantly since then.

In a release to the stock market, SpiceJet said: “The board of directors of the company has taken on record the proposal of the principal shareholder and promoter, Kalanithi Maran and KAL Airways Private Ltd, to transfer the ownership, management and control of the company to Ajay Singh, pursuant to a ‘scheme of reconstruction and revival for the takeover of the ownership, management and control of SpiceJet Ltd’ to be filed before the competent authority, the Ministry of Civil Aviation.”

On SpiceJet approaching Sebi on Wednesday for an exemption from the open-offer rule (triggered in case an investor acquires more than 24 per cent stake in a company), SL Narayanan, chief financial officer of the Maran-owned Sun Group, said: "It is for Ajay Singh to take a call on an open offer and negotiate with Sebi. The best of companies can fail. But all our creditors landed up together and the liabilities are far lower than being quoted. Also, job losses are inevitable when we lose our fleet." Sources say the lawyers advising the new owners think the deal will not require an open offer, as it is between two promoters.

In 2005, Ajay Singh and UK-based investor Bhupendra Kansagra had launched SpiceJet by resurrecting ModiLuft's dormant air operator's permit. Singh, an alumnus of the Indian Institute of Technology Delhi and Cornell University, was a key advisor to former communications minister Pramod Mahajan (under the National Democratic Alliance government), with interests in the software, automobile, telecom and transportation sectors, among others. In 2010, he sold the airline to Maran, but retained a stake of four per cent.

Sources privy to the deal say the airline will need Rs 1,500 crore to repay its dues and return to track. SpiceJet owes about Rs 200 crore to the Airports Authority of India, Rs 100 to private airports, Rs 700 crore to lessors and the rest to vendors such as catering and maintenance service providers, as well as banks.

For jet fuel, the airline is paying oil companies on a daily basis.

To cut costs, SpiceJet will lay off about 1,000 employees in the next weeks, across functions. Ajay Singh said once the fleet was expanded, these employees would be given offers to rejoin the airline.

The airline has already cut daily flights to 200 from 340 in July 2014; its Boeing 737 fleet has been cut to 17 from 35 in July last year.

On Thursday, the SpiceJet stock closed at Rs 18.65 on BSE, up 3.04 per cent; the company's market capitalisation stands at Rs 1,100 crore.

Experts say Thursday's development is good news for the aviation sector. "It's a welcome development. The failure of an airline with such market share is the last thing our beleaguered aviation sector needs. Singh has to rework his fleet network and people strategy. Given the support, the airline can rebuild itself into a profitable airline in the next 8-12 months," said Amber Dubey, partner and head of aerospace and defence at KPMG.

"With Singh at the helm, we do not expect SpiceJet to continue with a fare discount war. He understands the business better. But we have to see how much money the investors are ready to put in. And now, Air India has started a fare war," said a senior executive of a private airline.

Sources close to Ajay Singh say the aviation veteran has already identified the areas that need overhaul. First, clearly, is the airline's decision two years ago to opt for a two-fleet configuration: of Boeings and Bombardiers. SpiceJet had hoped it would leverage a first-mover advantage by flying between large cities and small ones using the 78-seater Bombardiers, and fly to small cities such as Hubli, Tirupathi and Amritsar. This way, the airline had hoped, it could fly to 96 cities across the country and expand market share. But the strategy has cost it dearly: it has been forced to open new stations even if it operates just one flight a day.

SpiceJet didn't anticipate that handling two types of aircraft, for which it needed separate spare parts, maintenance personnel and pilots, would lead to a rise in costs. Budget airlines such as AirAsia or EasyJet have opted for a single-aircraft configuration, as has IndiGo.

The second focus area is international routes, which needs a re-look.

Third, Singh has to weigh the airline's aggressive discounting policy. Though the airline had cut fares hoping this would improve revenue through higher passenger loads, the strategy did not work. Higher passenger loads result in loading more fuel and the staff being under pressure because of more passengers.

Also, chances of delays increase. If a carrier buys fuel on a cash-and-carry basis, it has to spend more under this head. Though SpiceJet's passenger load factor rose to 82 per cent, its revenue per seat-km wasn't high enough to meet its cost of available seat-km.

CHALLENGES

• Paying Rs 1,400 crore of dues
• Reconsidering its discounting policy
• Reducing operating losses
• Infusing funds for growth capital
• Reviewing the two-fleet configuration and various stations in small cities that have increased overall costs
• Dealing with staff retrenchment

RETURN OF THE FOUNDER
Ajay Singh founded the airline in 2005

• 2005: Ajay Singh and NRI investor Bhupendra Kansagra team up to launch no-frills airline SpiceJet
   
• 2006-07: Tata Group, BNP Paribas and Istithmar World collectively invest Rs 296 crore in the airline through preference shares
   
• 2008: Private equity investor WL Ross invests $100 million in the airline
          > Sanjay Aggarwal appointed CEO
   
• 2010: Sun TV promoter Kalanithi Maran buys Kansgara’s share in SpiceJet; appoints Neil Millsas CEO
   
• 2013: Mills quits airline. Airline brings in Sanjiv Kapoor as chief operating officer
   
• 2014, December: SpiceJet cuts schedule and cancels around 100 flights daily, following serious funding crisis
                                > DGCA steps in, imposes curbs on bookings and cancels all 186 flight slots
                                > Ajay Singh resumes talks with Marans to acquire control
   
• 2015, January: Maran decides to transfer ownership to Ajay Singh