Why government intervention to help SpiceJet is a bad idea

Civil aviation ministry should learn from the Kingfisher debacle before advising banks to help SpiceJet

The government seems to be buckling under pressure. A day after the management of SpiceJet met the civil aviation minister Ashok Gajapathy Raju, the ministry announced relief measures to the Kalanithi Maran family run airline. But these measures to help a fund strapped SpiceJet may yet again set a wrong precedent in the corporate world.

Reports say the civil aviation ministry might ask Indian Banks/Financial Institutions to extend loans of up to Rs 600 crore to the airline as part of measures to keep the carrier functional. Not only that, the ministry said that it will request the Finance Ministry to permit external commercial borrowings (ECB) for working capital as special dispensation. Thankfully, the government has said that the loan should be backed by a personal guarantee from the Chairman of SpiceJet.

But given the helplessness of the bankers in recovering money from powerful and politically linked ‘willful defaulters’ like Vijay Mallya of Kingfisher in the past should have served as a lesson to the civil aviation ministry. Recovery of loans even when guarentees are provided is a long drawn process and no bank wants to risk their funds investing in a sinking airline post the Kingfisher experience.

Some have argued that if the government can offer a bailout package to Air India, why it should not do the same for other airlines.But there is a difference between Air India and SpiceJet. The former has government as its promoter. Though the airline is as badly run as SpiceJet or perhaps even worse, it the responsibility of the promoter to keep its company afloat. SpiceJet’s promoter is running away from this responsibility. SL Narayanan, CFO of Sun Group said  “We do not have the liquidity to invest large sums at the time which is why we need bank financing. For which the promoters are willing to provide a guarantee. We cannot do more than this” (Read here)

This is coming from a group whose promoter Kalanithi Maran takes away more than Rs 120 crore per year as salary and bonus from Sun TV, a publicly listed company. Incidentally, the Marans get paid more than all the employees of Sun TV and the amount is more than twice of what all employees of SpiceJet earn collectively. If such a promoter is not willing to put in his own money, what right does the government have in asking hard earned money of the people deposited in banks to be invested in his airline.

There are emotional arguments made that shutdown of SpiceJet will be a major setback to the industry. On the contrary, it would bring relief to the entire sector. SpiceJet along with Air India with its predatory pricing policies in issuing advance booking of tickets at discounted rates did more harm to the sector than anything else. In its eagerness to collect advance money and meet their working capital requirement, these cash starved airlines were hurting other airlines as well.

Even if there are few players in the sector, healthy companies will bring in healthy competition. Further, new players are coming in who will fill in the gap. SpiceJet currently has a 20 per cent market share, which gives enough room for other players to expand. Their expansion will also lead to employment to some of the staff of SpiceJet, if the airline goes bust.

When the Marans acquired SpiceJet, it was a healthy and profitable airline. But poor decisions on aircraft acquisition resulted in huge debt. Asking banks to back such promoters will be putting good money after bad.