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Promoters' fund infusion in SpiceJet will only go so far

The airline can soon be expected to encounter rough weather like its peers Kingfisher, Jet Airways, Air India

Shishir Asthana  |  Mumbai 

Promoters of airline deserve bravery awards. For a sector that is profusely bleeding with no hope in sight, they are still willing to pump in money, either by selling their “family silver” as in the case of Vijay Mallya or pumping in fresh capital generated through other businesses as has been recently done by the Marans, promoters of SpiceJet and Sun TV.

While Mallya’s didn’t get the airline business dynamics, the same cannot be said about SpiceJet. After the initial freebees, realised that the only thing that works is “cattle class” or low fare.

SpiceJet, which started off by following Southwest Airlines model, the only profitable airline in the world at that time, has lost the plot under Marans. The company is soon expected to encounter rough weather like its peers Kingfisher, and Air India.

The Marans have announced that they will be pumping in roughly Rs 200 crore using the convertible warrants instrument. The company said that it needs capital for expansion and is looking at equity from its shareholders and also raise debt.

Forget the expansion, the reality is that it needs money for survival. SpiceJet has been spending more than it has been earning. It has been making operating losses and was digging in its reserves to pay back the banks. It is now a negative net worth company. The company had been able to raise External Commercial Borrowing (ECB) to the tune of Rs 614 crore, but that was for the purpose of buying Bombardier Q400 aircrafts. To keep its neck above water, the promoters would first have to put in money before anybody else decides to do so.

While the promoters have pumped in nearly Rs 200 crore, this amount is not expected to last too long as the company made a loss of Rs 150 crore in the September 2012 quarter. SpiceJet will need more money and that too soon, if it has to service its debt. If is able to revive itself and start flying operations again, SpiceJet’s numbers would deteriorate further.

Though SpiceJet’s promoters have put up a brave face saying they are not looking at selling their stake, there wouldn’t be many takers. A sector where the promoters neither have control over their costs nor on the price of their products (airline seats) can only attract investment from brave-hearted investors.

As in the case of Vijay Mallya, it is only a matter of time before the Marans start feeling the pressure of owning an airline.

First Published: Thu, November 22 2012. 17:48 IST