Low-cost carrier SpiceJet, which was on the verge of shutting down in 2015, posted its highest profit at Rs 261.7 crore in the April to June quarter, though a compensation of Rs 114.1 crore has helped. The airline claimed this compensation amount from Boeing for the grounding of 13 737MAX aircraft, which was disputed by the company’s auditor.
“We draw attention to the statement, regarding recognition of other income. In our view, there is no virtual certainty to recognise such other income, as required by accounting standards of Ind-AS 37. Had the company not recognised such other income, profit for the quarter would have been lower and accumulated losses as on June 30, 2019, higher by Rs 1,141.4 million (Rs 114.14 crore),” the company’s auditor S R Batliboi & Associates stated, indicating that discussions with Boeing on the compensation amount hasn’t been finalised yet.
Chief Financial Officer Kiran Koteshwar, however, said the company would receive a higher compensation but it had accounted only for Rs 140 crore as it was certain about getting that amount as lease rental payment to lessors.
“This is a compensation which is a no brainer as this is already sitting on my books. As a listed entity, I didn’t give any guidance to my investors for compensations on the other items which I am still not certain of,” Koteshwar said. He was replying to a query on whether it was proper to factor in the compensation, which the carrier is yet to get.
US plane maker Boeing has disclosed an amount of $4.9 billion as payment to customers, including compensation to airlines for the grounding and delayed deliveries of 737MAX aircraft.
Koteshwar argued that the company continued to incur expense on the grounded aircraft without generating any revenue. ‘’I have a contractual obligation with the lessors, airports, crews to pay them irrespective of the grounding. Then there are maintenance costs. The profit reported for this quarter is an operational profit in a true sense as the company should not consider the expenses on 737MAX as they are not revenue generating,” he said.
He, however, refused to give a guidance on the amount of total compensation, saying the discussions were still going on and the amount could change depending on the duration of the grounding. Boeing, which had previously told SpiceJet that the 737MAX would be back in the air by July, has now told the airline that the plane may not fly before the end of this year, Koteshwar said. Any further delay may force the airline to cancel the order, he added. “If there is no capacity addition, that airline will be pushed into a corner. As an organisation, we may have long-term relationship with Boeing, but if the aircraft doesn’t come in the next 8-10 months, the airline will be forced to look beyond for a new order,” he pointed out. SpiceJet has also been forced to trim its capacity induction because of the delivery delay.
The airline in March had said that it was looking to add 60 planes in FY20 but now has a forecast of adding only 10-15 planes till October, including five to 10 Boeing 737 NG aircraft and three 90-seater Q-400.
The addition will be a mix of dry and wet lease. Wet lease is costlier and pushes up an airline’s expense, but Koteshwar said it was necessary to cater to the growth in traffic. “The third quarter is usually a peak quarter and because we don’t want to lose on traffic, we may take some on wet lease. Those will be for shorter period of around six months,” he said. Also, it will be easier to replace the aircraft on wet lease as and when the delivery of 737 Max resumes.
“SpiceJet reported better than expected numbers driven by higher fares but there’s some sharp jump in costs (fuel, employees and other expense) mostly due to induction of Jet Airways fleet and crew. Arresting the rise in cost, post induction of the Jet fleet, will be very important,” Ansuman Deb, who tracks airlines for brokerage firm ICICI Securities, said in a note.