Davos 2020: SpiceJet To See Improved Cash Flow In Last Four Months Of 2020 After Boeing 737 Max Returns, Says Ajay Singh
SpiceJet Ltd. expects a turnaround in its cash flow in the last four months of 2020 once Boeing Co.’s grounded 737 Max aircraft returns to the fleet by mid-year, according to Chairman Ajay Singh.
“Privately, what we’ve been told is that they’re going to have a test flight in February, and they expect that certification will happen by April. After that, there’s a small process of pilot-training. With all that, we expect that the aircraft should return to service in May or June of 2020,” he said in an interview with BloombergQuint on the sidelines of the World Economic Forum in Davos.
Boeing said yesterday that its clients should expect a return of 737 Max by mid-2020. SpiceJet grounded 13 737 Max planes in March 2019 after technical faults led to two crashes involving Lion Air and Ethiopian Airlines flights, leaving 346 people dead.
The effect on the domestic carrier has been “very, very painful”, Singh said, without quantifying it.
There’s a massive financial impact, it’s tough to quantify but it has been tremendous, large.Ajay Singh, Chairman, SpiceJet
The 737 Max aircraft are much more efficient and cost-effective, Singh said, adding that the maintenance cost of Jet Airways (India) Ltd.’s old planes, some of which SpiceJet took over, is high.
Rising costs mean SpiceJet’s cash on books as of September stood at close to Rs 92 crore. While that’s higher than March, it’s well below the previous financial years. And its liquidity ratio—cash-to-sales—has been falling since financial year ended March 2017 and is down at 0.86 percent. Usually, airlines globally keep a fifth of sales as cash. InterGlobe Aviation Ltd., the parent of India’s largest carrier IndiGo, held more than a fourth its last 12-month sales as free cash as of September.
Singh, however, assured that the cash-flow situation is under control. The company will not have to raise funds or take on an investor to stay afloat, he said, adding that there are various sources of getting cash for an airline. He said SpiceJet is also in talks with Boeing regarding compensation for the losses it has incurred due to the 737 Max grounding, something it has claimed from the plane maker in the past.
So, in every which way, the cash flow situation will dramatically improve in the last four months (of 2020).Ajay Singh, Chairman, SpiceJet
“We have absolutely no fear that there is going to be a problem at SpiceJet,” he reiterated. “We have seen far tougher times and we have come back from a shutdown in 2014-15 and while this is a challenging time, this is also a time of opportunity.”
Despite a lower cash cushion, SpiceJet managed to increase its capacity in the ongoing fiscal, aided by the grounding of Jet Airways. “We would’ve grown more had Max been there but we’ve grown 50 percent of our capacity,” Singh said. “Hopefully, the Max will come back in the middle of the year and we can keep growing this year as well.”
We have to get a level playing field with the airlines around the world and I hope that can happen.Ajay Singh, Chairman, SpiceJet
Singh was speaking on the various levies, including on aviation turbine fuel, airlines pay in India. Recently, the throughput tax was rescinded, giving the aviation industry close to Rs 1,000 crore relief, Singh said. SpiceJet would benefit by Rs 100 crore, thanks to that.
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WATCH | SpiceJet’s Ajay Singh on India’s aviation industry
Read the full interaction here:
Let me start by asking you about the most recent passenger growth data that we saw which is at a 6-year low. What do you make of that and what are the reasons for this?
Well, I think it’s nothing to be alarmed by. The numbers are really for domestic travel and as you know many of the airlines have actually shifted capacity and started to fly much more internationally. So, I think if you put both those numbers together you will see a significant growth which will be at least in the high single digits and not in the low single digits as it has been shown. I think one of the reasons also for slower growth has been that both the manufacturers are having trouble delivering aircraft. So, Boeing is having trouble delivering the Max aircraft which is what SpiceJet was depending on and Airbus is having trouble delivering aircraft with Pratt and Whitney engines as well as the 321 Neos. That impacts Indigo, it impacts GoAir, it impacts SpiceJet and therefore you know because capacity expansion couldn’t really happen. But I think you’ll see return to a pretty healthy growth by 2020.
We were once discussing how almost every other consumption category was falling but aviation had sort of stayed steady. Now, over the last three to four months we have seen that data decline. Is it only to do with capacity issues?
I think its capacity and we don’t really see a slackening of demand per se. If you look at it, it was in April that Jet Airways stopped flying. You had this one big player which suddenly went out of the market and there was a decline in passenger numbers, but the numbers bounced back. I think that is incredible and it shows the resilience of the Indian aviation market that with a large player going out, the market can still return to growth in the same year itself. So, that’s pretty incredible. I don’t think that the problem really is demand. As more of these small stations open up under schemes like Udaan, as more and more Indians try and fly outside of our country, you can see that the growth impetus is there and we have other problems in aviation, but demand certainly is not one of them.
Let’s talk a bit about aircraft delivery because that is what’s constraining capacity for you and some of the other players. What has Boeing told you about when the delivery will happen, what will be the impact then on your ability to manage operations and financials connected to that? And will you be claiming any compensation from Boeing? Because in the past you have.
Boeing put out a press release just yesterday saying that their customers should expect return to service in the middle of 2020. Privately what we’ve been told is that, they are going to have a test flight possibly in the month of February and they expect that certification will happen by April and after that, there is a small process of pilot training. With all that, we expect that the aircraft should return to service by May or June of 2020. It’s painful, it’s very, very painful for airlines like SpiceJet of course. We are doing the best we can, of course.
There has been a massive financial impact on SpiceJet.
Can you quantify?
It is difficult to quantify but, it’s been tremendous, large for the reason that of course you know these aircraft were supposed to be in our fleet. They are much more efficient, they are cost effective and instead of that we’re flying these old planes. So, there’s been an impact. There’s no question about it. All the aircraft that we took from Jet Airways, those needed a lot of maintenance as well. So, certainly there’s been an impact. I think it’s pretty good that despite the Max going down, we’ve still grown 50 percent this year in our capacity. Of course, we would have grown more if the Max aircraft had been there, but we’ve grown 50 percent of our capacity. Hopefully, the Max comes back in the middle of the year and we can keep growing this year as well.
Can you share any cost numbers with us? In the fourth quarter, you were expecting the Boeing aircraft, you haven’t got that, so you probably have to lease more planes from the market.
We have to lease planes. We are of course extending the leases of some of our old planes not the happiest place to be but we are hoping that at least significant part of this loss will be compensated by Boeing. So, we are talking to Boeing.
Any numbers you can share with us?
I can’t share any numbers of course. That is a discussion which is confidential between SpiceJet and Boeing. But the discussion is ongoing, and we hope that we can reach a settlement soon.
You said if the aircraft do come in by May, June and once the brief training etc. happens, by the last quarter of this calendar year or maybe in the last four months operationally, things should improve dramatically and therefore whatever cost impacts you were having subsequently, cash flow impacts you are having subsequently, those should ebb by the last four months of this year. Is that a fair assessment?
Certainly, I think that’s a fair assessment. We should have a significantly better situation in the last 4 months of this year. Remember also that once the ban on this aircraft is lifted and it starts to fly, there will be aircraft that will be added to our fleet from our order schedule as well. So, in every which way, the cash flow situation will dramatically improve in the last four months.
I ask you this because there’s been quite a bit of debate within the media and the analyst community on the low cash on your books and what that means for the operational health of the airline and the sustainability or viability of the airline. We know that aviation functions in difficult conditions not just in India, just about everywhere in the world. So, how concerned are you about that situation? Are we looking at any further fundraising on the equity side? How are you going to surmount this?
I think that things are completely under control. In aviation, it’s an interesting space and these things go up and down. There are various ways of getting cash for an airline company. We have several sources and as I said to you, we also expect the compensation issue to be settled soon. So, we have absolutely no fear that there is going to be a problem at SpiceJet. We have lived through far tougher times than this and we’ve come out of a shutdown in 2014 and 2015. While this is a challenging time, this is also a time of opportunity. Because, as you have seen, despite the challenges we continue to grow at 50 percent. Despite these challenges, you will see that we will come back really strong this year and we will use the problems that we had and turn them around and you will see some of what we will do towards the end of the year to bring down costs even further and to make a more sustainable business.
Any numbers that you can share with us at all? Because there is concern. I understand the short history, I understand the recovery from a very difficult period, I understand therefore that you might not be strictly comparable with your larger peer IndiGo where the cash on book situation is much different. But any numbers you can give the market because there is a degree of concern as to the viability.
Look, I can’t give precise numbers, but you will see them soon in our results and in the compensation claims when they get settled. We will be in a comfortable position on that, there is no doubt.
Any targets you have in mind of what you want to restore the cash on books position to or the cash position to?
I don’t want to talk about specific numbers here but let me tell you that this is going to be a pretty exciting year for SpiceJet. As soon as the Max aircraft are back, you’ll see a vastly different situation at SpiceJet. We don’t think that there is any situation at all or any cause for concern or worry.
Any fundraising that’s on the cards right now?
We did consider it, but as I said, we are confident of where we are and we are confident of the path that we have ahead of us and should we need to, of course, that avenue is open. But we don’t think we need it.
At least in the near term, the next six months you’re not you’re expecting any of this?
Are you looking at any additional investors because the airline business is a capital-intensive business so I’m just wondering if, at this stage you might be considering any strategic or financial investment.
I have heard that question every single time for the last five years and every time, I said that we will not need to. In 2014 and 2015, when we were just getting back into the airline, people said you can’t possibly do this without an external investor. Now, we have shown that it can be done, and we will show you that again that SpiceJet will emerge stronger from these current problems.
A couple of broader questions not just limited to your company but what’s pricing like in terms of both the main routes as well as the Tier-II routes. Is therefore scope for movement both on the downward or on the upward side given the cost pressures but also the competitive pressures. You have one player in the market that has a close to 40 percent market share. So, I think deep discounting has been an issue with the aviation industry for a long time. So, how do you look at pricing? How comfortable are you with that?
The pricing is not where it should be, no question about that. The market can certainly sustain higher pricing. Today, the average pricing between Delhi and Mumbai is ₹4000. At ₹4400 everybody makes money. So, it’s nobody’s case that the market will not be a 4400 when they’re paying 4000. So, certainly we have an opportunity to raise fares and yields.
You are only making money at Rs 4,400 not at Rs 4,000?
I am just saying that as an example. A 10 percent increase in fares is general.
So, where is the break? 4,000? 4,400?
It is an example. Let me say that, a 10 percent movement in yield will result in a profitable industry despite all the pressures that we have today, despite all the taxes that we have today.
It won’t hurt demand? Given we are so price sensitive?
Not at all. You sometimes spend more money on going in a taxi from the airport to your home than you spend on his on coming from one city to another on an aircraft. So, I feel that the market certainly will sustain higher fares than we are charging them today. I hope that airlines are going to be sensible in fact, in the last couple of months there has been more sense that has prevailed.
On the cost side, this has been an ongoing conversation for several years now in India whether its tax on ATF or, I think some relief you’ve got on throughput or many of the other issues that are additional costs besides just flying the plane. Are you hopeful that the government is looking at rationalising some of these?
Certainly. I think the throughput has been a big decision. It’s been pending for so long; it was actually a charge against a service which didn’t exist. So, there are several other charges like this.
It is imposed by the airport, right?
It is imposed by the oil companies because they are in turn, charged by airports. So, there was no real service provided against this particular thing and we were being charged and we have been charged for so many years. So, for the industry, it was like 1,000 crore per year but a little more than Rs 100 crore for SpiceJet. But there are several such charges which we need to take away. It is tough to explain why these charges are being imposed and why they have not been looked at logically. But, it’s great to see that the government is moving and there are several other similar issues which I think the government is looking at and will be very welcome steps for the government and of course, for the industry. But I think the biggest piece still remains this aviation turbine fuel where we are still being charged 35 percent more than our peers around the world and increasingly, we are required to compete with the airlines around the world. It is our objective to make India a global aviation hub and for planes to come into India, for passengers to be distributed out of India rather than have Indian passengers distribute through Dubai, Abu Dhabi, Doha, Bangkok, Singapore and so on. So, that being the objective, we have to get a level playing field with the airlines around the world and I hope that can happen.
What’s the update on your cargo airline?
I think that’s a project that’s going extremely well. We have 5 freighter aircraft now and we have wonderful customers, the business is growing.
Size of the business at this point?
I think we would have done close to Rs 1,000 crore by March 31 and we expect to grow that business significantly in the next year.
I know much has been said about Air India and interest in Air India and no interest in Air India, but I’ll ask you, nonetheless.
The government is being extremely aggressive, and the government is extremely interested in selling Air India. Of course, as I’ve always said, this is too large an airline and too complicated an airline for SpiceJet to absorb.
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