Spicejet statements clarifies its position and refutes media frenzy. Our analysis.

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The last week has seen a flurry of reports on the troubles of Spicejet. Some accurate, some totally wrong, and many with a mixture of half truths that create more confusion, rather than inform the reader. Amid the media frenzy, the airline has issued three statements to clarify the situation from its point of view.

Spicejet statement issued December 5, 2014

• Slots cancellation for cancelled flights: SpiceJet today informed the DGCA and the public that for the near-medium term, it intends to operate a fleet of 22 Boeing 737s and 15 Q400s, down from 37 B737s that we operated earlier this year (Q400 fleet remains unchanged). As a natural consequence of the fleet reduction of 15 Boeings, unused slots are given back to the airports. This is routine process and a natural outcome of our revised fleet plan, and there is nothing unusual about the slots being cancelled.
• Future booking on cancelled flights to be stopped immediately: This has already been stopped as part of standard process.
• Future bookings to be not more than one month in advance: SpiceJet believes this restriction will be counter-productive, and will be discussing the pros and cons of this cooperatively with the DGCA.
• Refunds to be provided without deductions in a timely manner: As standard practice, SpiceJet provides refunds of all bookings for cancelled flights made directly with the airline (credit card or cash) within an average of 10 days, with no deduction of any kind – 100% refund is provided. Bookings made via travel agents are refunded directly by the agents, usually also in around 10 days. Service charges and deductions, if any, by travel agents is not in SpiceJet’s control.
• Salary of all employees to be disbursed by 15th December, 2014, and for future months, by the 7th of each month: In its entire history, SpiceJet has never delayed salaries – it has always paid salaries by the last day of the previous month – ie November salary is paid by Nov 30. November 2014 was the first time salaries were delayed due to unavoidable reasons, and as of today December 5, we have already paid 85% of our staff their November salaries. The remaining 15%, which consists of our highest pay brackets, will be cleared next week.
• A claim that SpiceJet had been put on cash-and-carry by the AAI today. SpiceJet once again categorically denies this, it is not on cash and carry with any airport. We have filed this denial with the BSE as well.
• A claim that the Q400 aircraft are being “taken back”. These aircraft are owned by SpiceJet and are not leased, and such claims can only be dismissed as malicious rumours, completely baseless and false.

Our note: DGCA is the Directorate General of Civil Aviation. BSE is the Bombay Stock Exchange.

Spicejet statement issued December 6, 2014

• It has been reported is some newspapers, notably the Times of India, that the DGCA has asked SpiceJet to refund bookings made beyond 30 days. This is absolutely incorrect and false information, and is causing a lot of confusion amongst travel agents and passengers. There has been NO such notification. There is NO requirement to refund passengers who have bookings beyond 30 days.
• It has also been reported in some publications that resignation of pilots has resulted in a pilot shortage and the remaining pilots having to fly extra hours, with potential safety implications. This is also a completely baseless and factually incorrect statement. Pilots who have resigned are serving their notice period and are still flying with us. With our fleet reduction, the average flying hours per pilot is less, not more, than before. Even after the pilots on notice part ways with SpiceJet in the coming months, we will have more than enough pilots to fly our fleet with no FDTL violations.

Spicejet statement issued December 7, 2014

• It has been reported is some newspapers that SpiceJet’s international flying rights may be in jeopardy as our fleet may fall to below 20 aircraft. This is absolutely incorrect and false information, as our fleet is currently 37 aircraft, well above the limit of 20. These newspapers neglect that fact we also have 15 Bombardier Q400s in our fleet in addition to 22 Boeing 737s.
• It has been reported in some media that our payables to suppliers is Rs 1600cr, and that we have been directed by the DGCA to clear these payments by Dec 15. First, our payables to suppliers is significantly less than the Rs 1600cr number being erroneously quoted. Second, the DGCA has not asked for all payables to be cleared by Dec 15, it has asked for a payment plan to be shared with them by Dec 15
• It has also been reported in some publications the SpiceJet’s fleet reduction is somehow related to its discount fare sales strategy. Once again we want to emphasize that it has nothing to do with our pricing strategy or operational performance, the current fleet resizing is driven by balance sheet issues related to legacy liabilities and the need to address them. Our new business and pricing strategy, adopted in early 2014, looks to boost loads through advance purchase sales to ensure we fly as few empty seats as possible, and boost yields through close-in pricing. This is global best practice for LCCs, and SpiceJet’s advance discount sales strategy has resulted in revenue increase of 15% in the last quarter year-on-year, more than double the rate of capacity (ASK) increase. It resulted in unit revenue (RASK) increase of 12% YOY for the quarter, a feat that is not easy to achieve YOY anywhere in the world. It resulted in losses for the last quarter being reduced 50% year-on-year. It has resulted in market growth of 15-25% YOY each month due to SpiceJet-led demand stimulation, with significant benefits to the travel ecosystem and the overall economy. Once again, there is absolutely no connection between our operating performance and pricing strategy, and our current fleet re-sizing. Those who make this false connection either choose ignore the facts that are clearly seen in the data, or do not understand basic airline operating and revenue metrics.
• There have also been some media comments relating to heightened safety oversight. SpiceJet wants to emphasize that safety is its top priority, and it has never, and will never, take short cuts on safety. It is proud of its unblemished safety record in over 9 years of operation. Every day we put ourselves and our own family members on our flights, with complete confidence as we know there is nothing to worry about regarding safety, there is no compromise on it. The Hon’ble Minister himself has stated to the media that the safety oversight was a routine process, and was not related to any specific safety issues or concerns.

Our analysis of Spicejet’s situation

There is little doubt that the current predicament is of Spicejet’s own making. The airline desperately needs a cash infusion and urgently. However, the airline can no longer look at the Marans as the perennial cash cow. The Marans need to care after their existing profit making businesses like Sun TV. The media side needs significant investments as it gears up to take on the competition that is on the horizon, be it 4G or DTH satellite TV.

Spicejet is EBITDAR (earnings before interest, taxes, depreciation, amortisation and rentals) positive. It is the aircraft ownership that was and is causing the bleeding, something the airline’s management should have recognised earlier in this year and commenced action on. Returning one or two aircraft every month from April would help meet cost reduction targets without raising eyebrows. Not paying salaries is the worst thing one can do in a highly misunderstood business like airlines. Pilots are the cream of crop and quite rightly think of themselves as the cats whiskers. They are also well connected and active within the entire industry. Delaying their salaries is like playing Russian roulette except with all chambers loaded. You will shoot yourself, if not in the head, in the foot for sure.

With panic now set in, the media frenzy is on, and there will be speculation galore, and unfortunately much of it by under-informed people, me included. Which is why I am not speculating. Coming to an investor, I agree with the reported opinion of Amrit Pandurangi, senior director of Deloitte, Spicejet will find an investor, but with the public pressure on the airline, the potential investors will drag their feet hoping to find themselves a better deal. The owners and management of Spicejet will have to just grit their teeth and be accommodating.

Will I personally make a booking and fly Spicejet? Absolutely.