April 28, 2015

India’s SpiceJet rejects Morgan Stanley bailout offer

SpiceJet have rejected an equity-based bailout offer from Morgan Stanley, despite appearing to be traveling down exactly the same path as India’s now defunct Kingfisher Airlines. While the company’s financial future appeared optimistic back in August 2014, by the time December arrived it was clear the airline was in greater financial trouble than expected. SpiceJet has been in the red for the previous six consecutive quarters and has registered a trading loss for each of the last three financial years. Back in December Robert Mann, President of aviation consultant R.W. Mann & Co., stated that “SpiceJet, and Kingfisher before that, illustrate the seemingly perennial problems in Indian aviation,” … including “fragmentation, excess capacity, irrational pricing, and unrealistic expectations for economic growth associated with unaffordable aggressive fleet plans.”
The company is undergoing a massive change at the helm with the founder of SpiceJet, Ajay Singh, buying back 60.3% of the company’s shares from the previous owner, Kalanithi Maran. The reasons given by Singh for the current problems was mainly due to the competitive Indian LCC market and its nominal margins while competing against other regional LCCs including IndiGo, and previously Kingfisher. There has been considerable concern regarding the running of the airline by Maran, who is the 34th richest man in India with a personal wealth estimated at US$2.3bn. He is a majority stakeholder in Sun TV at 75% which has an estimated value at US$2.2bn. Having invested over US$125m Maran refused to use his stake in Sun TV to shore up Spicejet, claiming that it was unfair on Sun TV’s shareholders to take on the financial liability of the airline. Instead, despite his wealth, Maran was expecting the Indian Modi Government to bail out the airline as it had tried to do for Kingfisher.
However Singh has indicated that the company is relying on local investors to come up with the required bailout sum of US$156m which is needed to cover Spicejet’s current leasing, aircrew pay and tax debts. “This money [will come] from a mix of investors and banks,” Singh said. “We are getting a lot of offers from players like private equity, debt providers, hybrid products and even foreign airlines.” However Sing also made it very clear that he was not looking for one sole major investor, but a number of smaller investors. So far Spicejet has cut 1,600 jobs, which is more than a quarter of its workforce, and trimmed schedules, stating it will now opt for “the mode of investment that comes at the lowest cost.” Finally, Singh said that if Spicejet did need any additional funds, any move would be put back until the company was trading more profitably.



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