Why is the Modi government throwing money behind a failing SpiceJet?

Quartz india
Quartz india

India’s third largest airline, SpiceJet, is collapsing—and the Indian government want its banks to throw money behind the carrier to keep it afloat.

SpiceJet insists that it isn’t a bailout—instead terming it as “breathing time”—but adds that the airline’s promoters are unable to infuse any more money into the business. The government, it seems, is buying the theory.

“Banks or financial institutions may lend up to Rs600 crore ($95 million) backed by a personal guarantee of the chairman, SpiceJet. This should be paid immediately after securing the long-term investment which will take around eight weeks to consummate,” India’s aviation ministry said.

SpiceJet is the second Indian airline in three years to face such a crisis, after Kingfisher Airlines shut down operations in 2012 due to heavy financial loss.

The numbers

SpiceJet has been in the red for five consecutive quarters and has been registering losses for the past three financial years. For the financial year ended March 2014, SpiceJet’s net loss stood at Rs1,003 crore ($159 million) compared to a net loss of Rs191 crore ($30.5 million) in the preceding financial year.

Since August this year, the promoter has been looking to sell his stake; in November, investor Rakesh Jhunjhunwala acquired a 1.6% stake in the company for Rs13.41 crore ($2.1 million).

In January 2013, SpiceJet’s market capitalization stood at Rs2500 crore ($395 million), but fell to Rs706 crore ($111 million) as of Dec. 18—a 72% drop.

Wealthy promoter

SpiceJet’s promoter Kalanithi Maran is currently the 38th richest man in India and has a personal wealth of Rs14,500 crore ($2.3 billion). His flagship group company, Sun TV network, in which he holds 75% stake, has a market capitalization of Rs13500 crore ($2.2 billion) as on Thursday.

So, why can’t Maran pledge his shares in Sun TV to save SpiceJet?

“Minority shareholders will never forgive us if we go down that path,” Sun Group’s chief financial officer, S.L.Narayanan told the Hindu. “It is bad corporate governance to undermine our media assets with unnecessary exposure to our aviation business.”

Yet, after running the airline into the ground, SpiceJet is now seeking help from the government, which in turn is prodding state-run banks, already burdened high with bad loans. The government says that it is doing so in the “larger interest of passengers.”

Maran is also part of one of the biggest political families in southern India; the Dravida Munnetra Kazhagam, led by his uncle, M. Karunanidhi, was part of previous United Progressive Alliance (UPA) government.

After purchasing his stake in SpiceJet for Rs940 crore ($150 million) from US-based private equity investor Wilbur Ross in 2010, Maran has reportedly invested another Rs800 crore ($126 million) in the company so far.

Persistent problems

The current government’s decision to ask banks to fund SpiceJet is similar to the stance taken by the previous UPA government when Kingfisher Airlines began its death spiral. As a result, India’s public sector banks were forced to bear the maximum damage when the airline went belly up 2012.

While Kingfisher airlines went bankrupt, India’s second largest airline, Jet Airways was forced to sell a stake to Abu Dhabi-based Etihad Airways due to mounting financial trouble. State-owned Air India is also heavily dependent on government funding for its survival.

“SpiceJet, and Kingfisher before that, illustrate the seemingly perennial problems in Indian aviation,” Robert Mann, president of aviation consultant R.W. Mann & Co. told Bloomberg. These problems include “fragmentation, excess capacity, irrational pricing, and unrealistic expectations for economic growth associated with unaffordable aggressive fleet plans.”

Canadian connection

As the crisis unfolds, existing lenders are keeping a close watch.

Canada’s Export Development Council (EDC), which helped finance SpiceJet’s lease of 15 Q400 Bombardier jets, is working with the airline through the financial restructuring.

“Spice Jet has been very collaborative with its lending group as they go through this process,” a spokesperson for EDC told Quartz. “In the event that the Spice Jet ceases operations in a permanent way, it is normal for airlines to return leased aircraft to the primary lender, in this case EDC.”

SpiceJet flights were grounded on Wednesday morning because oil marketing companies refused to refuel the company’s aircrafts, but operations resumed later after the airline paid a token amount. Earlier in the week, the government also reversed a decision to disallow the airline from taking booking more than 30-days before the date of travel.

Banks reluctant

In spite of the push from the aviation ministry, banks are seemingly wary of lending to SpiceJet.

The country’s largest public sector bank, State Bank of India, has reportedly already said that it isn’t keen on extending a loan to the troubled airline.

Other banks have also expressed their concern about investing in the company. “Our exposure in SpiceJet is backed with collateral. Theoretically, we are not going to lose our money. But even if we lose what we have lent, we are not going to try and salvage it by providing additional loans,” an executive at a private bank told Business Standard.

New takeoffs and hard landings

India’s domestic aviation industry currently has five major operators and is led by IndiGo, a low cost carrier whose promoters are yet to list the company at the bourses. Indigo’s net profit for last year was estimated at Rs317 crore ($50 million) while another privately held airline, Go Air, posted net profit of Rs50 crore ($8 million) last year.

In October 2014, Indigo placed an order for 250 aircrafts from Airbus for Rs158,000 crore ($25 billion), the European aircraft manufacturer’s largest deal ever.

On the other hand, state-owned Air India as well as Jet Airways registered losses last year.

But the aviation market in India is still attracting newcomers. Air Vistara—a joint venture between India’s Tata Group and Singapore Airlines—has just received the permit to lauch a full-service airline in the country. The Tata’s also partnered with Malaysian low-cost carrier, Air Asia, for a budget airline that began operations in June this year.

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