Resurrecting SpiceJet

As Ajay Singh, 56, chairman and managing director (CMD) of low-cost carrier SpiceJet headed for the Dubai Airshow on Sunday November 14, his troubles over the last two years seemed behind him. Somewhat deceptively though. Just two days earlier, SpiceJet announced Q2 FY22 results, reporting 149% growth over the previous quarter; losses were down and passenger loads, revenues, yields and departures were higher.

A month before, in October, on the sidelines of an IATA meeting in Seattle, Singh managed to settle the long-pending issue with Boeing over the grounded B737 MAX aircraft. Boeing agreed to offer cash and kind amounting to $200 million as part of the compensation for grounding of the planes in SpiceJet’s fleet and delay in supply of the remaining 142 aircraft,. “We made excellent progress in our recovery and I expect this trend to continue. The settlements with key lessors, return of the 737 MAX in the current quarter, transfer of logistics business are positive tailwinds that should have a significant impact on our long-term plans,” says Singh.

The pandemic forced airlines to find new ways to stay relevant. At a time when aircraft were parked in airports, Singh decided to enter the cargo business — it worked. He is all set to hive off the logistics business into a new firm under ‘SpiceXpress’ brand and deliver value to SpiceJet. The funds will be deployed to help SpiceJet settle outstanding dues.

Singh says he is “cleaning up” his company’s finances to emerge “leaner but fitter”. While there are grudging admirers, many are wary of Singh’s style of functioning and the future of his airline. The onus to prove sceptics wrong lies almost solely on him. According to industry expert and author of The Old, Bold Pilot, Shakti Lumba, “SpiceJet weathered the Covid storm thinking out of the box and making use of every opportunity, be it cargo, passenger or vaccine transportation”. But...

In And Out Of Trouble

In 2015, when Singh took charge of the airline from Sun TV’s Kalanithi Maran, it was just a day away from declaring bankruptcy. He resuscitated the company but within months of the pandemic, it was back to where he started. Since March 2020, accumulated losses have climbed to ₹2,300 crore. Although these are reducing, uncertainties on new Covid virus strains cast a shadow on the airline business.

SpiceJet’s biggest problem can be summed up in three words — lack of “cash, cash — and no cash”. Fund infusion is the need of the hour, says a former SpiceJet official. For an airline with a market capitalisation of around ₹5,000 crore and a robust cost structure, present losses are not insurmountable. “Funds infusion is all about timing and this is the moment the airline needs funds urgently,” adds the former airline official. Singh acknowledges, “Funds infusion through the hive off plan is my topmost priority for now”.

The stoppage of flights and the sharp knock the business took due to the pandemic over the past two years led to a build-up of outstandings to almost all vendors and suppliers. Payments were withheld for months. Dues to vendors and lessors have hit $300 million, which Singh was looking to settle through a new plan, partly with Boeing’s help. Smaller dues including tax, GST payments and EPF deposits of about `500 crore remain.

SpiceJet reduced salaries to bare minimum across grades (barring lowest categories) which halved its wage bill from ₹110 crore a month to ₹40-50 crore with the current staff strength of 14,000. Any contract that could be renegotiated was. It led to a ₹600-crore reduction in lease rentals.

Pre-pandemic, SpiceJet had 116 aircraft, including 32 Q400s. Of these, 13 Boeing MAX were grounded. Going by the registration records of the Directorate General of Civil Aviation [DGCA], it currently has 95 aircraft and 70% of the fleet is operational. But, utilisation levels are lower than pre-pandemic. Singh maintains the only way to survive is to “scale down” and emerge “smaller but stronger”.

Perhaps the most serious charge against SpiceJet has been over handling of its employees and an alleged safety concern. In 2019, after three safety incidents — one was serious enough to be classified an accident — the airline changed its safety head. But doubts and controversies around safety continued to plague it. “It suffers from inadequate professional supervision and control in crucial areas of flight operations and engineering,” argues Lumba. DGCA sources say the Q400 fleet does have some “landing gear issues”, but that there had been “nothing extra significant as far as incidents went for the airline”. Singh denies the airline has been complacent on the safety front, adding that this is his “first and foremost” priority at all times.

The airline is also mired in legal battles. Last month (January 11), the Madras High Court dismissed a stay sought by the airline that suggested its winding up. On January 28, the Supreme Court stayed the Madras HC order, and gave the airline three weeks to clear dues.

In the last few months, SpiceJet announced a settlement with De Havilland Aircraft of Canada Ltd. (DHC). Another case is long pending against the airline filed by Kalanithi Maran, the airline’s former owner who sold out to Singh in 2015, the last of which has not yet been heard as the matter is now in Supreme Court. Sources argue since court cases take forever to settle in the country, Singh is able to cruise along with a strong legal team backing him but the chickens could come home to roost.

The People Problem

Many employees say while the balance sheet and other matters can be tackled once funds are infused, the deeper malaise relates to the handling of employees during the pandemic and in particular Singh’s management style. Airlines are a people-intensive business and keeping employees motivated is among the biggest factors for success.

This is Singh’s weakest spot, a charge he denies hotly. He points out there was zero retrenchment at SpiceJet. “Many airlines globally chose to lay off large numbers. We took a more humane approach but the pain of a crisis like this cannot be avoided. We tried to distribute it as best we could,” he adds. The arguments at both ends remain hard to verify since complaints of staff, pilots and crew have been relentless through the last two years, not just at SpiceJet, but across airlines. In most cases, it has only been the pain of prolonged salary cuts, which led to resentment.

Disgruntlement among employees has surfaced from time to time. In November, the engineering staff went on a flash strike and sought restoration of salaries to pre-pandemic levels. Pilots have been short of rebellion all through the crisis. While a senior SpiceJet commander left active flying, another senior pilot says, “The carrier is a ticking time bomb”. He expects “mass exodus” the moment opportunity presents itself. Many feel low attrition in a market that’s down in the dumps is no measure of employee satisfaction. “People have stayed more out of compulsion than choice,” argues one commander.

In response to detailed questions, the airline says attrition levels have been lower than expected in the crisis. Since March 2020, it lost 2,100 employees out of 16,300, while attrition at the top level has been low. Barring long-time CFO Kiran Koteshwar who resigned, the top brass has been steady. Most senior commanders have stuck with the carrier, despite growing discontent. In an emailed response, the airline says it ensured salary of employees in the lowest pay grades remained unaffected and junior staff was paid a subsistence allowance. Other measures include life insurance cover of ₹15 lakh to ₹3.5 crore for families of employees over and above the regular mediclaim. It offered a job to one immediate family member of any Covid victim and a top-up on insurance cover over and above the existing plan.

“We took a decision not to retrench any pilots and pay them on the hours they flew (this was less than ‘normal’ pay but ensured livelihood is maintained). There will definitely be some outliers who will be disillusioned but those are exceptions,” argues Singh.

There have been four management changes in SpiceJet in the past and employees remained steadfast through these changes. “SpiceJet as a company and a brand is resilient. Commanders and rank and file have stood by the airline through thick and thin — be it in 2008 or 2014-15 when the airline found itself in a crisis. So, if the same people are disillusioned today, the management should not ignore it”, says a former senior management official on condition of anonymity.

Diversifications Abound

Two aspects of Singh’s management strategy bother many. One, SpiceJet has forayed into many non-aviation businesses — seaplanes, merchandise shops, cabin crew training, Covid testing to vaccinations (SpiceHealth), besides cargo charter. This, many feel, is treading on thin ice as in “a low-margin business as aviation, distraction can mean disaster.” “I often look at SpiceJet today and — it certainly isn’t just an airline”, says a long-time employee. He says it is not clear who invested in the airline when Singh took over the reins from Maran. In reports then, a few possible investor names were publicised, including JP Morgan Chase and Morgan Stanley, but it is not clear if anyone invested at all.

Like many hands-on chiefs, Singh is accused of failing to delegate adequately, or building a second line of command. Industry questions the effectiveness of the airline’s board of directors. In the absence of a strong board and strong second line of command, Singh tends to micromanage. “The airline needs to bring in a CEO, CCO and other similar positions to decentralise running,” argues Lumba.

The Golden Goose

It’s not all doom and gloom for the 16-year-old carrier since Singh has acted strategically through this phase. He realised earlier than others that if people couldn’t move in the pandemic, goods will have to. Cargo revenue for the airline shot up to $350 million from $45 million in pre-pandemic times. The cargo business is being hived off into a separate entity under SpiceXpress. Singh expects this to be valued at a multiple of four. So even as his core business may have dropped in valuation he created “a new asset worth many times more”. It will have its own board, management team and a staff of 1,100, which includes those seconded from SpiceJet. “I have created an asset which is significantly more in value than the losses incurred”, says Singh, arguing the pandemic has not been as bad for him as many think.

SpiceJet’s revenues in Q2 FY22 stood at ₹1,539 crore, of which SpiceXpress accounted for almost a third at ₹497 crore. This is emerging as the airline’s golden goose.

The move to hive off and transfer the logistics business could result in a one-time gain of ₹2,556 crore for SpiceJet, which could wipe out its substantial negative net worth. The plan is to issue shares in the new entity of which SpiceJet will own 2.55 crore shares of `10 each. Of this, 10% of total shares — at $1.5 billion valuation — will be offered to lessors of the Boeing 737-800NGs to settle dues amounting to around $150 million. In other words, the existing creditors will be given a stake (25 crore shares) in the new entity that amounts to dues owed to them. This whole plan according to Singh will be in place in the coming quarter or so. This will help clean up dues to a large extent.

That takes care of one half of what SpiceJet owes. Another $150 million owed to Max lessors will be settled with the help of aircraft manufacturer Boeing. Since Max was grounded globally, Boeing is stepping in to help settle dues of customers who were stuck with grounded airplanes till the MAX problems were resolved by the company. Between the two, Singh claims the airline will emerge with a much cleaner balance sheet.

As the company settles with creditors, the `2,300-crore book losses will come down, which will be reflected in results of the coming quarter. Further relief is coming through the settlement reached with Boeing, which agreed to offer cash and kind compensation, amounting to $200 million. Two old B777 aircraft were also included, both of which the airline plans to use for cargo operations.

Very early in the pandemic, SpiceJet began to aggressively renegotiate contracts with vendors, including lessors, to hammer out the best deals. This led to a saving of almost ₹600 crore in the first year itself. Overall, ₹1,100 crore has been saved by the airline on this alone.

Singh argues SpiceJet may appear battered today, but has a reasonably rosy future. “As we add the MAX, we will be back to original schedules quite soon.” Already, 11 of the grounded MAX are flying but the airline is yet to start taking deliveries of the new MAX aircraft from its order. In 2022, they argue the airline will get aircraft at a fairly quick pace. Some will be new while others will replace existing and inefficient engines. “Over time the entire SpiceJet fleet will be built around the MAX and the Q400s which we fly on regional routes, making it far more cost-effective as MAX is more fuel efficient than its predecessor”, adds Singh. In the next 12-15 months, all old Boeing planes will be replaced by MAX.

Observers say two other factors worked in the airline’s favour. One is Singh’s “come hell and high water” attitude, which pushes him to find an opportunity in adversity. Two, is his ability to retain peace of mind and maintain a calm temperament even as hell breaks loose around him.

Naresh Goyal Of Today

Even prior to the start of the pandemic, allegations have been made against Singh and how he uses his proximity with the current political dispensation to further business interests, another charge he denies. In the initial phase of the new regime, his alleged closeness to late finance minister Arun Jaitley was quoted as the reason for his survival. “Singh’s proximity to the present regime has worked in his favour,” says former Jet commander Sam Thomas who headed the pilots guild in the airline.

MOCA and DGCA sources say Singh is able to get his way on many small matters and often leads industry charge on prickly matters, but does not carry the heft Naresh Goyal, the founder of Jet Airways, did.

“Comparisons with Goyal don’t hold water since Goyal could and did influence policy to his advantage. None of the present players have that kind of clout or cunning,” says a former MOCA secretary.

Many don’t buy this. “SpiceJet has only managed DGCA and MOCA well” argues former Indian Airlines commander Mohan Ranganathan. He says the airline’s success in cargo and charter is mostly thanks to the goodwill Singh enjoys with the powers-that-be.

“People can level any allegation. Name one thing that has been done to help only us. Whatever decisions the government takes applies equally to all. Every single player in the market has benefited from the various policy decisions the government has taken. There is a certain section of people who envy our resilience and our resurrection, and who otherwise were waiting to read our obituary,” the company spokesperson says In response to an email query.

While that may be true in the divisive environment the country finds itself in, many are convinced that this is the only card up Singh’s sleeve and if this government was to shy away from bailing him out of his troubles, the airline would pull down the shutters.

Some former Spicejet employees believe Singh walked away with too much credit when he took over from Maran. They say Marans exited more for reasons extraneous to the airline’s functioning and that the company and SpiceJet brand have been robust through four management changes. “Yes, Singh did rescue it from closure, but the airline was already on a pretty firm wicket,” says a former staffer.

He argues that when Singh took charge, Marans could not infuse the funds the company required and that led the airline to near bankruptcy. He says SpiceJet has run into trouble time and again — like when oil prices skyrocketed or when Marans exited, but to say that Singh pulled off a major coup in rescuing the carrier is a stretch.

“SpiceJet has been a fairly resilient company whose rank and file, pilots and crew have stood by it through many troubled times and several management changes,” argues another former senior management official. To give all credit to one individual — Singh — is unfair to employees who have been there through thick and thin, and will be placing too much credence on one person’s ability. This, the official adds, is not to belittle Singh’s efforts or his acumen. “He is a committed and savvy businessman and even the latest step to hive the logistics business is in the right direction. However, as of now, this remains on paper,” he adds.

What’s On The Anvil In 2022?

While Singh may have drawn up a plan to infuse funds in SpiceJet, it remains so far only on paper. Financial analysts say viability of the logistics business and its future revenue projections will determine how much SpiceJet can hawk off its baby for — if at all it fructifies. “Projections depend on viability of the new business, future revenue projections and ability of the business to grow by bringing in freighters and cargo aircraft,” says a source. He points out that once things normalise and passenger traffic picks up, will SpiceJet be able to compete and sustain is a question since this as a long-term business against established logistics players who have greater scale and better efficiencies. Will it lose steam or interest or both? The impulsiveness of the move worries many, who say logistics and cargo space is not an easy ship to navigate and there are many established players such as Blue Dart, DHL and Delhivery.

Singh says these companies are present in specific segments. While Delhivery is a last-mile provider, Blue Dart only does domestic. “We do domestic, international and last mile pickup and deliveries for corporate,” he adds.

Industry observers and analysts raise other concerns: While the airline may think some problems are over, competition could intensify in 2022. With the new Tata airline likely to get its act together by the second half of 2022 and the launch of Akasa, the skies will get more crowded. With Akasa choosing MAX, it is an easy move for many SpiceJet pilots. “The real competition will come in when Akasa and the Tata airline take to the skies,” argues Thomas.

Stiffer competition will result in lower yields but will also result in losing people to rivals. The moment of reckoning for SpiceJet could be in managing people.

So, even as Singh puts the finishing touches to his new plan for funds infusion and embarks on a major clean-up, he needs to be ready for turbulence ahead. He may have weathered the pandemic better than expected, but, in India’s ever-changing aviation landscape, only the very nimble win.