The SpiceJet Turnaround Story And How It Became World’s Best Aviation Stock

Chandigarh-based Varun Checker, 28, a former Larsen and Toubro Ltd engineer, bought SpiceJet Ltd shares at Rs 15 a piece when the airline was close to shutting down because of a cash crunch in late 2014.

He exited in few months when the stock touched Rs 50.

Today, SpiceJet’s shares are hovering around Rs 125 each. In June, Bloomberg said it was the world’s best aviation stock this year with a 124 per cent gain.

“I sold too early,” said Checker, “but still I made three-four times — Rs 50,000 became Rs 1.5 lakh. This was the best return I got on any stock in that time frame.”

SpiceJet is valued at Rs 7,400 crore, up from the Rs 650 crore it was valued at during its darkest hour in 2014. Rival Jet Airways Ltd, with a fleet double that of SpiceJet, is valued at Rs 6,200 crore.

In the past two months, not only has the budget airline found mention from US president Donald Trump for buying Boeing planes “which will support thousands and thousands of American jobs”, it has also got more clarity on a legacy issue involving a share dispute with its former owners the Marans (Kalanithi Maran). The airline now stands poised for expansion. Interestingly, the current US secretary of commerce Wilbur Ross once held a 30 per cent stake in the airline (he sold it in 2010).

The turnaround story of SpiceJet is remarkable — starting from the fact that current owner Ajay Singh bought if off the Marans for Rs 2 (for 58.64 per cent of the company’s equity), according to a report in BloombergQuint that cited court papers filed in the dispute between the Marans and SpiceJet.

To be fair to Singh though, the airline was bleeding then: its net worth was a negative Rs 1,329 crore, short-term liabilities over Rs 2,000 crore, and it ended 2014-15 with a loss of Rs 687 crore, according to the same report. SpiceJet also had a debt of Rs 1,240 crore as of March 2015.

Equally remarkable is the alacrity with which the government cleared the deal (seven days according to BloombergQuint). The Civil Aviation ministry also exempted the new owners from having to make an open offer to public shareholders as required by government law.

Still, not too many airlines have come back from where SpiceJet found itself in late 2014.

Vijay Mallya’s Kingfisher Airlines, M Thiagarajan’s Paramount Airways, Mohan Meakin Ltd’s Indus Airways, and half a dozen others have closed down in similar circumstances in recent years.

“They were lucky but they also controlled costs and improved many things,” said Amrit Pandurangi, former head of infrastructure practice at Deloitte Touche Tohmatsu India Llp, referring to the drop in fuel prices.

Singh, the new promoter-chairman of SpiceJet, oversaw the transition closely.

“There was a plan to shut down the airline,” said Singh, chairman of SpiceJet and the airline’s original co-founder back in 2005 (he exited in 2008 before returning in January 2015). “I remember those days — every hour was full of anxiety.”

The Anatomy Of A Near-Collapse

At 9.30am on 15 December 2014, the Civil Aviation ministry got a call from the then SpiceJet management.

“They said, ‘We have a liquidity crisis and if it continues, we will have to close down; we may not be able to fly’,” said G. Ashok Kumar, the then joint secretary in the aviation ministry.

There were three critical issues.

First, the aviation regulator Directorate General of Civil Aviation (DGCA) had blocked the airline from booking any tickets beyond 31 December 2014, stifling its revenue stream.

SpiceJet was raising working capital by selling tickets well in advance, and at a discount.

This was smart inventory management because the airline was ensuring bums on seats, but the regulator was worried about the potential fallout on customers should the airline cancel those flights.

The regulator’s concern was not unfounded. This had happened a few times — because oil companies had refused fuel to the airline because it had not cleared its dues to them.

Meanwhile, the Airports Authority of India (AAI), which had burnt its fingers with Kingfisher’s unpaid dues, was also unwilling to allow any flights till SpiceJet cleared its dues.

Aviation minister Ashok Gajapathi Raju and former aviation secretary V Somasundaran were informed of the airline’s Mayday call. Both took the immediate view that since SpiceJet was a private airline, they couldn’t do much, recalled Kumar.

Meanwhile, SpiceJet staffers were getting manhandled by passengers at airports as it was peak holiday season in December and flights were not taking off. For television news channels, this was a big story.

Parliament was in session and early in the course of the day, Raju seems to have changed his mind about not interfering. He asked ministry officials to meet him at Parliament building for a meeting with Finance Minister Arun Jaitley at 10.30am.

The ministry officials reached Parliament building only to be told that the Finance Minister had to leave to meet Prime Minister Narendra Modi. The meeting was deferred to 1.30pm.

By then, chief secretaries of Goa, and Andaman and Nicobar were calling up the aviation ministry complaining of mass chaos at their small airports. There was no space to seat stranded passengers.

Eventually, the team from the aviation ministry decided to meet Jayant Sinha, the then minister of state for finance and now the minister of state for aviation.

By then, Singh had arrived at the finance ministry with his offer to take over SpiceJet.

“He said he was ready to revive the airline,” said Kumar.

By 2.30pm, there was still no clarity on what would happen to the airline that controlled about 13 per cent of the domestic market, but back-room lobbying by rival airlines was in full swing.

Some rivals were pushing aircraft lessors to deregister and take away SpiceJet’s planes so that the airline collapsed, said Kumar. Some executives from these airlines were actually in the ministry checking “whether SpiceJet was getting closed or not”, he added.

The discussion in the aviation ministry revolved around one question: Can the market afford another Kingfisher?

Kingfisher had shut down two years back, rendering thousands of people jobless. And although it wasn’t clear at the time, the collapse would also leave lenders to the airline high and dry.

Kumar explained Kingfisher also could have survived had the then United Progressive Alliance government moved swiftly.

When Kingfisher’s financial stress became visible in December 2011, the government formed a committee of secretaries to study issues in the country’s civil aviation sector and recommend solutions.

This working group sent its report to a group of ministers headed by finance minister Pranab Mukherjee.

On 7 February 2012, it was decided to allow foreign airlines to invest in Indian airlines. This was the biggest demand of Mallya then.

Curiously, the final order for implementation of this directive from the department of industrial policy and promotion came only in September 2012 — a delay of nearly six months. Kingfisher stopped flights in May 2012 and its licence was suspended by DGCA in October.

“If they had done that within a month, Kingfisher would have survived,” said Kumar. “If you want to give oxygen, give oxygen when the patient is gasping for breath, not when he is dead.”

The ministry was also worried about the negative publicity associated with the closure of an airline.

And so, it was decided that SpiceJet be given a lifeline, as long as the airline’s promoters were willing to talk to Singh.

It was decided SpiceJet should survive.

At about 4pm, aviation minister Raju wrote to AAI and oil companies asking them to allow credit facilities to SpiceJet and also allow the airline to stagger payments to clear its dues.

DGCA was asked to lift the ban on sale of tickets placed on the airline.

On 16 December, the aviation ministry issued a formal press note on steps approved by Raju to help SpiceJet.

Besides relaxations on oil, airport charges and ticket sales, the ministry asked Indian banks to lend Rs 600 crore to the airline, to be paid back in about eight weeks. SpiceJet didn’t seek this money from the banks eventually.

And so SpiceJet took to the air again and Singh checked in.

The Takeover

Minister Raju said in a May interview that SpiceJet’s survival is one of the success stories of the government.

The only thing standing between Singh and SpiceJet was stock market regulator Securities and Exchange Board of India, which required that an open offer be made to shareholders.

SpiceJet told the ministry that under special circumstances, this could be waived if the ministry concerned wrote to the regulator.

The aviation ministry took the opinion of a former Supreme Court judge, who said there was nothing wrong in making such a recommendation to the regulator as the airline was on the verge of being grounded.

And so, Singh took over the airline.

Things improved rapidly.

Jet fuel price that hovered at Rs 40 a litre in 2010 when the Marans bought SpiceJet, and rose to as much as Rs 77 a litre in 2013 and about Rs 70 a litre in 2014, fell to Rs 46 a litre in February 2015, according data from IndianOil website, and then further to Rs 35 a litre on February 2016. It’s now hovering at Rs 48 a litre.

Fuel makes up a third of the cost of an airline in India.

Data from SpiceJet’s balance sheet shows this was one of the biggest reasons for the airline’s turnaround.

SpiceJet paid Rs 2,410 crore to oil firms in 2014-15 but only Rs 1,392 crore in 2015-16, a drop of 42 per cent.

This was a saving of Rs 1,018 crore. The airline clocked a profit Rs 407 crore in 2015-16 and has been profitable since. Rival Jet Airways too posted its first ever profit in 2015-16, after eight years.

“SpiceJet also controlled costs and improved many things like including on-time performance. The one thing they used to do back then was dirt cheap fare sales which was dragging them down. That has gone to a large extent and has helped too,” said Pandurangi of Deloitte.

Earlier this year, the airline ordered 100 fuel-efficient Boeing Max aircraft, adding to a previous order of 55 planes which will be delivered over the next decade and bring down its costs by another 5 to 10 per cent. It also has options to buy 50 more planes taking its order book to 205.

The order laid down the long-term plan for the airline — one that it never had before because of frequent changes in ownership.

Boeing, which had also helped the airline during its crisis returning about $30 million paid as booking amount for planes, now sees SpiceJet as a strong customer.

“They are a strong player now,” said Dinesh Keskar, senior vice-president (Asia-Pacific and India) of Boeing Commercial Airplanes.

SpiceJet will gradually return the $30 million, as it is now making profits. The airline has also pared its debt and launched a new advertising campaign to restore consumer confidence.

“We needed to change the image. We had to change the mindset within the company,” said Singh.

Singh, who runs the airline like a CEO himself, allowed some senior staff in the Maran era to leave but retained old-time loyalists who helped him launch the airline in early 2005.

He also kept the culture simple. Instead of moving decisions all day on emails, Singh keeps his doors open all the time, allowing senior officials to discuss and take decisions on the go, said a SpiceJet official who did not want to be named.

Singh said the airline needs to do more — low oil prices will not last forever. “We have to prepare for a time where oil is higher than today. That’s what I am trying to do. The broad direction will be this — increase revenues, decrease costs,” he said.

The airline also knows what it is up against.

While they started as equals, IndiGo, India’s largest passenger airline run by InterGlobe Enterprises Ltd, now has 136 aircraft and is growing by about two planes a month, adding aircraft from its 400-plane order. It also controls 40 per cent of the domestic market.

And in a departure from its strategy of having just one kind of aircraft, IndiGo has decided to order 50 ATR turboprop planes that will ply on routes that bring high yields to SpiceJet.

SpiceJet has been trying to differentiate its product. There is a new uniform for the crew. It has also tied up with Lufthansa Systems to provide inflight entertainment to passengers on their mobiles and laptops in new planes. The airline may also offer Wi-Fi for a fee next year and experiment with international low-cost flights. It is also opening SpiceJet retail stores to experiment with ancillary revenues.

A legacy issue that prevents the airline from raising money through equity and potentially hurt investor sentiments is now closer to being resolved.

The transfer of control of the airline from the Marans to Singh — the terms of the deal were not made public and that came up for criticism; the details only emerged from the court filings — became controversial.

The matter has gone into arbitration. The Delhi high court on 3 July directed SpiceJet to set aside Rs 250 crore as cash and another Rs 329 crore as bank guarantee on or before 31 August against this even as the matter is resolved.

The airline currently has about Rs 350 crore cash on its books. Singh’s nearly 60 per cent stake is worth Rs 4,000 crore.

A former aviation secretary who did not want to be named said the ministry had planned to frame a policy for airlines going bankrupt so the same yardstick is there for everyone in the future. That policy should have been crystallised by now.

“In the last one-and-a-half years alone three small airlines have shut shop if you notice,” he said. “There should be one rule for all. ” His reference is to Air Costa, Air Carnival, and Air Pegasus that have all been grounded. And his reference is also to the perception that Singh is close to the current government.

Singh studied at the Indian Institute of Technology Delhi and Cornell University in the US, and went on to become an aide to the late Pramod Mahajan, one of the most high-profile leaders of the Bharatiya Janata Party (BJP), till his untimely death in 2006.

Chandigarh-based Checker, who is now working with his father in the family business, said Singh’s background led him to gamble on SpiceJet’s shares. “I just knew he founded the airline, he was a smart guy and that he was close to the BJP,” he said. “I was sure SpiceJet wouldn’t shut down.”

The Maran family put in Rs 179 crore into SpiceJet as debt in late 2014. They were to be issued convertible warrants against this. Subsequent to the takeover of the airline company that happened in early 2015, SpiceJet agreed to issue warrants against this and also against Rs 500 crore that the Marans paid at the time to settle some liabilities.

The share purchase agreement between the two says the Marans would invest Rs 679 crore and be issued these warrants and/or redeemable preference shares.

According to details that have emerged in the course of the arbitration, the Marans put in around Rs 579 crore, but were issued neither the warrants nor the shares.

Although SpiceJet wanted to issue the warrants, the stock market regulator didn’t sign off on it because it was not paid.

The Delhi High Court has, pending arbitration, asked SpiceJet to deposit Rs 329 crore bank guarantee and Rs 250 crore as cash in the high court as a security.

The matter in arbitration is likely to be decided in the next three months and the amount ordered by the arbitration tribunal will be paid by SpiceJet to the Marans, said a SpiceJet official who did not want to be named.

While the Marans are said to be keen on the warrants, it is unlikely that Ajay Singh will want to issue them and make them a shareholder in SpiceJet again.

The article was originally published in Mint and has been republished here with permission.