Will SpiceJet’s Expansion Falter On A Thin Cash Buffer?

The company has been making the most of Jet Airways (India) Ltd.'s shutdown. Ajay Singh-led SpiceJet increased its capacity by more than 50 percent in the second quarter ended September—the most in last four years.

The growth came despite the grounding of its Boeing’s 737 Max jets. But it’s below the company’s forecast of 80 percent.

SpiceJet’s cash on books as of September stood at close to Rs 92 crore. While that's higher than March, it’s well below the previous financial years.

Usually, airlines globally keep a fifth of sales as cash considered safe for airlines globally. India’s largest airline InterGlobe Aviation Ltd. looks at maintaining at least 15 percent of its revenues as cash. As of September, its free cash was more than a fourth its last 12-month sales.

But SpiceJet’s liquidity ratio—cash-to-sales—has been falling since financial year ended March 2017 and is down to 0.86 percent. That’s just a tad higher than 2015 when a crippling cash crunch threatened to ground the carrier, then owned by Sun TV Network’s Kalanithi Maran, and led to Singh’s return to the airline he founded.

Still, according to Santosh Hiredesai, aviation analyst with SBICAP Securities, the cash situation of SpiceJet is not as bad as last year even though it’s always better for an airline to keep sufficient cash because of the volatility involved. The industry situation at this point, however, is still better than what it was last year, he said.

But if the yields continue to fall and conditions don’t improve in the next two to three quarters, SpiceJet would start to feel the heat, Hiredesai said.

What’s The Problem

For an airline, cost-related volatility is high as nearly 60-70 percent of its expenses are dollar-denominated and more than a third of the costs is related to crude prices. Airlines also grapple with untimely engine and aircraft-related to issues.

India’s top two airlines have seen their costs rise after grounding of Max 737s and replacement of engines of Airbus A320neos. Crude prices and the dollar, too, remained volatile this year.

Yields, a measure of average fare per passenger per kilometre, have also been falling because of weak demand in a slowing economy and competition.

While that’s led to lower cash on hand, things are not dire for SpiceJet as the business is generating higher cash that last year. Cash flow from operations increased to Rs 1,168 crore in the first half of 2019-20 compared with Rs 286 crore a year earlier.

“SpiceJet is maintaining a healthy cash flow and we remain firmly committed to all our obligations,” a company spokesperson said in emailed response to BloombergQuint.

The company expects the coming quarters to better as 737 Max will likely return to service, the spokesperson said, adding that it will change the operating environment dramatically along with compensation from Boeing, sale and leaseback income, and lower maintenance and operating costs.