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SpiceJet gains lifeline, as cutbacks in Indian aviation intensify

SpiceJet Limited and WL Ross & Company LLC announced the execution of definitive documents for a funding transaction with WL Ross and Goldman Sachs. The completion of the transaction will make available up to Rs. 421 crores (USD100 million) to SpiceJet. This is higher than the Rs. 345 crore (USD 80 million) proposed earlier. According to a report by Centre for Asia Pacific Aviation (CAPA) billionaire Wilbur Ross Jr, Chairman, WL Ross & Co stated that the financing is intended to give SpiceJet the staying power to get through the industry consolidation that is under way. That SpiceJet has retained its independence (after rumours of a potential buy-in by UB Group) however means further consolidation (of ownership) in India is really no closer. As part of the transaction, Goldman Sachs has agreed to subscribe for equity warrants in SpiceJet under the preferential issue guidelines of SEBI and subject to requisite approvals.

According to CAPA report, consolidation of capacity is finally occurring, as reality has started to hit home in India. The alarming recent results of listed carriers SpiceJet and Jet Airways have shown just how difficult the airline market in India has become. For example, the break-even load factor of Jet Airways’ ‘value-based’ unit, JetLite, hit 111 per cent in Quarter One of 2008/09 (to June 2008).

Even one large aircraft manufacturer has called for capacity restraint. That message is now apparently getting through. In late July 2008, the lead salesman at Airbus, John Leahy, took the remarkable step of urging Indian airlines to defer deliveries to avoid excess capacity that could undermine the future of the market. In an interview with the Wall Street Journal, Leahy stated, “India has a great need for air travel, but now there's too much capacity.”

Ministry of Civil Aviation (MoCA) data shows airlines have reduced their weekly domestic services from 10,922 in March 2008 to around 8,778 in July 2008. This represents a year-on-year decline of 10.5 per cent based on Airports Authority of India (AAI) data. Ministry officials stated the number of flights offered in July 2008 is at the lowest level since 2005.

The July to September quarter, encompassing the monsoon season is traditionally the weakest for Indian carriers, but the market has been slowing since late 2007. Jet Airways is cutting domestic capacity by 12 per cent during the quarter, while Air India has cut its domestic operation by around ten per cent. Some of the smaller players, like GoAir, have cut back even further with several base closures. But others, including Indigo, Paramount Airlines and SpiceJet, continue to aggressively expand.

The latest data from the Directorate General of Civil Aviation (DGCA) shows domestic air travel shrank 3.8 per cent in June 2008 – the first monthly contraction in four years.

Indian domestic passenger numbers (thousands) and growth (% change year-on-year): January 2007 to June 2008

India’s aviation industry is in a very difficult phase and the bad news is likely to outweigh the good for several more quarters. Overall, the domestic market is likely to experience traffic reductions in the current quarter, followed by slow growth in late 2008 and 2009.

For some carriers holding out for white knight investors, a further 12 months of deep losses may be too much to bear. Further capacity cuts will flow from the weaker airlines, while those with deeper pockets will be aiming to consolidate their positions and cashed-up players, like newly re-capitalised SpiceJet, will be looking to grow aggressively through the adversity.

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