Can SpiceJet's share price top Rs 100?

SpiceJet's lessor Carlyle Aviation thinks so. Early this month, the debt-ridden airline said the lessor is converting $30 million of owed dues (lease arrears) into equity in the airline at Rs 100 per share, a 72 per cent premium to its last closing price! Carlyle is also writing off another $40 million and turning about $20 million into convertible debentures for SpiceJet's subsidiary SpiceXpress. The entire exercise means a reduction of Rs 587 crore debt of the total pile of Rs 5,376 crore on the books.

The ailing airline is putting up a fight. The recent fundraising of Rs 3,000 crore through a QIP is another testament to that. The money will be used to revive the grounded fleet and add capacity. The management is confident that the efforts will pay off and SpiceJet, saddled with a negative net worth of Rs 2,825 crore and losses of Rs 409 crore (as of FY24), will be in the black in two to three years. It's possible for the following reasons:

1. The debt pile has been SpiceJet's Achilles heel. The company is settling the debt with some of its biggest lessors (including Carlyle Aviation) and expects to clear the remaining dues with the rest of the creditors. It plans to use Rs 750 crore of the QIP proceeds for this purpose.

2. About 36 of its 58 aircraft (62 per cent) are grounded due to payment defaults, expensive maintenance costs, and a lack of spare parts. It aims to use most of the QIP money to unground these aircraft and add more to its fleet. By the end of FY25, it's targeting a fleet of 40—almost double the current size of 22!

If these goals are met, it's safe to assume SpiceJet can witness a turnaround. A strengthened operational capacity, reduced debt, and sectoral tailwinds of low fuel prices and high demand can help the company narrow its losses and lighten its balance sheet.

But is that enough?

The airline's efforts are promising. But before you take the leap of faith, we must remind you of the industry's competitive makeup, which threatens SpiceJet's prospects.

1. Aviation remains a high-volume industry. Those who win market share, win the race. Since SpiceJet has struggled with a stagnant fleet, its market share has seen sharp erosion from 10.5 per cent in 2021 to 4 per cent. Competitors IndiGo and Air India hold a substantial combined share of close to 90 per cent.

2. While IndiGo wooes customers with its punctuality, Air India (now backed by Tata Group) is busy enhancing its offerings to capture premium passengers. When the two heavyweights are strengthening their positions and improving their services, SpiceJet is left as the also-ran, struggling to stay afloat with substantial operational challenges.

3. It also loses out on customer service, which explains the weak brand image. A recent report by the online survey platform LocalCircles revealed that the airline ranked at the bottom of its competitors for service satisfaction. Passengers have highlighted many pain points related to flight delays, in-flight services, boarding and check-in procedures, and timely information sharing.

4. Lastly, even if the company manages to reduce its debt and expand the fleet, the industry's high operating costs and slim margins will likely remain unforgiving. Any gains can quickly deteriorate after a few good years, as seen in the past.

Your takeaway

The above risks are too significant to be overlooked. They also make it challenging for SpiceJet to snatch away market share from the big players. The company's Chairman and Managing Director, Ajay Singh, recently told a news platform after the QIP fundraiser, "This is an airline that refuses to die". While we concur that the airline might survive, a turnaround bet worth investing in must also thrive. This would require SpiceJet to be highly efficient both operationally and financially.

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