the inability to pay its dues has the aviation firm in a legal bind
sometimes in the world of business, a company can find itself in favour with investors not because of any particular action of its own, but instead thanks to favourable winds from elsewhere. that’s what happened with the Indigo Airlines stock on December 7, as its stock price surged nearly 4% on the back of some bad news for one of its competitors. SpiceJet, whose stock had lost over 6% in a single session over fears surrounding the Omicron variant last week, now has a Madras High Court directive asking it to wind up operations.
here’s why that could spell real trouble for the carrier, which has lost a further 10% in market cap since last week’s dip:
SpiceJet’s operations won’t be affected immediately as the court has granted it three weeks time to clear the $24 million it owes a Swiss company SR Technics for maintenance services. or it can appeal the decision. failing both, the Official Liquidator is directed to take over the assets of SpiceJet. the airlines had recently settled a legal dispute with Boeing over similar affairs.
for a company with a market cap of ~$550 million and an operating profit of ~$23 million for FY21, that is a pretty big deal. a little rejigging of cash flows might have been able to address that if it weren’t for the additional $446 million negative net worth (total value of assets minus total liabilities) that’s still stacked against its name. a figure that it seeks to cut down to $110 million with the slump sale of its cargo business to its own arm. but that too faces its share of legal contention.
all the troubles have taken a toll on SpiceJet’s market share, as it has gone from being the second largest player by a comfortable margin to falling behind Air India and Vistara into fourth place.
the Gurugram-headquartered firm has reported losses for six consecutive quarters, but had analysts hopeful by reducing its losses sequentially from Q1 FY22 to Q2 FY22. that trend might reverse if the Omicron variant of Covid-19 spreads. it has already led to a delay in the planned resumption of international flights to India, and has the aviation sector on edge.
even if not, SpiceJet has plenty to worry about in the form of increasing competition in the industry. Tata has strengthened its presence with the acquisition of Air India, GoAir is back in the skies, and Rakesh Jhunjhunwala has made an entry with Akasa.
despite all these tailwinds, SpiceJet itself seems to be in a buoyant mood. the reinduction of Boeing 737 Max aircraft into its fleet is expected to improve its efficiency and rub off well on its balance sheet. cutting loose all the extra baggage and focusing on profitability might be its only way out of this precarious position. can it once again return from the brink, as it did in 2014?