Column: For want of Rs 600 crore

The government should have helped out SpiceJet, it would have won itself a lot of goodwill

In a capitalist economy, it is hard to recommend a bailout; enterprises should be allowed to die if they are bankrupt because there is little point in throwing good money after bad. With SpiceJet, however, it could have gone the other way simply because the airline is running an efficient operation and also because the promoters, Kalanithi Maran of the Sun Group, has brought in a fair amount of money.

There is no doubt, revenues having been falling short of the costs over the past year and the competition, from the likes of an Indigo, a GoAir or even an Air Asia, is getting more keen. But the sharp drop in the cost of Aviation Turbine Fuel (ATF)—falling because crude oil prices have crashed close to 45% from their peak—can change the equation completely. That is because expenses on fuel account for roughly 40-45% of SpiceJet’s total costs. Even after pencilling in some depreciation in the rupee, the savings from lower fuel costs will be huge. By one estimate, the airline will make a profit in FY16, at even $95 per barrel of jet fuel, albeit a small one of Rs 180 crore; with oil at $60, that profit could be much fatter.

In the three months to September, typically a dull season for airlines, SpiceJet was able to grow revenues by 15%, bring down costs by 2% and reduce its losses by 45%. With a bit of luck, it can improve upon that. Having already scaled back the operations by cutting back on close to 150 flights, many of them in the loss-making routes, the airline’s passenger load factor was already improving. In the current fiscal, so far, the airline had retired six aircraft earlier than schedule bringing down the fleet to around 50 aircraft.

In contrast, the state-pampered Air India’s performance doesn’t seem to be showing much improvement despite a huge government bailout. Year after year, for almost a decade now, the government has helped the national carrier, at a humongous cost to the taxpayer. But the net result is R44,000 crore of debt and accumulated losses of over R30,000 crore.

It is churlish, therefore, that the government hasn’t been able to help SpiceJet with a paltry sum of R600 crore and some 15 days of credit for fuel purchases. Indeed, if the state of Indian aviation is what it is —R8,000 crore of losses last year—it’s partly because the government taxes ATF at such high levels, making the fuel very expensive in India. The government has also been regressive in not doing away with the 5/20 rule which will allow young airlines to fly overseas sooner.

Indeed, the civil aviation ministry and the aviation regulator have acted hastily and harshly. Had the regulator allowed SpiceJet to sell tickets for future months, and not asked it to cancel flights, the airline could have accessed funds and cashed in on the travel season, ratcheting up the revenues. Instead, the airline was forced to cancel tickets with the result that passengers are now wary of flying the airline.

There must be at least a dozen public sector companies that are far more inefficient and that are losing money hand over fist but the government continues to bail them out, at the cost of the taxpayer. SpiceJet isn’t an Air India, which has thousands of employees whose productivity can at best be less than average and which has a salary bill that will put any business model in jeopardy.

In FY14, Air India’s losses were over R5,000 crore and, for the current fiscal, it could be R4,300 crore—that’s more than seven times the amount SpiceJet is looking for.  The carrier has no hope in hell of making money yet the government continues to fund it; it recently infused some R4,800 crore of equity—that’s eight times the cash SpiceJet was looking for—and the plan is to put in R30,000 crore over a nine-year period.

Air India hasn’t been able to get its business model right despite trying for years—it has pulled out of at least half a dozen loss-making international routes, yet it continues to bleed. The carrier’s loss, on the Delhi-Melbourne-Sydney route, alone, was R70 lakh a day. SpiceJet is also no Kingfisher; it didn’t attempt a foolhardy acquisition like the Vijay Mallya-owned airline did when it bought Deccan Air. And it didn’t try to be a full service airline, keeping borrowings at about R3,000 crore.

Indeed, there doesn’t seem to be as much concern about other private sector companies not being able to pay their dues; as the data shows, banks have lent sums to companies which don’t even make revenues that are as large as the loans, let alone operating profits. These loans are being restructured—which means banks are merely tweaking the terms to make it easier for the borrower—and as we have seen many of these companies are not able to survive despite all the hand-holding. There are hundreds of such companies and, in many instances, the banks do not even have adequate collateral. Banks should have given SpiceJet a chance; the risks are far smaller and they would have helped an efficient service-provider, critical for infrastructure, survive. Even now it is not too late. The government can win some brownie points, at virtually no cost.

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