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This article is more than 2 year old.

SpiceJet awaits return of Boeing MAX aircraft to boost earnings

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SpiceJet's financial health has taken a hit after the MAX aircraft model was grounded worldwide in March following a series of two fatal accidents. This affected SpiceJet operations as it had 13 of such planes.

SpiceJet awaits return of Boeing MAX aircraft to boost earnings
The sooner Boeing 737 MAX aircraft resumes service, the better it is for SpiceJet’s deteriorating financial health. The low-cost airline posted a net loss of Rs 462.6 crore in the September 2019 quarter due to additional costs arising out of grounding of MAX aircraft and low yields in a seasonally weak quarter.
Calling this as a "forgettable but well-contained" quarter, CFO Kiran Koteshwar told CNBC-TV18 that the airline struggled with lower pricing power due to the grounding of more fuel-efficient Boeing MAX aircraft.
Fewer seats, higher fuel costs
"With the acquisition of 168-seater NGs, the pricing power got reduced as MAX could have offered 189 seats. Also, these NGs started coming in bunches. Most planes came in June or July so we could not open the booking for a long time before starting flights. It was hurried. It was forgettable quarter but well-contained," Koteshwar told CNBC-TV18.
The airline also had to incur a higher fuel cost as it used "sub-optimal" B737 NG aircraft which it acquired from the Jet Airways fleet whereas MAX would have provided the airline 20 percent more fuel efficiency, Koteshwar added.
"There were also challenges on the long international sectors where MAX performance would have been much better than the NGs," he further explained.
Bullish on MX
The airline's financial health has taken a hit after the MAX aircraft model was grounded worldwide in March following a series of two fatal accidents. This affected SpiceJet operations as it had 13 of such planes. The airline's total order book for MAX aircraft stands at 155 firm order and 50 options.
"Despite its inability to undertake revenue operations, the Group continues to incur various costs and losses with respect to these aircraft. As a result of the above, the Group is in the process of determining the costs and losses (including opportunity losses) incurred by it, and has initiated the process of seeking reimbursements and claims from the aircraft manufacturer," SpiceJet said in its earnings statement.
While the airline is unlikely to quickly recoup the losses made due to MAX grounding over a period of 9 months, it continues to be bullish on MAX and reiterates it as its "core and long-term strategy."
Compensation from Boeing
While Boeing is expected to compensate its customers for the costs being incurred due to grounding of MAX, the amount has not been disclosed publicly. In the case of SpiceJet, the manufacturer continues to discuss the compensation amount with the airline. However, the carrier has recognised Rs 291 crore as other income for the quarter (Rs 177 crore for Jul-Sep) as the least amount of compensation that it expects from Boeing for the grounding of MAX.
"We have taken partial compensation on the actual tangible costs that we are paying for that is the rentals, salaries of pilots, parking and maintenance of aircraft on the ground. We have accounted for these, but then there are certain intangibles like getting the pricing of the flight," Koteshwar said.
Boeing has also indicated to SpiceJet that it expects MAX to resume service in January and test flights may happen this month or in December. However, as civil aviation regulator DGCA said that it will conduct its own safety checks before MAX is allowed to resume service in India, the plane may take 15-20 more days to fly in Indian skies.
SpiceJet is expected to send pilots for training on the MAX aircraft once US aviation regulator recertifies it.
"We are aware that Boeing has conducted several production flights as well other than the test ones. The communication from Boeing has picked up substantially over the last 15-20 days and that has brought a lot of confidence," Koteshwar added.
SpiceBiz model
The airline has also decided to do away with SpiceBiz model completely where it was offering business class seats. Of the 31 B737-NG aircraft that it acquired from Jet Airways fleet, it has reconfigured 21-22 into all-economy seats and is in the process of converting the remaining ones too.
"SpiceBiz was never a strategy..never a model. We offered it because the planes we acquired from Jet Airways came with that kind of configuration," Koteshwar said.
Going forward, the airline continues to struggle with the industry-wide issue of unusual fare environment for a traditionally strong quarter of October-December and induction of aircraft on a short-term lease for the ongoing winter schedule may put a further financial strain on the airline as such kind of leases are expensive.
"I am a bit surprised (about the fare environment)...we will do a deep dive..it may be a rub-off of the economic sentiment. Volumes look great but the pricing power may have gone down due to the weak sentiment in the economy..as this tends to hit hotel and travel industry. Q3 is traditionally good but we will have to see the pricing," Koteshwar said.
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