SpiceJet unlikely to achieve any turnaround; auditor raises concern over airline survival

SpiceJet, the loss-making budget airline, whose auditor raised concerns over the air carrier's survival, is unlikely to achieve any turnaround in its fortunes any time soon, say industry experts. Experts pointed out that it would be difficult for the airline to return into profit zone in the near-term, as the rationalisation process takes at least 2 years to show results.

"We do not see turnaround to happen in near-term. It may take at least 2 years," said an analyst with a domestic brokerage firm who refused to be quoted. "The airline is more focused towards generating instant revenues and improving market share rather than profitability. The airline should look at cutting down loss-making routes and focus on routes that are more profitable," said the analyst.

The airline in the past had indicated that it will require funds in order to anchor its turnaround efforts. The company, which announced its results on Friday, reported its fifth straight quarterly loss. It, however, managed to reduce loss by 45% to Rs 310 crore for the September quarter over same quarter last year.

Despite efforts to increase market share by offering promotional fares, experts feel the airline may find it difficult to achieve the turnaround in near-term. The airline said during July-September, it managed to increase its passenger and ancillary revenues by 18% and 31% respectively during the quarter.

In 2014, the airline led the fare war in the industry, offering promotional fares leading to increased advanced bookings.

In a statement issued by Friday, the airline said, "The results for second quarter clearly demonstrates the positive impact of SpiceJet's strategy, which is focused on maximising asset and capacity utilisation thereby maximising revenues and absorbing fixed costs at a faster rate. The improved performance further demonstrates that the turnaround effort, which is still work-in-progress, has gained momentum during the quarter. The airline is in the process of rationalising its operations."

Despite the improved performance, airline's auditor SR Batliboi and Associates LP in a note has raised concerns over the airline's survival, as the budget carrier continues to remain in red. This is not the first time the auditor firm has raised such concerns. "The company's total liabilities exceed its total assets by Rs 1,460 crore. These conditions along with other matters, indicate that the existence of material uncertainty may cast significant doubt about the company's ability to continue as a going concern," the note said.

"No provision has been made for interest of Rs 7.47 crore, relating to earlier years on the outstanding inter-corporate deposits taken by the company. Had the same been accounted for, the net loss for the quarter ended September 30 would have been higher by Rs 7.47 crore, and the accumulated losses as at that date would have been higher by the same amount."

The airline, on the other hand, has already initiated the process of rationalising its operations by reducing its fleet size to 46 this year from about 57 last year. 

The company had previously indicated that it would save around Rs 300 crore on its fuel bill with ATF prices going down. However, according to experts, even the drop in fuel costs may not help the airline come out of the financial stress with new players entering and continuing fare wars impacting margins. Airline consultancy - Centre for Asia Pacific Aviation (CAPA) - had estimated an industry loss of $1.3-1.4 billion for the current fiscal compared to $1.5 billion last year.

Kapil Kaul, chief of CAPA for the South Asian region, recently said going by how things stand, it was unlikely that they would change their annual estimate of industry losses.