SpiceJet crisis: Govt may fix minimum airfare as more airlines could go bust

Something good may still emerge from the ongoing crisis at SpiceJet. The Ministry of Civil Aviation has finally woken up and sounded an alarm on domestic airlines and their precarious financial situation. One official source said that not only is SpiceJet in deep financial crisis, it is understood that two other domestic airlines may also find themselves in similar predicament in the near future. He said that urgent parleys are on within the ministry and a series of proposals are being readied for submission to the PMO soon.

Among the proposals being considered is a rather contentious one - fixing the minimum air fare for each route. As of now there is no regulation on air fares. SpiceJet has been at the forefront of offering ridiculously low fares through most of 2014 in a bid to stimulate demand - forcing competing airlines to follow suit. Many analysts say this practice has hastened the airline’s decline.

The source quoted earlier said all airlines may be asked to submit their break-even cost per kilometer. Then after adding 5% to this figure as “margin”, the minimum fare would be fixed for a route - of course depending on type of service offered and type of aircraft used etc.

“This step will ensure that no airline in future goes into losses,” this source said.

There is also a proposal to fix the maximum fare an airline can charge, regardless of route or other variable and the source said Rs 15,000 cap is being discussed.A series of other steps are also being proposed to grant financial relief to loss making airlines. These include:

1. Getting the airline industry “infrastructure” status, already enjoyed by airports. This would mean airlines have access to cheaper funds

2. Allowing airlines to go for ECBs with lower interest rates

3. Complete income tax exemption for a fixed period

4. Government should direct banks to cap interest charged on borrowings by airlines at 8%

5. Reschedule payment of dues to oil companies, airports and even banks for longer repayment

It is all very well for the ministry to speak of assisting airlines now, after it was caught napping over SpiceJet’s decline. Are all these steps being taken because the ministry has faced flak in the last two days over its haste in helping a private airline?

A ministry statement late on Tuesday had suggested that not only will oil companies and Airports Authority of India (AAI) grant a 15-day credit line to SpiceJet, suggestions have been made to banks also to lend another Rs 600 crore to the beleaguered carrier on personal guarantee of promoters.

Amid cries of favouring just one airline, Minister of State for Civil Aviation Mahesh Sharma was forced to clarify yesterday that nothing was being offered to any one airline. Oil companies have already refused to play ball and began supplying fuel to SpiceJet only after the airline paid Rs 3 crore yesterday. There are reports today that banks also are unwilling to accept promoters’ personal guarantee to advance further loans.

SpiceJet’s demise is a very real threat unless the airline urgently gets funding and is able to take care of its immediate payouts amounting to Rs 1400 crore. Why the promoters are not coming forward to invest in SpiceJet is unclear. But if the ministry wanted to save SpiceJet from certain death, it should have come forward earlier. Instead of confabulating with Petroleum and Finance ministries at the eleventh hour, any revival package for airlines should have been worked out by the Modi Government much before the SpiceJet crisis.

But now that there is a prospect of two other airlines also possibly coming under similar financial stress, perhaps the PMO may be jolted to action.