Does budget carrier Tigerair have enough cash to pump into SpiceJet?

There is a growing buzz about suitors circling low cost airline SpiceJet. Sources said frenetic activity has been seen at SpiceJet’s Chennai headquarters ahead of a deal with a potential equity investor and the latest name doing the rounds is of Tigerair.

In the last few days, names of other potential investors like Qatar Airways, Kuwait Airways and Emirates have also surfaced.

India allowed foreign airlines to acquire up to 49 percent equity in Indian carriers in September last year and since then, two proposals have come in - Etihad Airways wants to pick up 24 percent stake in Jet Airways whereas AirAsia has partnered Tatas and Telestra Tradeplace for setting up a new low cost airline from India.

In this context, the buzz around Tigerair, which is also a low cost airline with flights within AsiaPacific, is interesting. Tigerair is the first non-Gulf airline which is seen as an interested party. Sources said it is possible that a broad understanding has been reached between Tigerair and SpiceJet promoters but no deal has been signed till now.

But like in any potential acquisition, there is never any certainty about who will finally take the plunge. So we have no confirmation from any of the potential investors of their interest in SpiceJet. Also, while we have no idea about whether Tigerair has the ability to make the kind of investments which SpiceJet may need immediately, the Gulf airlines we spoke of earlier are obviously cash rich.

It remains to be seen whether any of these four airlines actually comes forward. An industry veteran pointed out that any deal, even if a foreign airline wants to acquire stake in SpiceJet, could take a long time to materialise. He said no one is in any hurry to bring in a large amount of money into a loss making Indian airline when the Indian cost environment is so hostile.

In the Jet-Etihad case, a major driving factor has been the reworking of bilateral agreement between India and Abu Dhabi. What substantial gains will a foreign investor now get by acquiring minority stake in the loss making SpiceJet?

Sources tell us that the SpiceJet promoters, the Kalanithi Maran Group, have been seeking investments through a strategic partner because they eventually want to exit the airline business all together. A detailed questionnaire sent to SpiceJet about potential investors and about the promoters’ intention to completely exit the airline business remained unanswered.

In a recent outlook aviation consultancy CAPA published for 2013 for Indian airlines, it has estimated that anywhere between $200-230 million is the immediate funding that SpiceJet needs. Of this, $120-130 million is for future fleet commitments whereas working capital requirements as of March 2013 were between $70-100 million.

Though CAPA says the airline is expected to declare “modest profitability” for the first quarter ended June this year (Q1 results have not been declared nor is there a date for their announcement yet), it still needs a substantial sum of $200-230 million for continuing to do business and for expansion in the near future. A story in Indian Express newspaper sometime back spoke of how SpiceJet had to raise Rs 100 crore from three travel agents since April towards working capital. So obviously, fund raising is a huge priority for this cash strapped airline. And therefore only an investor capable of making a substantial cash infusion into SpiceJet should come forward at this time.

For the financial year ended March 31, 2013 SpiceJet’s net loss stood at Rs 191 crore against a net loss of Rs 606 crore in the prior year. SpiceJet’s share price tumbled by about 13% in the last 12 months (as per a note to clients by ICICI Direct) and brokerages expect it to fall further. Then, it has also suffered because of currency volatility since almost 50% of its operating costs are exposed to currency exchange risks. SpiceJet has also seen the worst on-time performance for all Indian carriers in the last few months. Its debt has more than doubled from Rs 650 crore in FY12 to Rs 1,429 crore in FY13

So does Tigerair qualify? Its website says the Tigerair Group reversed operating loss of $83 million in FY2012 to turn in a profit of $7 million at the operating level in FY13. But could not manage to be profitable after taxes though it also narrowed losses from Singapore dollar 104 million in FY12 to 45 million in FY13 after taxes. During the same period, revenue increased from Singapore dollar 618 million to 866 million.

Tigerair, established in 2004, is a well known budget carrier which offers connections across the Asia Pacific. It operates from four bases in Singapore, Australia, Indonesia and the Philippines. On its website, the company says it aims to expand presence in Asia through both new strategic partnerships and organic growth. But does Tigerair have the cash to pump into SpiceJet?

In fact, the three other Gulf airlines which are rumoured to be interested in SpiceJet are far better placed financially to pick up a minority equity stake.

As at June 30th, Tigerair’s fleet comprises 45 Airbus A320-family aircraft, averaging under three years of age. Tigerair flies to over 50 destinations in 13 countries in the Asia Pacific region. Tigerair plans to build its fleet to 68 aircraft by December 2015.