SpiceJet unleashes yet another fire sale, will other airlines follow?

One year on and SpiceJet is back to offering a fire sale. Just like it offered a million seats at huge discounts at the same time last year, the airline has once again offered a million seats for up to 65 percent discount with fares beginning at Rs 2,157. Though this is not a flat discount like last time and is only available on 30 to 90 days' advance purchase fares, SpiceJet is again unleashing the discount beast in the market, compelling other airlines to follow. The discounted fares are for travel betweenJanuary 19 and March 31.

SpiceJet unleashes yet another fire sale, will other airlines follow?

Reuters.

Good news for passengers, for sure, but is it good news for SpiceJet and indeed for the struggling domestic airline industry? Airlines resort to fire sales when they want to fill up planes and generate quick cash, in a bid to fulfill working capital needs. SpiceJet is known to be suffering from acute working capital shortages and this could be a good way of quick cash generation. Other airlines such as Jet Airways also resorted to this fire sale method last year, similarly generating quick cash piles.

But this method of getting people on board is dangerous for all airlines and specially for SpiceJet which has been struggling with mounting losses and inability to generate enough funds. Last year's fire sale is seen by many as one of the major reasons why the airline's losses mutiplied manifold in FY13, though SpiceJet officials have denied this in the past.

Last year, SpiceJet's jaw dropping offer of a million seats had set alarm bells ringing within the Government as within hours of its announcement IndiGo and some other airlines also began advertising matching fares but then mercifully stopped. This wasn't because common sense suddenly prevailed upon competing airlines but because top Government officials picked up the phone and spoke to the CEOs of all airlines, issuing veiled threats.

These phone calls were intended to not only ask airline CEOs informally to desist from any such parallel fire sales but to also make them see how filling up seats on their aircraft could leave them in an even more precarious financial position than they already faced. This is what prompted competing airlines from not rushing in with their own discount offers. Will the Government again have to intervene this time?

Typically, a fourth of the aircraft flies empty during the lean March quarter for most airlines and fire sale or huge discounts are seen by many airlines as attracting this 25 percent of flying public which would have otherwise not booked with them. They never seem to realise that any rush for tickets during the sale days could well be from those very 75 percent people who would have anyway flown, leaving the airlines with reduced profitabiliy and a fourth of the aircraft empty still. Besides, airlines' yields (revenue per passenger) would be dangerously low for such discounted seats.

SpiceJet urgently needs cash. In its outlook for Indian aviation, aviation consultancy CAPA had estimated that SpiceJet needs anywhere between $200-230 million as immediate funding. Of this, $120-130 million is for future fleet commitments whereas working capital requirements as of March 2013 were between $70-100 million.

It has said in the past that it will be getting a strategic investor within the next two months. This partner is expected to be another international airline and will obviously bring in the cash required for SpiceJet's very survival. SpiceJet's networth was fully eroded as of March 2013 and auditors have already expressed apprehensions over its "going concern" basis.

Rashesh Shah and Darpan Thakkar of ICICI Securities have said in a note to clients last month that the airline's networth is negative Rs 603 crore as onSeptember 30thand its loan liability is over Rs 1700 crore. SpiceJet posted its highest ever quarterly loss in September at Rs 559 crore.

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Updated Date: Dec 21, 2014 01:13:01 IST

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