Weekend Musings: Operating profit the ultimate truth

Edition 25

The last week saw SpiceJet announce its much delayed results which saw it report a loss for Q2-FY24. The larger story however was the fund infusion of INR 2250 crores from a number of investors. It remains a mystery on what exactly the fund houses, individuals and institutional investors saw in SpiceJet to infuse funds. The airline has had liabilities exceeding assets and a negative net worth for as long as one can remember. Lately, the airline has also had delays in announcing results. The fund infusion though comes as a welcome move for the employees, banks, lessors and the aviation ecosystem as a whole, in a year when Go FIRST has gone down.

The INR 2250 infusion pales in front of the loss that the airline has incurred in the last few quarters, starting with COVID. While the pandemic years were non-normal ones, the financial performance has been sub-par even before the pandemic. 

The funds which will be infused will take care of just the basics, like regulatory dues, salaries, certain high visibility court cases but that will still mean that the airline will have higher debts than assets and auditors are likely to continue calling this a going concern as the airline won’t be debt free. To grow, it will need more planes – which in its current financial condition is difficult to get.

This gets us to the most important question. Reduced debt, regularising the salaries and paying statutory dues – What next? The airline has to survive and for any airline to survive it has to generate operating profit where the cost of operation is clearly lower than the revenue earned. Income under “other income”, “sale of loyalty program” have only delayed the eventual death of the airline as was the case with Jet Airways, where it continued to lose money operationally even when it reported profits – thanks to the money flowing in from the sale of its loyalty program to Etihad group. The moment this transaction was complete and all its financial leases were converted to Sale and Leaseback, the airline started facing headwinds and eventually nosedived, never to recover again. 

SpiceJet’s fund infusion thus has to be looked at in multiple ways. Is it delaying the inevitable or has the airline found a way to make profits? Indian airlines get into a spiral where they take one loan to take care of current losses with a hope of earning enough to repay, which does not happen. This leads to taking another one, which partially services the previous loan and takes care of current working capital needs. This goes from one loan to another to a point where either no one wants to lend or a time comes when the debt servicing has ballooned so much that the airline can never make as much money to sustain and service the debt. This is exactly why “Operating profit remains the ultimate truth”!

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