DGCA’s tighter surveillance of SpiceJet: What investors should know, explained

SpiceJet shares tumbled nearly 7% on August 30 after the Directorate General of Civil Aviation (DGCA) placed the airline under enhanced surveillance.

This development has raised concerns among investors as the DGCA’s increased scrutiny could impact SpiceJet’s operations and financial performance.

The BSE-listed stock, which hit an intraday low of Rs 62.01, declined following reports of operational disruptions and financial distress at the struggling airline.

DGCA’s enhanced surveillance raises concerns

The DGCA’s decision to intensify its scrutiny of SpiceJet follows a special audit of the airline’s engineering facilities on August 7 and 8, which revealed certain deficiencies.

The regulator announced that the enhanced surveillance would include increased spot checks and night inspections to ensure the safety of SpiceJet’s operations.

This is not the first time SpiceJet has faced such regulatory action. The airline was previously placed under enhanced surveillance in July 2022 due to repeated safety incidents and again in July 2023 because of financial stress and technical.

The DGCA’s latest move reflects ongoing concerns about the airline’s operational safety and financial stability.

Cabin crew members on furlough

Apart from the DGCA’s move bringing the airline under greater scrutiny, SpiceJet also announced it has temporarily placed 150 cabin crew members on furlough for three months to adjust to a lean travel season.

An airline spokesperson said,

This step has been taken in response to the current lean travel season and the reduced fleet size, with the long-term stability of the organisation in mind. We deeply value the contributions of our crew members. During this furlough period, they will continue to retain their status as employees of SpiceJet, with all health benefits and earned leave intact.

The airline reiterated its efforts to secure an upcoming Qualified Institutional Placement (QIP) of Rs 3,000 crore which is expected to get completed this month.

Efforts to raise capital continue

In a bid to shore up its finances, SpiceJet has been attempting to raise Rs 3,000 crore through a qualified institutional placement (QIP) of shares, Mint had reported.

The airline had previously raised Rs 744 crore through the allotment of shares and warrants on a preferential basis, but the latest fundraising effort has faced challenges.

One of the primary investors backed out, leaving SpiceJet with only Rs 1,060 crore of the Rs 2,250 crore it initially planned to raise.

Despite these setbacks, SpiceJet remains hopeful that it will secure shareholder approval by September 13 to raise the necessary capital.

The airline’s spokesperson recently emphasized that the capital infusion would be crucial for driving growth and expanding its fleet.

However, with over 30 of its planes grounded due to the non-availability of engines and spare parts, SpiceJet’s operational capacity remains severely constrained.

Financial troubles deepen

SpiceJet’s financial woes have been a significant source of concern for both regulators and investors.

The airline has been grappling with financial stress, leading to flight cancellations and delays.

On Thursday, the carrier’s scheduled flights from Dubai were cancelled due to non-payment of dues to the Dubai airport, further exacerbating its operational challenges.

The financial strain is also reflected in the airline’s recent earnings.

SpiceJet reported a 20% drop in its consolidated net profit for the first quarter of the fiscal year ending June 2024, with profits falling to Rs 158 crore from Rs 198 crore in the same period the previous year.

The airline’s revenue from operations also declined by 15% year-on-year, highlighting the ongoing challenges it faces in maintaining profitability.

Legal battles and salary delays

In addition to its financial and operational challenges, SpiceJet is also embroiled in several legal battles.

The airline is facing contempt notices from the Delhi High Court and the National Company Law Tribunal over unpaid dues to aircraft lessors, vendors, and suppliers.

These legal disputes have further strained the airline’s resources, making it difficult for SpiceJet to address its financial obligations.

The financial difficulties have also impacted the airline’s employees, with reports of delayed salaries and furloughs.

What should investors expect?

The company’s share price has declined by more than 53% in the last five years, but has gone up by about 97% in the last one year.

In March this year, the airline announced a settlement agreement with Export Development Canada (EDC) worth approximately $91 million.

The deal was a breakthrough as it allowed SpiceJet to take ownership of 13 Bombardier Q400 aircraft, this helping it in its ongoing financial restructuring efforts.

The airline has also been reporting profits for two straight quarters, although with declining revenues. Its losses however are a cause of concern.

With SpiceJet’s accumulated losses standing at Rs 7,700 crore as of June, 2024, auditors in its Q1 earnings announcement said this indicated existence of “material uncertainty”.

SpiceJet’s performance metrics have also been the worst among all airlines as of July, 2024.

According to Emkay, the on-time performance (OTP) for all airlines fell to 70% or below, with AIX Connect recording the highest OTP among all airlines at 70.3%.

SpiceJet’s OTP however was much below, at 29.3% As of August 28, only 52% of SpiceJet’s flights were taking off on time, making it the least punctual among domestic airlines.

Also, while cancellations aggravated last month, SpiceJet recorded the highest cancellation rate of 3.11% followed by Indigo at 2.25%.

SpiceJet’s market share in India’s aviation sector has been steadily declining, dropping to 3.1% in July 2024 from 5.6% in January, according to the latest data from the DGCA.

Emkay foresees an approximately 4% month-on-month cut in ATF prices for September, largely owing to an approximately 7% decline in crude prices partly offset by a marginal 3% uptick in jet fuel spreads.

This may provide some relief in the coming quarter.

As per Mint, three analysts have initiated coverage on SpiceJet. While none have given it a ‘strong buy’ rating, two analysts have given it a ‘buy’ rating and one has given the stock a sell rating.

A challenging road to recovery

SpiceJet’s current predicament underscores the broader challenges facing the aviation industry in India, particularly in the wake of the COVID-19 pandemic.

While the airline has taken steps to address its financial and operational issues, the road to recovery remains uncertain.

The DGCA’s enhanced surveillance, coupled with ongoing financial stress and legal battles, presents significant headwinds for the carrier.

Analysts remain cautious about the airline’s prospects, with some expressing concerns about its ability to weather the storm.

SpiceJet must tackle fundamental financial and operational issues to rebuild investor and passenger trust, despite potential relief from capacity growth and reduced ATF prices.

As SpiceJet navigates these turbulent times, the coming months will be critical in determining whether the airline can stabilize its operations and return to profitability.

For now, the challenges facing the carrier continue to mount, with no clear resolution in sight.

The post DGCA’s tighter surveillance of SpiceJet: What investors should know, explained appeared first on Invezz