SpiceJet reaches settlement with aircraft lessor CDB Aviation amid financial pressures

#aviation, #India Aviation, SpiceJet, settlement with Avolon

A SpiceJet aircraft | Representative image

Low-cost airline SpiceJet has “commercially agreed” to a settlement over the lease of Boeing MAX aircraft from CDB Aviation, less than three weeks after reaching a similar deal with Avolon, another plane lessor, as it battles the adverse impact of the pandemic and other pressures on its finances.

“This will add to the already announced settlement with Avolon and grow its fleet of 737 MAX aircraft. The airline expects to start operations of MAX aircraft around the end of September 2021, subject to regulatory approvals,” the airline said in a statement.

CDB Aviation’s fleet consists of 379 owned and committed aircraft and its global customer network comprises 72 lessees across 37 jurisdictions. Besides SpiceJet, its clients in India include AirAsia India, GoAir (now GoFirst)  and IndiGo.

The announcement comes within three weeks of an announcement by SpiceJet that it had reached a settlement with Avolon, another major lessor of MAX aircraft, amid speculation over its financial health. The aviation regulator recently lifted a ban on the operation of MAX aircraft clamped following two major plane crashes overseas in 2019.

On August 12, the airline reported a net loss of Rs 729 crore in the first quarter of the financial year, up from a net loss of Rs 593 crore in the year-ago period, as its flights suffered the impact of the second wave of COVID-19 and pricing pressures.

Earlier this month, SpiceJet employees at Delhi airport walked out over alleged non-payment of salaries. In response, an airline spokesperson said, “The issue with a section of SpiceJet employees at  Delhi airport has been resolved and the employees have returned to work. SpiceJet’s flight operations remain normal.”

SpiceJet deferred payments to various parties including aircraft lessors and other vendors and its dues to statutory authorities.

“Where determinable, the company has accrued for additional liabilities, if any, on such delays in accordance with contractual terms/applicable laws and regulations and based on necessary estimates and assumptions. However, it is not practically possible to determine the amount of all such costs or any penalties or other similar consequences resulting from contractual or regulatory non-compliance. The management is confident that they will be able to negotiate settlements in order to minimize/avoid any or further penalties. In view of the foregoing, no amounts of such penalties have been recorded in these standalone financial results,” auditor Walker Chandiok &.Co LLP has said.

Industry watchers are divided about what the agreements with CDB Aviation and Avolon mean financially for SpiceJet.

Avoiding litigation   

Nripendra Singh, research director at the aerospace, defence and security practice at Frost & Sullivan, said the agreement SpiceJet has announced with CBD Aviation was a “normal/routine activity in airlines that follow an aircraft leasing model.”

Singh pointed out that it was better, both for the airline and the leasing company, to work out new terms to avoid prolonged litigation over an expensive asset.

Also Read: SpiceJet launches 38 new domestic and international flights

He said that, like the airlines, the lessors have also felt the impact of COVID-19.

“The COVID crisis was widespread, and there was a deferral of aircraft deliveries from the manufacturers and leasing companies to airlines globally. In such a scenario, the leasing companies have no choice but to be more flexible,” he said.

An industry watcher said on condition of anonymity: “The word settlement means that the two sides have agreed not to litigate any more. A lot of airlines globally have gone in for this.”

He said there were two or three ways of reaching a settlement, including sacrificing a part of the revenue that would have accrued or spreading it over the remaining lease period.

“It is very unlikely that there will be any cash flow for the airline,”  the industry watcher added, because leasing companies are facing trouble getting aircraft leased to airlines because of a global slump in aviation stemming from Covid-19.

An email sent to SpiceJet seeking details about the agreement, where the money for the settlement was coming from and how many aircraft had been leased from CDB Aviation remained unanswered.

Vidit Mehra, at the aviation practice of IndusLaw, added that while the financial terms of the deal cannot be conjectured on, it can be said that SpiceJet would have insisted on stringent maintenance and regular upgrades for its fleet of 737 MAX aircraft.

“Given that SpiceJet is utilising the fleet for both cargo and passenger operations and under the Regional Connectivity Scheme, it is imperative to ensure that the tainted history of the 737 MAX fleet remains history,” he said.

Sukun Chandele, a partner at the legal firm Mind Legal, said that coming on the heels of the settlement with Avolon, the settlement with China Development Bank-backed CDB Aviation looked like a promising move for SpiceJet.

“Share price of SpiceJet has already gone up since the announcement and come September end it looks like MAX aircraft will literally take off,” Chandele said.

MAX troubles  

SpiceJet is the only Indian airline that has the MAX aircraft in its fleet. It had 13 MAX 8 aircraft which were flying in March 2019 and the airline had signed an agreement for around 142 more such aircraft, whose deliveries were halted following the worldwide grounding of the aircraft in April 2019 after two fatal crashes.

On August 26 this year, the Directorate General of Civil Aviation (DGCA)  lifted the ban on the Boeing 737-8 and Boeing 737-9 MAX flying in India. The DGCA banned MAX’s operations in April 2019 following the global ban on flights by the aircraft following the crash of Lion Air and Ethiopian Airlines MAX planes which killed over 300 people.

Of course, there is more than what meets the eye in the latest agreements that SpiceJet has entered into with two of the leasing companies.

Chandele pointed out that the airline has faced mounting losses over the past so many quarters and was also stuck in a quagmire of legal cases across India and even abroad.

“The low cost carrier has had to approach its existing lenders for further lending to ease off its debt situation. It also appears that the chairman and owner of the airline, Ajay Singh, has also approached the Delhi branch of the SBI{State Bank of India}  to get a bank guarantee for which he is going to pledge his shares and his personal property as security to make a bid for Air India.  SpiceJet is also going to hive off its cargo business to raise $ 300 million as its contribution to the bid. So, SpiceJet looks to be pulling out all stops to make a strong comeback,” Chandele said.

According to Chandele, given SpiceJet’s present financial situation, these settlements and bid efforts seem to be a risk that the airline is willing to take for its revival.

Also Read: Why is Spicejet transferring its cargo business to subsidiary SpiceXpress, explained

“The result could be increasing its share and market value due to which there are chances to get more investments and funding opportunities. SpiceJet needs funds to pay off its debt in the market and to make a fresh start,” Chandele said.

MAX aircraft have been in the news when it comes to SpiceJet for other reasons as well. On August 13, Walker Chandiok said in a review report on the airline that SpiceJet had claimed  on the grounding of MAX planes, certain costs, including aircraft and supplemental lease rentals and certain other identified expenses aggregating to Rs 143.57 crore for the quarter ended June 30, recognised as “other income.”

The auditors have been pointing this out for a few years now in comments on the airline’s quarterly financial results.

To make matters worse for the airline, Walker Chandiok also indicated the existence of material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern.

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