CREDIT RATING ANALYSIS

SpiceJet

Strategic Business and Risk Analysis

(Term IV)
Individual Report

Satyaki Dutta
PGP/22/379
Executive Summary

SpiceJet Airlines is assigned a Credit Risk Rating of 3- according to the current research with a number

of objective and subjective parameters under analysis.

• Industry Risk is rated at 3+ with newer Government initiatives coming up to boost new routes.

However, strong competition and rising Air Traffic Fuel prices are a concern

• Market Position Risk is attributed a rating of 3 with a strong market share for SpiceJet but heavy

competition from other airlines with relatively low entry barriers.

• The risk in Operating Efficiency is estimated to be about 3+ with the existence of high fleet size

and considerably high Load Factor over the years. The non-fuel expenses and threat to brand

image might hamper the Operating Efficiency in the long run.

• The Financial Risk of SpiceJet can be denoted at 3-. Operating Margin is showing a slow growth

or a decline as projected in the coming years. However, in comparison to its peers, SpiceJet is at a

relatively comfortable position.

• SpiceJet management however, successfully wins over creditors confidence, with CMD Mr. Ajay

Singh being the pioneer of low-cost aviation in India. Management Risk is estimated to be a safe

3+.
The Indian Aviation Industry – A Risk Overview

The Industry Risk for the Indian Aviation Industry can be estimated at about 3+ with increasing government
support and newer routes. However, fuel and power costs possess a threat for airline companies in India.

The aviation market in India is the 7th largest in the world and it is set to surpass UK to become the 3rd
largest aviation market by 2024, with a growth in both business and leisure travel. The domestic passenger
traffic recorded in FY18 in Indian airports is Rs. 243.28 Mn. Government is also set to increase investment
in the aviation sector with total estimated planned investment of $6 bn in the next five years. The Indian
airline industry is highly concentrated with only a few major players. The Herfindahl-Hirschman Index for
Indian airline industry is 2674. Aviation in India is highly organized with both the public and private players
working in tandem throughout the industry.

The major players with their market share are as follows:

• Indigo – 46.9%
• SpiceJet – 13.6%
• GoAir – 9.9%
• Air India – 13.1%
• JetLite – 1.2%

The aviation industry in general is determined by several factors such as

• Service Operations: The manufacturing is negligible and most aircrafts are on lease in the aviation
industry at large. The airline companies’ focus lies on ticket booking, luggage handling and transfer
as well as passenger check-in and check-out. The efficiency of airline operations is entirely based
on how fast aircrafts can prepare for the next flight, and therefore is on maximizing the time in air.
• Substitutes: The only substitutes of airlines are the high-speed luxury trains over a short distance
that can avoid the check-in delays.
• Input Materials: The increasing fuel prices are added with the volatility add to the pressure on the
financials for the airline companies. The availability of skilled professionals possesses another
challenge.
• Cost Structure: The fuel and power cost structure are the most important cost components for
airlines
The demand and supply scenario in Indian passenger airlines are witnessing a steady growth with
passenger traffic growth of 11.64% YoY to reach 344.70 Mn in FY19. The load factors have risen
sharply in the last four years, with the preference of air travel growing as the fare gap narrows between
railway and airlines. UDAN scheme has boosted growth in demand from the regional airports and
smaller towns. On the supply side however the recent grounding of Jet Airways has caused a supply
crunch.

The Pricing drivers are the price of crude oil, the number of players in the market, the cost for the
employees, the on-board facilities provided by the airlines as well as the route coverage. Air India is
positioned as a value-based player with its focus on hospitality and rich heritage. The Maharaja mascot
acts a stimulus. Indigo and SpiceJet as the low-cost airlines with their focus on competitive pricing,
cash rewards and pre-booking discounts. The airlines price are forecasted on the route usage – business
or leisure, seats booked till date and the real time bookings and cancellations

In the aviation sector, Government plays a major role as a regulatory body. The National Civil Aviation
Policy of 2016 was a first integrated aviation policy of its kind, which includes a number of initiatives
such as Regional Connectivity Scheme, Route Dispersal Guidelines, 5/20 Requirements, as well as
Aviation Education and Skill Building. Ude Desh ka aam Naagrik (UDAN) falls under the Regional
Connectivity scheme which plans to operationalize airports in Tier 2 towns and cities. Liberalization
and Open Sky Policy now allows domestic airlines to expand their routes internationally and make
route sharing or fleet sharing joint ventures with international carriers. The 100% FDI in Greenfield
Projects is set to boost the airports and infrastructure developments in Indian aviation.
SpiceJet – Market Position

The Market Position Risk for SpiceJet airlines can be earmarked at a modest 3, with strong market share
for SpiceJet but heavy competition from other airlines with relatively low entry barriers.

SpiceJet enjoys the 2nd largest market share among the

Indian airline companies. Post the discontinuation of Jet
Airways, SpiceJet’s market share grew to 15.8% during
June, 2019, while Indigo’s market share witnessed a
slight dip from 49.9% to 48.1%. SpiceJet achieved a
passenger growth of 24% in May’19. In the International
passenger segment as well, 15.6% growth was noted in May’19.

SpiceJet has access to lucrative domestic routes connecting Tier II and Tier III Indian cities, which comprise
about 20 routes under the UDAN scheme. Diversified access to metros and Tier I is granted to SpiceJet
from among the 130 slots vacated by Jet Airways. SpiceJet already has existing plans of expanding its fleet
size to 10-140 by the end of FY20 which promises to maintain its competitive positioning. At present,
SpiceJet comprises a 111-fleet size with 410 daily flights flying in 159 routes.

The competitive market is intense in India with frequent entry of new players and aggressive flight additions
by the existing players. The revenue is leaking for most low-cost carriers as there is an intense price
competition draining down profits. SpiceJet, being a strong private player with considerably large market
share is already taking measure to acquire aircrafts from Jet Airways and hiring new staff and crew.

SpiceJet always focused heavily on the revenue from ancillary services and diversification. SpiceXpress is
an extension of Cargo business with dedicated freighter plane services. Multi-channel revenue streams,
preferred seating, extra leg room, priority checking etc. through SpiceMax provides additional benefits for
a cost. Insurance, Lounge access, Visa, Cab, Cargo, Onboard Merchandise, Spice Experience are some
other revenue streams for SpiceJet.
SpiceJet – Operating Efficiency

The risk in Operating Efficiency is estimated to be about 3+ with the existence of high fleet size and
considerably high Load Factor over the years. The non-fuel expenses and threat to brand image might
hamper the Operating Efficiency in the long run.

Despite the highest passenger load factor and highest operating revenue, a healthy Operating Efficiency is
a Plus but Air Traffic Fuel prices remains a challenge for SpiceJet. SpiceJet has the highest passenger load
factor (>90%) in the last 4 years. Load factor is an important criterion determining the efficiency of airline
operations. The operating revenue per available seat miles is the highest for SpiceJet. CASK decline was
expected as it inducted the more fuel-efficient fleet of Boeing 737-Max8 aircrafts. SpiceJet is consistently
adding aircrafts to its fleet and increasing capacity every year leading to better operating efficiencies.

The YoY capacity growth stands at 24% in Q4 FY19. SpiceJet is among the top airlines in India when it
comes to on-time performance- a parameter supremely important for the efficiency of flight operations.
The cancellation rates in SpiceJet is among the lowest among passenger airlines.

The operating cost went up in Q4 last year, in spite of fall in ATF prices, due to the rise in non-fuel expenses.
Current uncertainties about the future of 737-Max poses a serious question on the operating efficiencies of
SpiceJet as a whole. The Cancellation rate and on-time performances are important determiners of operating
efficiency and both of them possess a serious threat on the brand image of SpiceJet.
SpiceJet – Financial Risks
The Financial Risk of SpiceJet can be denoted at 3-. Operating Margin is showing a slow growth or a
decline as projected in the coming years. However, in comparison to its peers, SpiceJet is at a relatively
comfortable position.

The operating profit margin are in a non-increasing The debt has been gradually decreasing for SpiceJet
slope with the increasing aircraft leasing cost. which is a silver lining. While the Current Ratio is
While the EBITDA as well as EBITDAR have been increasing over the years, the debt is projected to
increasing and projected to increase over time, the decrease sharply from 2018 onwards.
Operating Margin is being stabilized around the
0.1% mark.

Return on Capital Employed has increased

significantly over the years however it is seeing
a decline in the recent years. Operating
efficiency although increasing, is often by the
increase of ICR. Liquidity is moderate with 108
cr. bank balance. The negative cash accrual due
to increased ATF prices are a threat. The
Interest Coverage Ratio is falling which
coupled with the moderate debt is a cause of concern to acquire further funding. The increasing international
operations is expected to lead to higher operating margins. With the moderate capital structure, it is expected
to have a moderate degree of risk mitigation.
Albeit a stronger capital structure of Indigo, with improved retained earnings, SpiceJet is catching up with
its peers in terms of operating margin and gearing ratios.

When compared with its peers like Indigo

and the now defunct Jet Airways, gearing
has significantly improved for SpiceJet over
the last few years. In 2014-15 the debt-
equity ratio used to be negative during the
debacle period. While Indigo has a far
stronger capital structure, the retained
earnings on SpiceJet wins over the
confidence of credit lenders. Operating Margin of SpiceJet is second only to Indigo and is set to provide
close competition in coming years. SpiceJet’s Interest Coverage Ratio is one of the highest in the industry,
denoting string repayment capability.
SpiceJet – Management Overview

SpiceJet management successfully wins over creditors confidence, with CMD Mr. Ajay Singh being the
pioneer of low-cost aviation in India. Closeness to government is a plus. Management Risk is estimated to
be a safe 3+.

The Management at SpiceJet gives one of the strong points of support to boost creditors confidence. The
able Senior Management has its focus on shareholder wealth maximization while strongly holding the
reigns of SpiceJet.

CMD Mr. Ajay Singh himself is a pioneer of low-cost aviation in India. He and his entire experienced
Senior Management team does an able job in uplifting creditors confidence. Management lays a strong
focus on shareholders wealth maximization. From Rs 15 per share once upon a time, SpiceJet now trades
at close to Rs 136 per day. The management manages risk quite effectively, which is showed in the
consistently moderate gearing ratios over the last few years.

The SpiceJet management is also concerned about conservation of energy and the usage of alternate fuels.
This gives hopes to the creditors in the face of high price and volatility of Air traffic fuel.

SpiceJet has an open-door policy with a simple culture where the company encourages on more facetime
with senior officials than emails. The decisions are more discussion based and are taken on the go.

Mr. Ajay Singh had been close friends with former Prime Minister Mr. Rajiv Gandhi. The closeness or