Low fare carrier SpiceJet says it has previously had discussion with potential investors and the company will proceed with discussions once the foreign direct investment (FDI)proposal is okayed by the government.
In an interview to CNBC-TV-18, Neil Mills, the airline's CEO said that the firm is open to strategic as well as financial partnerships. He also stated that the fall in crude prices has not sustained and the benefits are low on rupee weakness.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: When do you expect FDI in aviation to come through because we understand that you are in active talks with private equity investors with some aviation companies as well, you might have a better understanding than us of the expectations on the ground. What is your estimate of the timeline?
A: I think the estimation of the timeline is it is always Monday so it is not something that we are banking on or planning on to happen soon. If it happens, great, but at this point in time, we have had some tentative talks with potential investors. As soon as FDI in aviation comes through then we can take it forward to being something concrete. At the moment, it is just a plan.
Q: How far have conversations reached in terms of whether or not you have signed a term sheet with interested parties? What is it that the SpiceJet management is keener on - some kind of strategic stake buyer in the form of another airline or is it a capital need right now that could be fulfilled by PE players as well?
A: Going forward, growth requires capital and whether that comes from a strategic investor or from more of a pure financially vested PE type will depend on what deal is available for the company that suits the company and the shareholders.
Either one of those we are open too. We haven't made a decisive decision as to which one we would rather go for. So it depends on what deal is on the table but the airlines particularly are reluctant to engage too much because they have been told for a long time now that FDI is coming. So, they are probably a little more apprehensive about it than we are.
Q: Is it purely an FDI clearance issue right now though, most aviation companies globally are debt-ridden or have gone down under. The market over here is quite tight. Most aviation companies including you have high debt issues. Is there that much significant interest coming from aviation players or is it more about investors?
A: That is not correct. We don't have high debt issues. The only significant debt that we carry on our balance sheet is directly related to aircrafts that we bought in the last nine months. They have assets attached to them. The unproductive debt that we have which has to do with historic costs is actually very small.
SpiceJet is not hugely debt burdened at all. That is not something that puts people off, that is not the problem and people do see that aviation in India does have an upside. It is just which airline can take advantage of it which is best placed that we will be able to be successful going forward. SpiceJet is certainly one that comes up regularly on that very short list.
Q: The thing that has plagued yours and most airlines' balance sheets or profit and loss is the kind of fuel costs that you have been dealing with. Now that ATF prices have come off quite steeply because of the movement in crude and you will start importing ATF directly, how much you can reduce fuel costs on a quarterly basis from hereon?
A: Fuel costs have come down but unfortunately fuel crude oil moved all the way down to USD 90 per barrel but only stayed there for less than a week and it has moved back up to almost USD 100 per barrel. On crude, a lot of the benefit has actually gone away and has disappeared again within a week.
The other difference is the reduction in crude; unfortunately, the weakness of the rupee in the short-term has more than offset that. Absolute fuel prices come down I think it was about 2% and about 5% so not nearly the sort of headline numbers we would like it to come down by. Going forward, we will do direct importing of fuel. It will have a contribution towards our bottomline but we cannot import our entire requirement. It will just help us to try to offset part of the cost on the P&L.
Q: What is the total debt on the books of SpiceJet? What is the working capital debt that the company is working with? Are you seeing any kind of restriction from banks with respect to working capital requirements?
A: Banks are understandably reluctant at the moment to lend money to aviation in India. Two of the banks particularly have really given them a fairly rough time. There is a lot of non-performing assets (NPA) in aviation. We don't have that issue. We have got two banks that are quite happy to support us. As our borrowings are not significant, there is no particular issue with us on cash flow at the moment.
Q: We hear that passenger traffic growth has slipped into single digits even as yields still remain relatively high for aviation companies mostly because of the restraint that many other aviation companies are facing. What exactly is the on the ground picture, in terms of passenger traffic growth and what kind of yields you enjoy right now?
A: Passenger traffic growth is gradually going up and will continue to grow. With the general economic environment in India there will be a slowdown in growth in passengers. But it's no that significant. What you can't do though is in the short-term, because we have now moved into the off-season, compare the high quarter and the low quarter and say - there is a reduction in capacity.
Year-on-year (YoY) there is, but one airline particularly has had a lot of problems in the last 12 months and has reduced capacity. That has certainly helped in trying to put back on the pricing side some sort of normality. Going forward, the growth is definitely there. Longer-term within India, passenger growth will continue to happen. What passengers are definitely showing is that want value for money and they are certainly choosing the low-cost carriers. That's where the growth is going to be going forward.
Q: Once this FDI in aviation issue is resolved is it just a matter of signing on the dotted line? Have you more or less made up your mind which way you want to lean between strategic or capital investment?
A: We couldn't possibly give you those sort of details. We are a listed entity and we have obligations to our shareholders as well. So I am afraid I will have to give that to our shareholders first.
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