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BW Businessworld

Putting The Spice Back Into His Jets

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It was with an unusual proposal that Kalanithi Maran, the promoter of SpiceJet, approached the airline’s minority stakeholder Ajay Singh in September 2014.
 
“Are you interested in taking over?” Maran asked Singh.
 
As one of the founder promoters of SpiceJet, Singh had been closely associated with its day-to-day affairs, including heading its operations until 2010, the year when Maran acquired the airline’s majority stake from US investor Wilbur Ross, UK-based Bhupendra Kansagra, and their investment companies. After the change in management, Singh, who had a mere 4.5 per cent stake in the company, resigned from its board, while retaining a minimal shareholding.  
 
In the next four years, while Maran, the owner of Chennai-based media conglomerate Sun Network, struggled to manage an unwieldy airline, Singh stayed busy buying out Daewoo Motors (India) out of liquidation and playing the role of an angel investor in a nanotechnology company in Bangalore and an IT company in Mumbai. He was also part of BJP’s key campaign team in the last general elections and is credited with coining the winning phrase, “Ab ki baar Modi sarkaar”.
 
Almost five years later, Singh was told that the airline he helped build will either have to be taken over by him, or be left to die. “My sense initially was that the problems (that led to mounting losses and a desperate stake sale plan) were pretty severe. I said I am willing to look at it, but I need to understand what the problems are,” he says.
 
The Maran-Singh dialogue did not get anywhere at that time. Three months later, Maran approached Singh again. This time, he was very clear, says Singh: “They said I should take a call, otherwise they will shut it down.”
 
 
Goldman Sachs had given “dud” value to SpiceJet. According to industry experts, the enterprise value of the company at that time was Rs 3,000 crore in accumulated losses that it had made, and Rs 1,400 crore of liabilities it had. Singh was virtually offered the airline “free”, though it was his responsibility to raise enough funds to steer the company away from its liabilities and turn it around. 
 
The call Singh eventually took is evident from the fact that he today owns over 60 per cent stake in SpiceJet. Though the takeover was not without controversies, it is very clear that Singh means business. He claims to have cleared all debts of the ailing company in just three months since the takeover in December last year. The company is talking about fleet expansion and fresh hiring. His revival strategy for SpiceJet is to get the basics right.
 
Experts are not ruling out the revival possibilities either. “They have to recoup a lot of things. Overall, it looks positive,” says Amber Dubey, partner and head, aerospace and defence, KPMG India. “They are back in business. Competition is always good for the entire aviation industry. Not only does it keep us on our toes, it also pushes us to keep improving our products and services,” says Phee Teik Yeoh, CEO, Vistara.
 
Second Coming
As promoter of the airline, it was a second coming for Singh. His entry as SpiceJet promoter for the first time happened in December 2004 when he, along with his investor friends re-named and re-launched Royal Airways (originally known as Modiluft) — an airline company that had suspended its operations in October 1996 — as SpiceJet. The following years saw the company pursue a low-cost model to increase its fleet size, network of operations and revenues to culminate into some profit in 2010, the year when Maran took control.
 
Several things changed after SpiceJet became part of the Sun Network. And some of which proved too costly for Maran. “I think the airline deviated from its principles of trying to reduce cost on a regular basis. You have to keep knocking down costs which I didn’t think was the focus under Maran’s leadership,” says Singh. He also points out that there was a lot of dilution of revenues due to faulty design of promotional schemes. “They went more for spread, in terms of opening up of large number of operations as opposed to having higher frequency. Also, the airline was functioning under an absentee leadership because Maran was not physically present here (in Delhi, its operational head quarters). It’s a very competitive space, you can’t afford a hands-off deal,” says Singh.
 


An investor note from ICICI Securities, which announced the suspension of SpiceJet coverage on 17 December 2014, explains the dire situation that compelled Maran to take the airline company to Singh a second time: “SpiceJet has reduced flights across its network from 332 daily to 239 from 1 September till date. It has cancelled 1,861 flights till this month end, which has also affected its brand image. With three consecutive years of net losses and mounting outstanding dues of over Rs 2,000 crore, it needs at least Rs 1,000 crore immediately to keep it off the ground. Given this backdrop, amid high uncertainty over funding, we suspend our coverage on the company and recommend that investors exit the stock.” If SpiceJet was in such a bad shape and seemingly at point of no-return, how did Singh became interested in it?
 
“The fuel prices were low, the economy was picking up, the brand was good, and it was a brand that I intimately knew,” says Singh. “I also thought it was a national service. But it couldn’t have been done if there wasn’t a rational reason. I knew there was an honourable way to do it and I had the ability to do it,” he says.  
 
The Deal And After 
As part of share sale and purchase agreement, Maran transferred his 58.46 per cent of SpiceJet stake to Singh in February 2015. The deal also received requisite statutory clearances, though not everyone agrees with the level of transparency. The most vocal among those who criticise the deal is senior BJP leader Subramanian Swamy. He has already written a letter to PM Modi seeking an inquiry into the manner in which the deal was made. In Mid-May, Swamy also filed a petition in the Supreme Court seeking an inquiry into the matter. “Maran offloaded 58 per cent of SpiceJet shares to Ajay Singh. But, at what price? How can you keep that a secret? It is against company law, it is against the Sebi regulations,” says Swamy.
 
Swamy also complained that the deal occured without a mandatory open offer, which is against company law. “Sebi claims that it made an exception. How can it do that? What is his (Singh’s) net worth? How is he running the airline? Where does the money come from? Did it come from some offshore bank in Britain?” he asks. In his petition in the Supreme Court, Swamy illustrates the SpiceJet deal in the context of black money. “I have sought an inquiry. The court has on 13 May asked the government to respond,” he says. Singh refutes all the allegations raised against him. “We acted completely as per Sebi’s rules and regulations. There were provisions in the Sebi law that permitted an exception under certain conditions. And we used those provisions,” he clarifies.
 
On the larger ground of equity and fair play, Singh says that Sebi has only done its job of protecting investor interest. “If this acquisition had not happened, the value of the shares held by small investors would have gone to zero. So, by doing what we did, we protected the small investors. They would have been zero. They are at 20 bucks now. I followed the law, I acted in the interest of SpiceJet, and its small investors.”
 
Singh says that the money (Rs 550 crore) that he has infused since acquisition has come from a mix of investors and banks. “We are getting a lot of funding offers from various players such as private equity, debt providers, hybrid products and even foreign airlines. We will choose the mode of investment that comes at the lowest cost. If any further dilution of stake is needed, that will be done at better valuation. Our improved performance will reflect in our stock price. We would need another Rs 500 crore for complete revival of the company.” So how much time to reach the 2010 level?
 
Singh says that he is still planning. “The first order of business was to stabilise. To make sure that flights start on time, as we were down to almost 40 per cent on time performance. In March and April, we have crossed the 80 per cent margin,” he claims. The company has stabilised that. It has brought some of the most outlier costs under control. “We shut down some airports and curtailed the network to get back to low-cost model — which is fewer stations and higher frequency to these stations,” he adds.Singh is also renegotiating debt-restructuring plans. “We have amended the contracts. We are re-negotiating a large number of contracts to bring the costs back in line.” 
 
A new SpiceJet board is also in the making. “We have applied for four members in the board. Security clearances have come for three. Harsha Vardhan Singh, former deputy director general of World Trade Organisation, is one of them. As we expand, we look to get aviation professionals, finance professionals on board,” he adds.
 
He also refutes the charges of nonpayment of dues. “Ever since I joined I have cleared all the statutory debts and every single rupee of bad debt, all employee salaries are up to date and oil companies are paid,” says Singh. The company’s cash flow has become much stronger than anticipated, according to Singh who so far has pumped in Rs 550 crore and has a larger funding plan to infuse capital as and when required. They were reports that the Lessors aircraft owners had sought the return of their Boeing aircraft and a payment of millions of dollars from SpiceJet to cover several months of unpaid rent and maintenance costs. “We have cleared debts of Lessors and are in the process of paying large creditors, in some cases, vendors have agreed to be paid in instalments, things are under control at the moment,” says Singh. 
 
The crisis had also resulted in an exodus of top-level management, pilots, cabin crew etc., says Kiran Koteshwar, chief financial officer and acting human resource head of SpiceJet. “Since Maran was not physically present in a day-to-day business, there was an environment of gloom among employees especially during the crisis time that the airline went through in the last few months. But Singh’s presence in the office exudes confidence and motivation among employees that things will go right because he is a very hands-on executive,” says Koteshwar.
 
 
According to him, the company is still looking for a full-time HR Head. “We will hire about 100 pilots, 50 commanders and as many co-pilots. We will also hire 200-odd cabin crew and flight engineers,” adds Koteshwar. At present, SpiceJet has a fleet of 17 leased Boeing 737s and 15 Bombardier Q400s that it owns.
 
Singh believes in a flat and leaner organisational set up. He is hiring old hands who left the place during Maran’s time. With Singh back in SpiceJet, many who had quit are returning now. Singh had made it clear that he would give first opportunity of joining to those who had either quit or had been laid off during the airline’s difficult days. Some have already returned. As part of his cost-reduction strategy, Singh has trimmed his expensive top management. “I want a leaner management with responsibilities dispersed equally at the mid-level,” says Singh, who fired the top load that were drawing salary of Rs 2 crore per annum.
 
With all the revamping and restructuring, Singh has no more time to spin off his mantra: “Fly our flights on time, make sure they are safe, clean, and the people who are flying are happy. The fares are reasonable. Just stick to the basics.”  
 
(This story was published in BW | Businessworld Issue Dated 15-06-2015)


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