SpiceJet Crisis Highlights the Perils of Airline Investing
SpiceJet shares got a big boost last month when billionaire investor Rakesh Jhunjhunwala, who has been constantly accumulating shares in the carrier, bought 7.5 million shares (or 1.40 per cent stake) on November 28. SpiceJet surged 38 per cent in just two trading sessions, nearing a 52-week high, post Mr Jhunjhunwala's share purchase.
The sharp gains attracted both small investors and speculators, with delivery volumes rising in the week after Mr Jhunjhunwala bought stake. The stock hit a high of Rs 21.65 on December 2, but this proved to be a top.
On December 5, when SpiceJet was barred from selling advance tickets beyond a month, its shares plunged 14 per cent. The stock has not recovered since then. On Tuesday, when SpiceJet cancelled a number of flights, its shares crashed to Rs 11.25, a drop of nearly 50 per cent since the intraday high of Rs 21.65 hit on December 2. Its market cap is down by nearly Rs 400 crore from Rs 1,029 crore on December 1 to Rs 639 crore on Thursday.
The crash in SpiceJet shares has brought back memories of Kingfisher Airlines, which stopped flying more than two years ago under similar circumstances. Trading in Kingfisher shares was suspended earlier this month.
Analysts say investors should exit SpiceJet as there is little hope that the carrier will survive despite the government asking airport operators and fuel suppliers to give it more time to pay its bills.
SpiceJet has not posted a profit in the last five quarters and needs urgent infusion of over Rs 2,000 crore to stay afloat. It has cut its fleet by about a third in September and daily flights have come down to 230 from 340. It owes money to oil companies, airports as well as its employees. The airline was forced to ground operations for a few hours on Wednesday.
Kapil Kaul, CEO (South Asia) at Centre for Aviation or CAPA says events of the last few says have crippled the customer confidence and the government's reprieve may have come too late for the ailing carrier.
"If the promoters are not willing to put money, this is a closed case... it will be a miracle if they get any outside investor at this stage given the challenges that have appeared in the last few weeks," Mr Kaul added.
But SpiceJet's parent Sun Group has made it clear that it does not have the cash to rescue the beleaguered carrier. "We do not have the liquidity to invest large sums at this time," said SL Narayanan, chief financial officer of Sun Group. (Read the full story here)
Independent analyst Sanjeev Bhasin says though the airlines business appears to be good because of the immense growth potential in domestic markets, the tough regulatory environment and broken balance sheets of most carriers makes investing in airline stocks a risky proposition.
"Only those with a big heart and lots of patience should stay invested in SpiceJet... I would advise investors to shift to Jet Airways if they have to buy an airline stock," he added.
Jet Airways shares are up 50 per cent in the last one month as it stands to benefit from SpiceJet's woes (falling crude oil prices have also helped). The other carriers that will benefit include IndiGo and Go Air, both of which are profitable but not listed. Jet Airways last reported a full-year profit (standalone) in 2010-11.
"Even if SpiceJet manages to survive, competitive intensity is going to increase with new companies such as Vistara - the airline joint venture between the Tatas and Singapore Airlines - expected to start flying in a few weeks," Mr Bhasin added.
India is not the only country, where carriers are finding difficult to survive. Six of the 10 initial public offerings by airlines in Asia during the past five years are trading below their sale prices, according to data compiled by Bloomberg.
It's not for nothing that the world's most famous investor Warren Buffett calls airline investing a "death trap for investors". Mr Buffett sworn off putting money in airline stocks after facing troubles with his investment in US Airways in 1989.
"I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: 'My name is Warren and I'm an aeroholic.' And then they talk me down," Mr Buffett is quoted as saying about investing in the airline industry. (Read the full story here)
SpiceJet shares closed flat at Rs 13.20 on the Bombay Stock Exchange. Jet Airways gained 4.5 per cent to end at Rs 404.15.
