SpiceJet has approached the government for financial help. The top officials of the airline met the Minister of State for Civil Aviation Mahesh Sharma, a couple of days back.
“We have given no assurance to SpiceJet. We will take a final decision keeping wider interest of passengers in mind,” Sharma told the press after the meeting. He also said that the request for financial help would be put before the petroleum and the finance ministries, as well as the prime minister’s office.
A newsreport in The Times of India suggests that the officials of SpiceJet told Sharma that the airline had an immediate cash requirement of Rs 1,400 crore and an overall requirement of Rs 2,000 crore.
The airline, like Kingfisher before it, owes money to employees, airports and oil companies. Over and above this there are statutory dues that remain unpaid. The airline has provided a guarantee that it would clear the dues worth Rs 200 crore that it owes the Airports Authority of India (AAI),
which operates most airports in the country.
Yesterday the government allowed SpiceJet to book tickets up to March 31, 2015. Earlier, the airline wasn’t allowed to book tickets beyond thirty days.
This will help the airline in two ways. First, it can honour the bookings that it had made earlier and will not have to cancel these bookings. Cancelling the bookings would have meant paying back the customers who had booked tickets, and this would mean outflow of cash for the airline. The airline is currently running short on cash.
Secondly, the airline can make fresh bookings and in the process raise some money. It will be interesting to see if the airline uses this opportunity to announce flash sales. This is how the company has been operating this year.
A report in The Hindustan Times quotes an unnamed expert as saying: ““In a bid to raise working capital, the airline started frequently coming up with flash sales. It was their desperation to raise working capital as they waited for an investor.” In a bid to shore up its working capital the airline has announced over 25 sales this year.
It will be interesting to see if consumers book seats on SpiceJet given that in the last few months the airline has used what aviation industry insiders term as the “Christmas tree” option. This essentially means that the airline is taking out spare parts from its aeroplanes and using them for other planes in its fleet. Long story short: it doesn’t even have the money to pay for spare parts. So, the question will consumers feel comfortable travelling in such an airline?
Further, the government also allowed the airline to operate for another 15 days without paying up the Rs 200 crore that it owes AAI and Rs 80 crore that it owes to other companies operating airports in the country. The company also owes Rs 14 crore to oil marketing companies.
The Times of India report quoted earlier goes on to suggest that the government may be working out a “’revival package’ for SpiceJet as it fears shut down of yet another big airline after Kingfisher — both poor companies of rich promoters — ‘will send a bad signal globally’.”
Another PTI report suggests that the government may request banks to give loans of up to Rs 600 crore to SpiceJet, so that it has enough money to keep operating.
If the government does anything like that it will be setting a bad precedent by building in moral hazard into the system. As economist Alan Blinder puts it in After the Music Stopped : “ [the]central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”
A very good example of this in an Indian context is Air India. Its employees know that the government will not shutdown the airline and keep pumping money into it, and given that they have very little incentive in turning it around.
While this is not the only reason for the disastrous performance of Air India, it remains one of the major reasons. Its employees know that the government will not shut-down the airline because the politicians need their free airline rides at the end of the day and that is only possible with Air India around.
The airline made a loss of Rs 5,400 crore in 2013-2014. During this year the airline will see a total capital infusion of Rs 6,000 crore from the government. Such capital infusions have become a regular feature of Air India’s survival kit. The airline also has a total debt of close to Rs 40,000 crore.
One look at these numbers tells us that SpiceJet’s requirement of Rs 2,000 crore is rather small in comparison. Nevertheless, it is important to point out here that once bailouts start they can’t be scaled back, as central banks all over the world realized in the aftermath of the financial crisis.
Further, if the government chooses to rescue SpiceJet, after this every airline in trouble will expect to be rescued by the government and so might other companies as well. And this is exactly what moral hazard is all about.
Other than encouraging the insiders to take on increased risk, it gives them the impression of the world being a safer place to do business in than it actually is. This is because the firms assume that in case of a crisis, the government will come to their rescue. And this is not good for the system as a whole.
Also, as I have often pointed out in the past, the government isn’t exactly overflowing with money. The tax collections this year have been nowhere as expected. The disinvestment programme is yet to take off. And the fiscal deficit for the first seven months(April to October 2014) of the financial year has already burgeoned to 89.6% of the annual target.
Further, as I had pointed out in a previous piece on SpiceJet, it is worth remembering that the commercial aviation business is a huge cash guzzler and has led many a capitalist to his ruin. This is not only an Indian phenomenon, it seems to be the case globally. A February 2014, article in The Economist suggests that profits margins of airlines have been less than 1% on average over the last 60 years.
In this scenario, it doesn’t make any sense for the government to rescue SpiceJet. Further if they choose to rescue SpiceJet, they will essentially be rescuing a crony capitalist, who built his main “media” business with the blessings of a political party. This will not be a good thing to project for the government.
It is important to remember here what Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists: “Since a person may be powerful because of his past accomplishments or inheritance rather than his current abilities, the powerful have a reason to fear markets…Those in power – the incumbents – prefer to stay in power.” Even if it means begging the government for a rescue.
Rajan and Zingales further elucidate on this point: “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”
Keeping these points in mind, if the government does decide to rescue SpiceJet, it will be helping another crony capitalist survive without having to face the consequences of his actions. This can’t be good for the government which anyway gives an impression of being close to big business.
To conclude, it is important to remember what the American economist Allan Meltzer once said: “Capitalism without failure is like religion without sin. It doesn’t work.”
The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, as on Dec 17, 2014.