SpiceJet on course to join biggies’ club

Spicejet is one step closer to joining the league of big airlines in India having secured funding for its 16 aircraft it had ordered. The sale and lease-back transaction that the company is getting into is usual industry practice.

SpiceJet had recorded an extraordinary income of Rs 17.7 crore on sale and lease-back of an aircraft during the third quarter. The price of the aircraft had increased from the time of booking to the time of sale, resulting in a profit.

Given the large order of 16 aircraft, it is not clear if it will sell the aircraft at a profit, or instead sell it at the original purchase price, which will result in lower rentals. It may probably do a mix of both, which will let it record some profit on its books as well as keep operating costs low.

In a sale and lease-back transaction, the aircraft is sold by the airline company to a third-party, which leases it back to the company for a rental. This strategy should help SpiceJet pare its losses. For the three months ending May ’06, SpiceJet’s total income was Rs 154 crore and it suffered a loss of Rs 13 crore.

But what is more significant is that the company’s expansion is now fully funded. The company is currently operating with a fleet of six aircraft, which is expected to increase to nine by end ’06. The deliveries for these 16 aircraft start from early ‘07 and are spread out over 22 months. This should also help SpiceJet move into the big league.

The implications for the aviation industry are somewhat different. Apart from SpiceJet, Air Deccan and Kingfisher are also adding new aircraft on a regular basis, while Jet has a large contract with Boeing. During FY06, capacity on domestic routes was up almost 50%. This means that the ongoing price war is unlikely to subside in the near future.