SpiceJet's plan to hive off cargo business faces challenge from creditors

With a fleet of 20 aircraft, which includes four wide-body aircraft on wet lease and passenger aircraft converted to carry cargo, this a far cry from just five aircraft a year ago
Ajay Singh-led SpiceJet’s plans to hive off its logistics and cargo business into a separate entity called SpiceXpress is facing legal hurdles, with lenders and aircraft lessors challenging the move.

One of SpiceJet’s lessor Goshawk, along with its trustees, has moved the Delhi High Court (HC), asking for an injunction on the airline’s plan to transfer any of its assets to a separate company until the airline clears its pending dues of around $16.2 million as lease rentals on three aircraft.

In its interim order, the Delhi HC has restrained SpiceJet from alienating the assets.

“Till further orders, the judgment debtor is restrained from transferring/alienating its assets to the tune of the decretal amount,” stated the Delhi HC order.

The development is a big hurdle for the airline since hiving off and monetising the cargo unit remains one of the key strategies to recapitalise the company. The next date of hearing is on November 29. SpiceJet is in talks with multiple private equity investors to sell shares in the logistics arm to raise money.

People aware of SpiceJet’s business plans indicated that investors in their talks have made it clear that they want the cargo business to be ring-fenced and kept at an arm’s length from the passenger business.

The airline has also approached the Ministry of Civil Aviation for a new air operator permit for the cargo arm and has set up a management, separate from the passenger business.

However, the airline said the request for a stay has been declined by the court on the transfer of the logistics business to its subsidiary.

“We would not want to get into the detailed interpretation of the court matter since it is sub-judice. We have been in discussion with all MAX lessors for a settlement and return to service of these aircraft. We have already done so with Avolon and CDB Aviation and discussions with other lessors, including Goshawk, are on. None of the MAX lessors (including Goshawk) have terminated any of the leases and are continuing to make all commercial efforts to resume safe operations of the MAX fleet,” said a spokesperson for the airline.

Last week, the company announced it had received approval of shareholders for transferring its cargo and logistics services business to its subsidiary SpiceXpress and Logistics on a slump-sale basis valued at Rs 2,555.77 crore.

Slump sale means the transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to individual assets and liabilities in such sales.

SpiceJet had leased three Boeing 737s from Goshawk (one B737-800 and two B737-MAX8s). On account of the Covid-19 pandemic, travel restrictions were imposed, resulting in worldwide grounding of Boeing MAX8s. As a result, SpiceJet defaulted on its rent payment obligations and Goshawk appealed in a UK court for a summary judgment in relation to its claim for arrears.

In May, the UK court passed a summary judgment, in which it ruled that Goshawk is right in claiming the amount, but stayed its order asking the lessor and SpiceJet to instead mediate saying that SpiceJet is currently in a precarious financial state and an order to pay all outstanding amounts may push it into bankruptcy.

Aircraft lease agreements are covered under the ‘hell or high water’ clause, which implies that lessees (in this case, airlines) should continue paying lease rentals, irrespective of any issues like financial losses.

Sources aware of the development said that the mutual mediation between Goshawk and SpiceJet has failed, following which Goshawk has moved Delhi HC to enforce the order.

Lenders of SpiceJet had also raised concerns about the move. In the absence of growth in the passenger business, it is the cargo arm which has brought in revenue for SpiceJet. Hiving off the logistics company would remove one of the important cash segments. However, sources said the airline, in its discussions with lenders, has agreed that cash generated from the monetisation of the cargo arm would be first used to clear dues. Such an undertaking may help the airline get a no-objection certificate from banks.

With the passenger business severely hamstrung, the logistics business has virtually been a lifeline for the airline. The logistics arm - SpiceXpress - earned a net profit of Rs 30 crore, with revenue for the segment up 285 per cent to Rs 473 crore for the first quarter of 2021-22, from Rs 166 crore in the same quarter last year.

With a fleet of 20 aircraft, which includes four wide-body aircraft on wet lease and passenger aircraft converted to carry cargo, this a far cry from just five aircraft a year ago. The wide-body aircraft, which it has wet leased from Hi Fly, have been operating to multiple destinations like Lagos in Africa, Brussels, and Frankfurt in Europe and to Kabul, Tashkent, and Almaty. It plans to add eight more wide-body aircraft by the end of this year.

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