2. SpiceJet is India’s second-largest low-cost carrier and domestic
operator. With a fleet of Boeing 737s and DHC Q400s, the carrier is
similar to many budget airlines globally. When looking up SpiceJet’s
founding year, many might point to 2004, the year Ajay Singh began
flying the low-cost carrier. However, in reality, SpiceJet can trace its
origin and Air Operators Certificate (AOC) to an airline known as
ModiLuft. ModiLuft was founded by Indian businessman SK Modi and
Lufthansa in 1993, which was eying a stake in the recently liberalized
aviation industry. The carrier began flying that May with a Lufthansa
737-200 and crew training from the German flag carrier. As India’s
first major joint-venture, expectations were high. At the end of 1996,
the airline officially shut down after Lufthansa pulled out. Notably,
ModiLuft’s AOC lapsed but remained dormant, an important point
for the future.
In 2004, a young entrepreneur named Ajay Singh drew up plans to
create SpiceJet, one of India’s first low-cost carriers. However, while
the usual process would be owners chasing the all-important AOC, Singh found
a simpler way. He opted to purchase ModiLuft’s AOC
and rename it SpiceJet, helping save time in starting operations.
SpiceJet began operations in 2005 using a leased Boeing 737-800,
setting it apart from competitors IndiGo and GoAir, who opted for
the A320 family. The first flight departed from New Delhi to Mumbai
on 24th May, officially kicking off the airline. SpiceJet quickly racked
up losses in 2012 due to the rise in oil prices and faced scrutiny from
regulators over safety concerns. While an influx of cash helped it
survive that year, the carrier’s underlying debt put it at high risk of
failure. By the end of 2014, SpiceJet was days away from bankruptcy.
3. The airline was losing planes and loans were getting harder to
secure. However, the carrier made a series of changes in 2015 to
remain afloat and once again gain a major presence in the market.
This change was helmed by the savvy and politically connected Ajay
Singh, who took over a major share of SpiceJet again and became
MD. In July 2021, SpiceJet reported net losses shrunk to US$34.6
million during the fiscal quarter ended 31 March 2021, as revenue
fell by 28% annually to $294.8 million. The airline plans to raise funds
to the tune of $337.2 million to ensure its long-term sustainability.
We have used the consolidated balance sheet of Spice Jet, and from
that we have made these financial statements of last five year to
analyse its financial condition. Financial statements are the written
records that convey the business activities and financial performance
of a company. Financial statement analysis enables investors and
creditors to evaluate past performance and financial position, ad
predict future. And there are four techniques to analyse financial
statements, and they are :
Horizontal analysis
Vertical analysis
Ratio analysis
Trend analysis
We have used the first three tools, to analyse the financial statement
of SpiceJet.
Horizontal Analysis : This analysis calculates the amount and
percentage changes from the previous year to current year. While an
amount change in itself may mean something, converting it to
percentage is more useful in appreciating the order of magnitude of
the change. It is presented in the form of comparative-size
statements. First two excel sheets, presents the horizontal analysis
of SpiceJet’s financial statements.
The calculations shown in the first excel sheet are quite
revealing. In 2018, both sales and net profit increased by 26%
and 30% respectively. But “revenue from operations” and
“other income” are highly volatile, and they move into two
different directions. From this we can infer that in 2018,
company’s profit growth was better than sales. From the
comparative balance sheet, we can infer that the company is
limiting its operations because its fixed assets are in negative.
4. From the 2018-2019 comparative analysis, one thing that is
sure that the company has started incurring losses since it has
been earning negative net profit i.e, -154%.
In 2019-2020, the company started expanding its operations,
since its fixed assets have increased substantially.
In 2020-2021, there is huge negative increase in non current
assets, which is worrisome. This could have In different reasons,
one of which could be insufficient inventories to maintain the
momentum in sales.
Vertical Analysis : Vertical analysis is the proportional
expression of the amount of each item on a financial statement
to the statement total. The results of vertical analysis are presented in the form
of common-size statements in which the
items within each statement are expressed in percentage of
some common number and always add up to 100. The next two
excel sheets deals with common size profit and loss account
and balance sheet. We can infer the following things, from
them;
From the common size statements, we can see that there are
significant changes in the tax and expenses. Also, there are
major changes in reserves and surplus, long term borrowings,
and trade receivables.
The percentage figures bring out clearly the relative
significance of each group of items in the aggregative position
of the firm.
Ratio Analysis : It is a widely used tool of financial analysis. It is
used to compare the risk and return relationships of firms of
different sizes. It is defined as the systematic use of ratio to
interpret the financial statements so that strengths and
weaknesses of a firm as well as historical performance and
current financial condition can be determined. We have
calculated seven ratio’s and they are;
Current Ratio: It is the ratio of total assets to total current
liabilities. Current assets are those assets which can be
converted into cash within a short period of time, normally not
exceeding one year. According to the graph of current ratio, we
can see a constant decline in it since 2020. Since it measures a
5. firm’s short-term solvency, and the higher current ratio, the
more is the firm’s ability to meet current obligations. As we can
see from the graph, the ratio is declining continuously from
2019, and it makes it very clear that the firm has no ability to
meet its current obligations, and safety of the funds of short-
term creditors are at a risk.
Debt – Equity Ratio: This ratio reflects the relative claims of
creditors and shareholders against the assets of the firm. The
ratio reflects the relative contribution of creditors and owners
of business in its financing. It indicates the margin of safety to
the creditors. And from the negative growth of the graph, we
can say that the company has more liabilities than assets.
Total assets to debt ratio: It show how much of a business is
owned by creditors compared with how much of the
company’s assets are owned by shareholders. There has been
an constant increase in this ratio from 2017 to 2021, which
means it is riskier to invest in the company and provide loans
to.
Operating Profit Ratio: This indicates how much profit a
company makes after paying for variable costs of production
such as wages, raw materials, etc. Decreased operating profit
ration in 2021 indicates that SpiceJet has been experiencing
increased rising of COGS (Cost of Goods Sold) with less
customer base.
Gross Profit Ratio: It is the result of relationship between
prices, sales volume, and costs. The gross margin/ratio,
represents the limit beyond which fall in sales prices are
outside the tolerance limit. After 2018, there has been a
constant decline in this ratio which means the condition is quite
alarming. And this negative margin indicates company’s
inability to control costs.
Net Profit Ratio: It is the indicative of management’s ability to
operate the business with sufficient success, it measures how
much net income or profit is generated as a percentage of
revenue. The company has been incurring negative net profit
ratio since 2019, and it means that the company is making
much less money than it is spending.
6. Return on Capital Employed Ratio: This measures how
efficiently a company can generate profits from its capital
employed by comparing net operating profit to capital
employed. It also shows how effectively assets are performing
while taking into consideration long term financing. There has
been a steady increase in the ratio in 2020, but again it fell
down to 21.25% which shows inefficient use of capital
employed.
From the financial analysis of SpiceJet, it is cleared that financially it
is not in a good position. Its operational cost is on rising since past
four years. And it has been losing its customer base along with it.
