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

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 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 High Court has restrained SpiceJet from alienating the assets worth the amount into a separate company.

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

The development is a big hurdle for the airline as hiving off and monetising the cargo unit remains one of the key strategies to recapitalise the company. The next date of hearing is on 29 November. 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 in their talks investors have made it clear that they want the cargo business to be ring fenced and at an arm’s length distance from the passenger business.

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

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Last week, the company announced that it has received the approval of the shareholders for transferring its cargo and logistics services business to its subsidiary, SpiceXpress and Logistics Private Limited 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 the 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 Coronavirus (Covid-19) pandemic, travel restrictions were imposed resulting in a 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 judgement 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 High Court to enforce the order.

Lenders of SpiceJet had also raised concerns over the move as in the absence of growth in passenger business, it’s the cargo arm which had brought in revenue for SpiceJet and hiving off the logistics company into a separate company as it is removing one of the important cash segments. However, sources said that the airline in its discussion with lenders has agreed that cash generated from the monetisation of the cargo arm will be first used to clear their dues. Such an undertaking may help the airline to get No Objection Certificate from the banks.

With the passenger business severely impacted due to the impact of COVID-19, 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 percent to Rs 473 crore for Q1FY22 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 passenger aircraft converted to carry cargo, 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.