SpiceJet: It is important to save capitalism from "crony" capitalists

Dec 17, 2014

- By Vivek Kaul

Vivek Kaul
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.

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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."

Should the government be rescuing SpiceJet? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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14 Responses to "SpiceJet: It is important to save capitalism from "crony" capitalists"

R.Ramesh

Dec 29, 2014

It is politics!!! The PM and the ministers can pay from their pocket not my tax money.

If I am in loss or do not have money.......Will the Government give me cash???

Like 

Ansh

Dec 28, 2014

I don't think spucejet is asking for a bailout. Let's get the fact straight. None of the airlines r making money at the operating level. Very high exise n sales tax is the biggest reason. 60% of their operating costs goes into fuel. No country can grow without airlines. I truely believe airline industry deserves an infrastructure status and rational taxes. That is all which is reqd.

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ramesh agrawal

Dec 28, 2014

GOVT NEED NOT WASTE POOR INDIAN CITIZEN'S PRECIOUS MONEY TO BAIL OUT SCOUNDREL INDUSTRIALISTS LIKE VIJAY MALLAIH OF KINGFISHER FAME & NOW MARANS OF SPICEJET. LET THEM SELL THE COMPANY TO ANYBODY WHO CAN RUN IT WITHOUT GOVT LARGESSE. THESE PEOPLE HAVE ALREADY SCREWED THEIR EMPLOYEES;SHAREHOLDERS & CREDITORS. NOW; NO MORE PL.SCRAP IT/SELL IT TO SOMEONE WHO CAN RUN IT ON HIS OWN.

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R.Suresh

Dec 28, 2014

Why to talk about Spice jet ? First let us close Air India. What will happen if we close airindia? Some people will not have a job which pays them more than they deserve! In this country today crores of people work as temporary workers getting less than Rs.7000 per month without any job security.They are the wealth creators. Government suck these peoples blood in the form of tax and feed a few politically oriented corrupt administrators, who can not manage Air India. Shame Modi Shame!!

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prasad rao

Dec 20, 2014

No. The refusal by the government to bail out will send positive signals. Even if it means closing down, the government should take a firm decision which will act as an eye-opener to industrialists.

Like (1)

R.KUMAR

Dec 18, 2014

IT SHOULD NEVER BE RESCUED BY A GOVT. IT WILL SEND WRONG SIGNAL TO ALL INDUSTRIALISTS AND THEY WILL BECOME IRRESPONSIBLE.

Like (1)

Sarat Palat

Dec 17, 2014

The Govt. should not provide or guarantee any financial aid to Spicejet. Then it will become a common practice for every one. It is a public limited company. Let them handle the situation by themself. The only thing the govt. should do is to extend the time period for the outstanding payments.

Like (1)

D D Kochar

Dec 17, 2014

I have repeatedly announced " CRONY CAPITALISM IS DEAD ..... LONG LIVE CRONY CAPITALISM ". Even if Mr Mody is against it, his colleagues will never let it bury because of political & many other compulsions. BJP has to make its presence felt in South where Mr Maran can be a useful allie.

Like (2)

S.John melt

Dec 17, 2014

While in loss they approach Govt to rescue. But If they are in huge pile of profit will they give the surplus profit to Govt. The same promoters other business in huge profit. Will they share with the Govt.

Like (1)

P.Imma Maheswaean

Dec 17, 2014

I agree with you. If a small medium companies borrow from banks,if they fails in their repayment, banks will not extend credit terms to the companies. Government must ask spice jet from their other sources.They can bring the money. But they don't want to bring their money from other sources.They want to let the Government should bring the money.

Like (1)
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