The Airline Making Money Off Grounded Boeing 737 Max Jets

(Bloomberg) -- Airlines follow a pretty simple formula for success -- fill as many seats and fly as many hours as possible, and keep a young fleet. One Indian budget carrier is going another way to drum up income -- not flying.

SpiceJet Ltd. hasn't flown any of its Boeing Co. 737 Max jets for more than 27 months, after two deadly crashes operated by other airlines led to a global grounding. While most other major markets apart from China have cleared the Max to fly again, SpiceJet seems in no hurry to get it back in the air, and not just because there's less demand to use the jet because of the pandemic.

India's second-biggest budget carrier booked other income of 12.3 billion rupees ($165 million) in the eight quarters through March. That was the amount it expected to get in compensation from Boeing for not being able to fly its 13 Max aircraft, helping the company to trim its losses during deeply challenging times.

SpiceJet is the only Indian airline that operates the Max. With firm orders for 142 more, it's also one of its biggest customers globally. Yet the carrier hasn't asked regulators to lift the flying ban in India, a person familiar with the matter said. There's no clarity on why it has held back, and it would take at least a month after applying to get approvals in place, the person said, asking not to be identified as the matter is confidential.

SpiceJet declined to comment. Boeing said it continues to work closely with aviation regulators in India and elsewhere about returning the Max to service, but doesn't comment on talks with its customers.

In its annual results released late Wednesday, SpiceJet said management was confident of collecting the compensation from Boeing. However, its auditor Walker Chandiok & Co. said there was “no certainty” that the income would be recognized, reiterating a previous stand and that of SpiceJet's erstwhile auditors.

“SpiceJet is using this accounting method to shore up their results, and obviously to make sure that they don't need to bring in solvency capital of a magnitude which would dilute the current ownership,” said Shailesh Haribhakti, a chartered accountant and chairman of Shailesh Haribhakti & Associates, adding that such an approach is allowed under Indian regulations.

SpiceJet posted a loss of 10 billion rupees, its its third-straight annual loss, in line with what analysts expected. The carrier almost shut down in 2014 after running out of money, only to be rescued by co-founder Ajay Singh, who as chairman has changed its network, renegotiated vendor contracts and diversified into businesses including a dedicated cargo service, retail and health care. On Wednesday, Its board also approved a plan to raise as much as 25 billion rupees by selling shares to institutional investors and to spin off its profitable cargo business.

SpiceJet shares fell 1.5% to 81 rupees Wednesday in Mumbai, before the results were announced. They've fallen almost 15% this year, while the benchmark S&P BSE Sensex index has risen 10%.

SpiceJet's fleet includes other Boeing 737 models and Bombardier Inc. Q400 turboprops, though it isn't operating near the capacity it was before Covid. The airline carried just 3.9 million passengers in the first five months of 2021 as the outbreak in India worsened, a slump of more than 52% from the same period in 2019.

The 737 family has been the backbone of SpiceJet's fleet all along, with the company previously saying the “highly sophisticated” Max would allow it to compete better and expand profits.

While those profits aren't expected now, the Max -- even when grounded -- might offset some of the pain from last year.

“An entity must be allowed to account for a highly anticipated inflow of economic benefit,”said Suvigya Awasthy, a New Delhi-based Associate Partner at PSL Advocates and Solicitors, who specializes in commercial disputes.

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