SpiceJet to seek compensation from Boeing

SpiceJet had bet its fortunes heavily on the new version of the 737 of which it has 13 planes in its fleet and another 193 aircraft on order

SpiceJet will seek compensation from Boeing and demand credit on maintenance, repair, and overhaul for the 12 grounded 737 MAX aircraft.

The airline, which had an aggressive expansion plan that banked on the delivery of the Boeing 737 Max, will now look to lease old planes.

SpiceJet had bet its fortunes heavily on the new version of the 737, of which it has 13 planes in its fleet and 192 on order.

The fuel-efficient and longer range 737 MAX provided an opportunity for SpiceJet to control its cost and plan new foreign routes, the future of which looks uncertain now.

The airline's stock slipped 2.09 per cent to Rs 77.15 on the BSE on fears that the grounding of Boeing 737 MAX 8 aircraft would hurt the airline's revenue.

“We will seek compensation from Boeing for the grounding of the planes.

"We will also seek recompensation for revenue loss and any kind of maintenance or technical overhaul that the aircraft will have to undergo.

"This is part of the contract, which we signed with Boeing for all the 737 MAX aircraft,” said a senior SpiceJet executive.

SpiceJet had recently started to see an improvement in its fortunes based on capacity increase and route development by the more fuel-efficient aircraft.

The airline, which has 13 Boeing 737 MAX, had plans to add 15 Boeing 737 MAX in 2019.

"We haven't yet studied how many will be delivered in the changed scenario, as it depends on the duration of the ban. However, we have a contingency plan ready," said another SpiceJet executive, adding the airline is going to wet lease two Boeing 737 in the next 20 days.

Wet lease is an arrangement under which an airline leases aircraft along with crew, maintenance, and insurance from the lessor.

It is a costly process and will lead to a spike in operational cost for the company.

According to the company's statement, in the October-December period, its cost increased only 2 per cent, while jet fuel price increased by 6 per cent. This was due to lower fuel burn of the aircraft.

Additionally, the airline will have to go slow on its expansion plans.

The airline had planned to launch flights to Guangzhou, Istanbul, Moscow and other cities in central Asia from the upcoming summer schedule.

It has also been forced to cut flights on at least 12 international routes.

"Should the issue prolong, it could result in loss of profits for SpiceJet in the impending peak season… though we expect some compensation from Boeing, depending on the agreement," brokerage firm SBI Cap said in a note to clients.

As of now, there seems to be no clarity on how long the grounding will continue because it has been done following global examples and without any directive from Boeing or the Federal Aviation Administration.

“As of now, we don't have any clarity when the ban will be lifted.

"Boeing has to assure us and other regulators that it has implemented changes in the aircraft and they are safe to fly. We may follow global examples too,” said B S Bhullar, head of the Directorate General of Civil Aviation.

Boeing has said it plans to make major changes to the flight control systems on the 737 MAX aircraft.

The changes will be implemented by the end of April.

According to Civil Aviation Secretary Pradeep Singh Kharola, the airline will cancel around 40 flights from Thursday.

He, however, added the airline had been asked to not cut flights to a city that would make it unconnected.

“SpiceJet is rationalising the use of its other aircraft to address the current situation. We are evaluating options for augmenting capacity in the coming days through a mix of additional flights and aircraft induction,” a SpiceJet spokesperson said.

Photograph: SpiceJet via Twitter