SpiceJet posts highest-ever profit on books, but auditors do not agree
SpiceJet’s auditors have raised a red flag primarily because the company has factored in a hefty compensation from Boeing which it hasn’t received yet
August 10, 2019
The first quarter of financial year 2019-20 has proved to be a turning point of sorts for domestic carrier SpiceJet as in the June quarter of FY2019-20, SpiceJet posted its highest-ever profit of Rs 261.7 crore. The airline was on the verge of shutting down in 2015.
The airline claimed that the compensation that came in from Boeing for the grounding of 13 737MAX aircraft — Rs 114.1 crore — provided a great boost to the airline’s profits. However, the claim was contested by the company’s auditor.
What did the auditor say?
“We draw attention to the statement, regarding recognition of other income. In our view, there is no virtual certainty to recognise such other income, as required by accounting standards of Ind-AS 37. Had the company not recognised such other income, profit for the quarter would have been lower and accumulated losses as on June 30, 2019, higher by Rs 1,141.4 million (Rs 114.14 crore),” the company’s auditor S R Batliboi & Associates stated. The comment indicates that discussions with Boeing on the compensation amount hasn’t been finalised yet.
SpiceJet defends itself
SpiceJet’s Chief Financial Officer Kiran Koteshwar, however, dismissed the auditors’ view and said that the company would receive a higher compensation from Boeing but had accounted for only Rs 140 crore as it was certain about getting that amount as lease rental payment to lessors.
“This is a compensation which is a no brainer as this is already sitting on my books. As a listed entity, I didn’t give any guidance to my investors for compensations on the other items which I am still not certain of,” Koteshwar said while commenting on whether it was ethical to factor in the compensation that the airline has not yet received.
Airline is still incurring expenses on grounded aircraft
Koteshwar also admitted that the company is continuing to incur expenses on the grounded aircraft without generating any revenue. “I have a contractual obligation with the lessors, airports, crews to pay them irrespective of the grounding. Then there are maintenance costs. The profit reported for this quarter is an operational profit in a true sense as the company should not consider the expenses on 737MAX as they are not revenue-generating,” he said.
In the aftermath of the grounding of 737 Max 8 planes, Boeing disclosed an amount of $4.9 billion as payment to customers, which includes compensation to airlines for the grounding and delayed deliveries of 737MAX aircraft.