The king of good times???

An over ambitious promoter and gross mismanagement or high fuel prices, duties and taxes; what is to blame for the current situation of India’s second largest airline by market share? Kingfisher airlines which revolutionized Indian aviation industry by its intense focus on service today finds itself left behind the competition, bogged down by huge debt and recurring losses.  Kingfisher would like to lay blame on the high fuel prices, depreciation in rupee, high duties and taxes. However, the real fact is that Kingfisher has been a mismanaged organization, proved by the fact that the airline hasn’t generated a single rupee of profit since its inception in 2005.

Troubled past

Kingfisher was launched in 2005 amid much fanfare and in just two years it became a prominent player in the country. Mallya’s ambition was to create the biggest airline of the country. To achieve this ambitious goal he set his target on acquisition of Sahara and Air Deccan. Kingfisher lost in a fiercely fought battle for Sahara. Having lost out on Sahara he set out to take over Air Deccan, the first low cost carrier of the nation, and after successfully acquiring the company he rebranded it ‘Kingfisher Red’ in 2007. This acquisition propelled Kingfisher to the second spot in market share. Mallya, however, had a bigger ambition of becoming the number one in Indian skies. The acquisition didn’t help Kingfisher much; instead it increased the gestation period for the company.

Trouble started in 2007, when oil prices reached alarmingly high levels. Then came the slowdown in 2008. Things went so bad that all airlines had to go before the government seeking relief packages. The conditions improved towards end 2009 as oil prices began to fall and passenger traffic began to pick up. Most of the airlines used this period to recoup losses of previous quarters. Kingfisher however decided to go international resulting in heavier losses and longer gestation periods. It continued to borrow heavily to fund its operations. Now again the global economy is in a poor state, oil prices are rising. The massive debt load of Kingfisher has become unsustainable causing the company to take some drastic efforts to rationalize its operations and reduce its debt.

Gravity of the situation

Kingfisher has been running in deep trouble since a long time, but its pain has been aggravated in recent months. It has managed to create a staggering debt load at over Rs. 6,000 crores. Having made a loan restructuring deal with a consortium of banks last year, Kingfisher is again knocking at the banks door as it struggles to manage its working capital needs. Last time round it managed to get the banks to convert a part of their debt, about 1200 cr, into equity at an absurdly high price of Rs. 62 per share. With the stock now trading below Rs. 20 the banks have already made a huge loss.

Two banks, SBI and bank of India have declared that Kingfisher airlines’ loan has become a sub standard asset for them. This declaration came after the airlines failed to pay up its dues to these banks. SBI has the largest exposure to Kingfisher at Rs. 1,457.78 crores. Collectively, all lending banks hold approximately 23% stake in the beleaguered airline.

With the exit of many pilots and cancellation of many flights in recent days Kingfisher is struggling to remain in the skies. It also got a rap from DGCA which said that it could cancel Kingfisher’s license to fly as it felt that the cash strapped airline might compromise on safety of its fleet.

Its clear that Kingfisher is struggling to stay afloat. 

	SEP’11	JUNE’11	MAR’11	DEC’10	SEP’10
Revenue	1528.17	1881.64	1677.64	1658.70	1382.72
Profit/Loss	-408.69	-263.54	-355.54	-253.69	-230.82

The above table shows the problem at Kingfisher. The airlines’ has been running a loss since many quarters, in fact it hasn’t made a single rupee of profit since its inception in 2005. With its total debt crossing more than 6,000 crore rupees and its weak balance sheet the company has been finding it hard to find new source of funds.

One could argue that other domestic airlines too haven’t fared well; they are also running losses and have huge debt. However, their debt issues aren’t as significant as Kinfishers, in fact their debt is against acquisition of aircrafts which can be sold to repay for the loans. Kingfisher’s debt on the other hand is due to its operating losses.

Fight for survival

In its bid to survive, Kingfisher announced in September that it will discontinue it low cost offering ‘Kingfisher Red’. It plans to reconfigure these planes into full service ones. The business class seats on these full service flights would be reduced to make more space for economy class seats. This decision however beats logic since most of the airlines world over are entering into the low cost segment. Even in India, domestic airlines make more money from their low cost offerings. This segment accounts for almost 45% of the market. Indigo and SpiceJet, both low cost carries reported a profit last year. Jet plans to increase its low cost service to 80 to 85% of its total capacity. Kingfisher, however, feels that their full service flights give more yield than Kingfisher Red. How this decision will help Kingfisher is to be seen.

Help might also come from the central government in the form of FDI in aviation. When and how it will happen is not known at present. But such move will surely help the cash strapped airline. A strategic investor will provide the funds the company needs badly.

Kingfisher has also approached banks to help it raise foreign currency debt which has a low cost of interest. It was supposed to go in for a GDR issue last year but gave up that plan later as they thought the share prices weren’t attractive enough. Today its share price has reached new lows. Surely Mallya would have realized by now that his dream of making Kingfisher the number one airlines is just a far cry for now. Hopefully 2012 will provide better days for the company.