Over the last 15 days, Kingfisher Airlines has been savaged in the media (read articles here and here) based on a research report by analyst Neeraj Monga of Veritas Investment Research Corporation of Canada, which casts doubts on the airline’s viability.
A report earlier today, in The Mint newspaper appears to be the straw that broke the camel’s back. The airline’s Chairman Dr. Vijay Mallya has issued a statement to try and comfort shareholders.
September 28, 2011
I would like to share with you the progress of Kingfisher Airlines Limited (“Kingfisher”) and also address the recent sensational articles in the media.
Aviation demand remains strong and Kingfisher is still the single largest airline in India with a market share of approximately 20%. Kingfisher is also India’s most awarded airline, recognized for the quality of its product and service and its vast network. In fact on September 26, 2011, Kingfisher received the “Best Indian Airline” award at the Business Traveller Awards 2011 in London. Kingfisher operates 370 flights daily to 60 destinations carrying 12 million guests every year. Of the cities it serves, 11 destinations are served only by Kingfisher. We fly to eight international destinations – London, Hong Kong, Singapore, Dubai, Bangkok, Kathmandu, Colombo and Dhaka.
During the most recent quarter ended June 2011, Kingfisher delivered a better financial performance than other listed Indian carriers. On domestic operations, Kingfisher reported an EBITDAR (Earnings before Interest, Depreciation, Amortization, and Rentals) margin of 15.4% which compares favourably with 6.4% and 7.2% reported by others.
Kingfisher implemented a debt recast package during the year under review pursuant to which loans from bankers in excess of Rs. 1,300 crores and funds from Promoters of approximately Rs. 745 crores were converted into share capital. Further, the interest rate on the recast loans was lowered to 11% and the period of repayment was extended to 9 years. Kingfisher continues to work with the consortium of banks with a view to further reduce the interest cost. Some of the proposed initiatives include sale and lease-back of some of its aircraft and other assets to reduce loans and converting part of its Rupee loans into low cost
forex loans based on existing forex cash flows. The Consortium of Banks is currently appraising the enhanced working capital request to cater to the strong growth and higher fuel costs.
In order to further improve operating performance, Kingfisher is in the process of reconfiguring its aircraft. This reconfiguration will increase capacity by 10% at minimal incremental cost. With Kingfisher’s domestic economy load factors running in the mid 80s, this additional capacity will result in significantly improved revenues. There are numerous other initiatives underway to make Kingfisher a more efficient airline.
Kingfisher has a very competent and motivated team led by senior managers who have been with the airline from its inception. This has enabled the airline to not only deliver the best-in-class-service, but also very reliable operational performance. In this fiscal year, we have had a high dispatch reliability of 99.5%.
The high cost of ATF (Aviation Turbine Fuel) coupled with a weakening Rupee is the biggest challenge that the whole aviation industry in India is currently dealing with and we are no exception.
Kingfisher has been working and continues to work aggressively to raise fresh capital. As you would appreciate, in a volatile global economic environment and with oil prices as high as they have been, it is not an easy task. We continue to believe that Kingfisher is a great investment opportunity and have recently announced (subject to shareholders’ approval) a Rights issue which can be launched in addition to a GDR or separately to raise capital.
I now turn to some of the sensational media headlines about our company. At the outset I would like to assure you that Kingfisher follows best accounting practices in line with other global airline companies. Our accounts are reviewed by an audit committee comprised of astute and reputed professionals and are audited by M/s B K Ramadhyani & Co, an independent and reputed firm of chartered accounts of long standing in Bangalore.
To address the specific issues raised:
1. Going Concern and Deferred Tax Credit – The auditors have, in fact, concurred with the Board of Directors’ adoption of the going concern assumption for preparation of accounts despite erosion of net worth which is apparent from the face of the Balance Sheet itself.
In a separate communication dated 27.09.2011 addressed to the Chairman of the Audit Committee, Mr Shyam Ramdhyani, the Auditor has concurred that
“Para 9 of our Audit Report is not an adverse opinion in terms of our disagreeing with the management’s assessment of the going concern assumption”.
The decision to draw up accounts on a Going Concern basis, as also the treatment of the Deferred Tax Asset is consistent with the findings of an independent evaluation of the Company’s prospects which was conducted by the company’s bankers as directed by the Reserve Bank of India. Indeed, the recast of the debt, consequent to which the Banks have converted 30% of their loans into capital was also executed keeping in mind the future profitability of the business and the possible upside in the value of the company’s shares. The fact that the financial forecasts of the company were vetted by the Banks is covered in the Minutes of the consortium of bankers held on 22.09.2010 at the office of State Bank of India, New Delhi.
With further regard to the Auditors’ observations about Kingfisher’s ability to infuse funds, it may be pointed that post the debt recast which was implemented in December, 2010, long term funds amounting to over Rs. 500 crores have been infused into Kingfisher.
2. Accounting treatment of Maintenance Costs – The treatment accorded by Kingfisher is consistent with the practices followed by the Aviation Industry globally.
For example, the practice followed by British Airways as extracted from the Annual Report and Accounts 2010 states:
“Major overhaul expenses including replacement, spares and labour costs, is capitalized and amortized over the average expected life between the major overhauls.”
Similarly, the notes to Financial Statements of Malaysian Airlines state:
“Deferred maintenance costs relates to maintenance costs incurred for aircraft, engines, auxiliary power units or landing gears prior to the return obligation stated in the lease agreements. Deferred maintenance costs is capitalized and amortized over the actual flying hours as the aircraft is flown up to its return condition”.
The new Accounting Standard AS 10 [which is currently awaiting notification] not only supports this view but uses engine overhaul costs in an airline company as an illustration of this treatment, which is also consistent with the “component” approach which will become mandatory on adoption of IFRS.
Prof. Ashish Bhattacharyya of the Indian Institute of Management, Kolkata, has in Para 4.3 of his opinion dated 21.5.2010 and entitled –
“Opinion regarding engine overhauling costs in Kingfisher”, confirmed “the amortization of overhauling costs of the nature described is the most appropriate accounting method. This is a globally acceptable accounting
practice which has been adopted by many companies engaged in the Airline business.”
3. Subsidy – The treatment given to manufacturers’ credit received on aircraft orders by Kingfisher, [erstwhile Deccan] is consistent with the Airlines Accounting Guideline No. 3 effective 1.5.1996 and revised on 4.1.1999 by the International Air Transport Association (IATA) Para 4.15 and 7.1 [b].
4. Statutory dues – Statutory dues, which are ongoing and fluctuate on a continuous basis, have been quantified by the Auditors on a particular date. As explained by the Auditors, there have been some delays in remitting certain statutory dues. However, as of date, there are no demands that are unpaid.
As far as dues to the oil companies and airports are concerned, Kingfisher is complying with the agreed payment arrangements.
5. Guarantees by United Breweries (Holdings) Limited (UBHL) and myself- The quantum of guarantees issued by UBHL on behalf of Kingfisher has been grossly exaggerated and incorrectly reported in various sections of the media.
For example, Guarantees and Letters of Credit issued by the Bankers are to cover suppliers’ credit from Oil Marketing Companies, Airport Authority, and Maintenance Agencies etc. The amounts due to these vendors already appear as creditors in the Balance Sheet and therefore the Guarantees/Letters of Credit cannot be double counted, as it appears has been done in certain media reports.
The Promoter Group of Kingfisher has consistently supported the airline through direct investment, advances from the holding company, guarantees from the holding company and also by securing third party funds to meet exigencies in Kingfisher. The total investment by UBHL till date in the form of shares is Rs. 2118 crores. This includes a sum of Rs. 745 crores which was converted, alongside the banks, on 3.01.11 into preferences shares and thereafter on 31.3.2011 into ordinary equity shares at the SEBI specified price.
Besides this, UBHL has also procured third party finances from associates by way of Optionally Convertible Debentures amounting in all to Rs. 710 crores. This cannot be counted as debt as the holders have agreed to convert these into equity subject to regulations.
UBHL has provided Kingfisher with corporate guarantees totalling Rs. 9135 crores. Each of these primary obligations is supported, in the first instance, by Kingfisher’s assets and cash flows. UBHL guarantees are by way of additional collateral to further strengthen the Promoters commitments.
I have also personally stepped in to provide a third level of comfort to the lenders who have been extremely supportive of Kingfisher. As you are aware, the Master Debt Recast was achieved under the aegis of a RBI dispensation, and after exhaustive studies on the sustainability of the Industry and the viability of Kingfisher conducted by the Banks. The Banks have not only given relief to Kingfisher in the form of moratorium on repayment, extended tenor of the loans and reduced interest rates but also converted 30% of their outstanding loans into preference and equity capital. By the same measure, I too have given my personal comfort to the Lenders over and above the securities provided by the Company and the additional collateral of UBHL guarantees.
A realistic estimation of UBHL’s total assets both quoted and unquoted (carried in the Balance Sheet at cost) would exceed Rs 12,000 crores.
India is a growing market for aviation with a double digit annual growth. Kingfisher has established itself as a dominant player with a focus on service, fleet strategy, and focus on connectivity to Tier II and Tier III cities. I am sure that on the basis of the above clarifications, you will share my optimism on the future of Kingfisher.
With best regards,
Bangalore Aviation may or may not subscribe to the statement in whole or in part.