Kingfisher Airlines: ending in bankruptcy or survival by blackmail ?

India’s fun airline which invites you to “fly the good times” is sending shock after shock to all its stakeholders. In the last two days the airline has cancelled almost 80 flights leaving passengers across the country, running from pillar to post as their travel plans went in to complete disarray.

From an earlier announcement that the airline would cancel about 10% of its 340 daily flights, a newspaper reported that Kingfisher has announced that the cancellations have been increased to 50, at least till November 19th. The sudden capacity withdrawal has caused a panic reaction in the travel market and air fares on most trunk and busy routes have already doubled in the last 24 hours. News reports claim that over a 100 pilots of Kingfisher have quit due to non-payment of salaries.

At its annual general meeting in September announced that its fleet would be re-configured. On Wednesday the airline in a statement to Bangalore Aviation said

In continuation of our earlier announcement to focus on the full-service market, KFA has initiated reconfiguration of its aircraft. This exercise will require few of our aircraft to be out of service for the next few weeks, requiring a temporary modification of some of the flight schedules. Once the reconfiguration is complete, these aircraft will be pressed back into service immediately.

The airline has not responded to repeated mails, texts, and phone calls seeking comments and information. The airline has not even provided a list of flights which are cancelled.

Sources inside the airline say that only two or three aircraft have been grounded for re-configuration. That would account for only 20 or so flights being cancelled. The exact reason for the other 30 remain unknown, though it is without any doubt, due to the absolute financial nightmare the airline is experiencing.

India’s aviation regulator has sent the airline a show cause notice for violating rule 140(a) for not obtaining permission prior to cancelling these flights.

No network planning
With a “me too” approach to network planning for many years, Kingfisher has tried to copy the network of arch rival Jet Airways. Shifting from its international operations base from Bangalore, where it was the sole Indian carrier offering wide-body services, to Mumbai, the home base of both Jet Airways and Air India, Dr. Mallya forced his team to indulge in suicidal competition. Despite best efforts, the international operations which constitutes only 22% of total revenue, still continues to be a huge money drain, loosing over 5% of gross revenue.

The poor planning was reflected by the abandoning of Airbus A340-500s original ordered to do Bangalore-San Francisco flights, and the indefinite deferral of the Airbus A380 superjumbos. Yesterday, the final ignomy; the cancelling of the last two A340-500 aircraft left on order.

Overdues everywhere

The airline owes money to everyone. Airport operators, fuel companies, vendors, caterers, and on and on and on. It has even failed to remit to the government and airport operators taxes and levies which it collects on their behalf on its tickets. Virtually every vendor have the airline on “cash up front” terms, as its cheques regularly bounce like rubber.

With regular non-payment, the airline has driven lessors like GECAS to re-posses aircraft, and disputes with engine vendors Pratt and Whittney and IAE have led to significant grounding of the fleet.

The financial melt-down
Thanks to a combination of factors Kingfisher has racked up debt of over Rs. 70 billion (7000 cr). In a downright scary situation, the airline spends twice its gross operating profit or 16% of total revenue, on interest payments and debt servicing alone.

In September, Veritas, a Canadian firm, released a report titled “Pie in the Sky” in which it called Kingfisher and its parent UB Holdings Limited on the verge of bankruptcy. The report was subsequently slammed by Mr. Ravi Nedungadi, the CFO of UB Group.

The airline has tried every trick in the book to reverse the slide, but with no success. SpiceJet’s former CEO Sanjay Aggarwal was hired to steer KFA to a path of profitability, and most feel to tap WL Ross for a strategic injection of investment in to the airline. I recommend reading this good analysis on the history of the airline.

With declining investor interest in the Indian airline sector, Kingfisher is desperately trying to obtain working capital of Rs. 1,000 Crore. With the banks refusing his attempts to re-cast more of the airline’s debt, the airline is now trying to pare down debt by getting lessors to release $200 million cash in safety deposit held by them in a mandatory maintenance reserve, with banks credit guarantees.

The future

Despite all these setbanks, the Kingfisher brand remains strong in the eyes of the consumer. The airline has strong load factors and was the only listed Indian carrier that declared an EBITDAR profit in the first quarter of this fiscal.

Kingfisher is due to join the oneworld alliance late next year and has been strengthening frequent flyer and code share partnerships with many oneworld members like American Airlines, British Airways, and Finnair.

For some time now, Dr. Mallya’s sole hope of a bailout has been with his partners in the oneworld alliance. However, foreign airlines are not allowed to invest in Indian carriers at present. Recently the government has mooted the idea of allowing 24%~49% foreign airline share in domestic carriers. This idea is bitterly opposed by India’s largest airline, Jet Airway’s influential owner Naresh Goyal, who also needs an injection of funds, since he stands to lose his controlling stake.

But it appears, time is not favouring Mallya. When Kingfisher announced stoppage of its low cost operations, we opined that this was a prelude to an enforced fleet downsizing.

Recently the government bailed out national carrier Air India who has debts more than six times of Kingfisher. The rejection of the same government controlled banks to bail out Kingfisher appears to have tipped the Chairman’s hand.

Dr. Mallya is reported to have said

“Decision to reschedule and cancel flights was taken to cut losses. We are only ensuring loss minimization by flight rationalization and enhanced revenue through reconfiguration.”

A cancellation of just 50 out of Kingfisher’s 340 daily flights has caused fares to double. Dr. Mallya knows fully well that a closure of Kingfisher will suck out 19% capacity from the market and will cause gigantic upheavals in India’s airline industry, not to mention the fact that creditors know loss making operations is still preferable to no operations at all.

The government is still smarting from non-stop scandals, price increases, and an upcoming winter parliament session that promises to be more stormy than Katrina. These cancellations could be just the arm twisting Mallya is putting on government to approve foreign airline investments, banks to fund his airline some more, and creditors to give him just that extra time, to get an investor, and get out with just that modicum of respect.

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About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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