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Kingfisher Airlines Q3 FY2012 financial analysis

The past few days have been admittedly brutal for Kingfisher. Whether it was suspending flights entirely from Kolkata, or dealing with a particularly critical journalist, the events that befell Kingfisher stopped just short of catastrophic.

The immediate pressure appears to have been relieved by loans from State Bank of India, which will go further onto the hook for Kingfisher to the tune of Rs. 1,500 Crore, apparently on the premise that India’s government may finally release its vice-like grip around the Indian airline sector’s neck.

Given this rush of news from Kingfisher, we felt that it would be helpful to analyze the carrier’s Q3 FY 2011-2012 results, and in highly disappointing results, Kingfisher has outdone its domestic rivals in losing a ton of money, Rs. 442.6 Crore, which is up from Rs. 253.7 Crore in the year prior.

  • Revenue growth for Kingfisher domestically was very weak, falling 3% to Rs. 1,184 Crore from Rs. 1,227 Crore
  • International Revenue growth was even worse, falling 9% to Rs. 363 Crore from Rs. 398 Crore
  • Passengers carried fell 15% to 2.63 million; antithetical to general market trends.
  • Domestic Passenger Yield fell 3% to Rs. 3,804 despite capacity discipline.
  • International Passenger Yield rose 5% to Rs. 10, 864
  • Domestic absolute non-fuel costs fell 17.8% driven primarily by a large decrease in “Other Operating Expenses” (to a large extent aircraft maintenance; resulting in just 25-35 Kingfisher aircraft currently operating out of a fleet that numbered 64 in October 2011 and once had as many as 80 aircraft), while absolute fuel costs jumped a relatively modest 37%; on a capacity decrease of 5%, a 14% fall in number of flight hours flown, and a 15% decrease in number of departures, perhaps due to the drawdown of the ATRs.
  • International absolute non-fuel costs were down 1.7%, driven primarily by cost discipline in employee remuneration (in certain cases not paying salaries at all),” while absolute fuel costs jumped 37%; on a capacity decrease of 4%, a 2% decline in number of flight hours flown, and a 6% increase in number of departures that was driven by a shift in capacity towards short-haul international markets.
  • Domestic seat-kilometer revenues were up 2%, while seat-kilometer costs were up 9%; seat-kilometer costs excluding fuel were down 7%.
  • International seat-kilometer revenues were down 5%, while seat-kilometer costs were up 22%; seat-kilometer costs excluding fuel were up 6%.
  • Domestic seat factor was 79.1%, international 68.2%
  • Interest expenditures on debt were up 2.2%% YOY to Rs. 347.2 Crore, which thanks to revenue declines represents a crippling 25.9% of total recenues
  • EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 125 Crore (Rs. 284 Crore in Q3 10-11), EBITDAR profit of Rs. 161 Crore on Domestic (Profit of Rs. 225 Crore in Q3 10-11), and EBITDAR loss of Rs. 36 Crore on International (Rs. 59 Crore profit in Q3 10-11)
  • Kingfisher deferred almost 213.4 Crores worth of losses into future taxes under “Deferred Tax Asset”
  • There was a onetime special item of almost Rs. 79.25 crore that contributed to the loss.

Observations:

Domestic:

Almost paradoxically despite their continual shrinkage in the domestic market, Kingfisher has continued to post solid, if unspectacular operating figures in the domestic market. Remember, Q3 includes most of the November flight cancellations and the resultant issues, and yet despite these effects and huge capacity increases from the other carriers, they managed to prevent yields from falling off a cliff domestically, riding this decent revenue performance to yet another EBITDAR profit, which beat both Jet Airways and SpiceJet (in all likelihood Air India and Go Air) in terms of margin.

This EBITDAR profit was also enabled by discipline in employee remuneration, which was of course achieved in large part by simply neglecting to pay employee salaries. It is almost tragically comical that the only carrier to actually listen to my mantra of limiting the rise in employee costs was only able to achieve that by not paying any salaries at all.

The growth in costs was also limited by their approach to maintenance, which was to ground any and all aircraft that they were unable to adequately pay for parts and service for. While this course of action has been met with predictable teeth gnashing and hyperbole from certain members of the Indian press, in our opinion it is far preferable to the scenario where Kingfisher flies planes that are unfit for flight.

The outlook moving forward is sadly far, far worse. Kingfisher will essentially be flying at 55% of its average Q3 capacity in Q4, and domestic and international travelers continue to book away from Kingfisher on even the shortest of flights. These drops in revenue will likely place enough pressure on Kingfisher to swing them to negative EBITDAR domestically in Q4, especially if they are unable to reverse the trend of business traveler and frequent flyer outflow.

International:

Kingfisher’s international results meanwhile, are an illustration and manifestation of the full swath of issues facing Kingfisher. That they managed to keep revenues from tanking after pulling out of high-demand routes to Bangkok, and the increase in passenger yield of close to 5% was probably the last vestige of the respect Kingfisher has from the international business traveler.

That being said, we suspect that on the revenue side, October was unusually strong, November exceedingly weak, before a slight recovery in December that produced the overall slightly positive performance.

But as with the company in whole, these moderately positive trends were unable to outweigh the continuing rise in costs, both fuel, and aircraft lease rentals. Maintenance costs did not fall at the same level as they did domestically, which is indicative of a troubling decision on Kingfisher’s part.

Given that Kingfisher had a pressing need to reduce maintenance costs, it was ultimately necessary to ground certain aircrafts. Yet, what is not clear is why Kingfisher did not choose to ground more of its A330s (4 of 5 remain flying) during the quarter. If they had grounded all 4 aircraft, that could have paid for the maintenance of almost eight A320 family aircraft.

Considering that Kingfisher’s domestic operations are far more profitable, this would have been a far more sensible decision, even if it necessitated the cessation of flights to London and Hong Kong. Kingfisher appears to have made this decision as much for prestige as for economics, and it has certainly contributed to their accelerating losses.

General:

What is Kingfisher’s loss is the other airlines’ gain; Air India with its near-incompetent revenue management system has posted huge gains in January revenues, meaning that Jet Airways is likely to have a very strong (perhaps even profitable) Q4 along with the beleaguered national carrier. If India’s other airlines do not blindly rush to backfill the lost capacity from Kingfisher, these events might even have a positive effect on the Indian market as a whole.

To those who claim that Kingfisher’s losses go beyond the government I agree wholeheartedly but caution that government is still the largest factor. If the sales tax on jet fuel, which ranges from 4-29% in India and nets to about 20% for Kingfisher’s ops, were set to zero, Kingfisher would have more than doubled their EBITDAR profit, and achieved an EBITDA profit (which accounts for rentals) as well as pushed the net loss to closer to Rs. 250 Crore.

Meanwhile the near term prospect for Kingfisher are not great, with the carrier likely to post large losses in Q4 and the full year despite the slight narrowing of losses from Q2 to Q3. The SBI equity has given Kingfisher a small “margin of error” so to speak, it will be interesting to see how well the airline can

About Vinay Bhaskara

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