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Employee Relations, Payment Defaults Hinder Kingfisher’s re-structuring

The damning evidence against Kingfisher continues to mount, as a new report from the UK High Court claims that the embattled airline owes $21.6 million (Rs. 109.06 Crore) to the Bank of Scotland for overdue lease payments on 10 ATR 72-500 aircraft. The action was brought by Bank of Scotland on behalf of a consortium of lenders against Kingfisher parent UB Holdings, who had guaranteed Kingfisher’s obligations. The judgment, brought by Justice Eder, paves the way for potential action in India or elsewhere, and enables Bank of Scotland to pursue United Breweries Holdings’ assets to recover the outstanding sum.

Bank of Scotland is owed money because it helped fund KF Turbo Leasing, a special purpose vehicle incorporated in the Cayman Islands that purchased the ATR aircraft to lease to Kingfisher. Each ATR aircraft was then leased by KF Turbo Leasing to Kingfisher for a period of 10 years, dating from an agreement signed on 29 March, 2007.

The troubles with the Bank of Scotland represent only the latest credit issue for Kingfisher, who has been grappling with lessors off and on since the carrier first entered a state of crisis back in November. Since that point, Kingfisher has shrunk its operations at a rapid pace, operating around 175 flights per day (versus 340 at the same time last year). However, the decline in revenues has further eroded Kingfisher’s cash flow, making it difficult for the carrier to pay for contracts entered into when its operations were more than two times their current size. Adding to this is the fact that Kingfisher is almost Rs. 7,000 Crore in debt (US $1.26 billion), and interest payments are now an astronomical 25.9% of nominal revenues. At this point, Kingfisher has defaulted on most of its interest and supplier obligations, and is essentially operating on a cash-and-carry system for critical charges such as landing fees and fuel. Thus it was not surprising that Kingfisher had its bank accounts seized by the income tax department; though the question of whether Kingfisher should even be taxed at all given its gargantuan losses and refusal to pay employees is a valid one?

India’s aviation regulator DGCA (Directorate General of Civil Aviation) too has continued to repeat its concerns over potential safety violations in the face of Kingfisher’s financial difficulties. Late last week, the DGCA threatened to de-register another Kingfisher plane as the carriers maintenance technicians went on strike from Thursday onwards. As of now, the strike has not yet caused major operational disruptions, but as time goes on, the situation will continue to worsen. The DGCA has already de-registered 3 Kingfisher A320s (VT-KFA, VT-KFD and VT-KFE), according to a report in The Live Mint.

More seriously, Civil Aviation Minister Ajit Singh threatened Sunday that a suspension of Kingfisher’s operating license might be in order as the ministry continues to worry that non-payment of dues and employee salaries will compromise safety. “Closing an airline will impact passengers, employees,” said Singh, “So cancellation of license won’t happen. Suspension, however, gives a chance to restart operations once the issues have been sorted out,”

Employees indeed may be the most immediate threat facing Kingfisher. As we mentioned above, Kingfisher’s technicians have been on strike at Delhi Airport since Wednesday. MRO service technicians perform routine and scheduled maintenance on aircraft engines, air conditioning systems, brakes, cockpit instruments, valves and other components. They also replace worn-out or defective parts, rebuild engines maintain service records, and perform aircraft inspections. While this maintenance work can be performed by technicians at other airports for the time being, Kingfisher’s large Delhi operational base will eventually necessitate a resolution.

Kingfisher’s pilots also feel threatened according to a recent report from the Times of India. According to the paper, Kingfisher had a confrontational meeting with its pilots Thursday, as the exodus of pilots to India’s other airlines continues. Kingfisher hasn’t been on-time with salary payments to pilots since early 2011, and with India’s other airlines hungry for qualified pilots, many of Kingfisher’s pilots have fled for greener pastures. Remaining pilots in Mumbai have reportedly begun calling in sick in droves in a form of industrial action that does not qualify as a formal strike, while up to 20% of Bangalore based employees have simply quit. If such industrial actions were to spread amongst the rest of Kingfisher’s 510 odd pilots, management has claimed that Kingfisher may have to temporarily shut down as Australian carrier Qantas did back in October in response to strike threats from unhappy employees.

Kingfisher’s current method of salary deferral while continuing operations (which has also shown up at Jet Airways and Air India in recent times) would not be valid in the US, where contracts (which employee salaries fall under) are absolute until a company shuts down or enters bankruptcy reorganization. But in India, the situation is not so cut and dry, and Vijay Mallya recently sent out a letter (presented at the bottom of this post) to his employees, urging them to maintain their faith in the company and accept proposed changes. However to many, Mallya’s words ring hollow in the face of his huge personal wealth and possessions. All those photo shoots with statuesque models and the time spent at Formula One races and IPL matches do not mesh with Mallya’s message of sacrifice by the employees, and we fear that his efforts may thus prove unsuccessful. When labor resents management, the results range from severe financial issues to full-on bankruptcy (see Qantas and American Airlines).

One of the ironic things about this entire sequence of events at Kingfisher is that the ATR aircraft adding to Kingfisher’s woes are in all likelihood grounded. Kingfisher’s cancellations have brought the airline closer in size to Go Air than to Jet Airways, and customer confidence and perception has continued to erode. Foreign travelers have for the most part sworn away from booking Kingfisher for their Indian flights, and we fear that the problem may no longer be easily solvable. Recognizing this issue, Kingfisher recently sent out the following letter to its travel agent partners in the United Kingdom seeking to re-assure them.

Dear Trade Partner,

On behalf of all of us at Kingfisher Airlines, I deeply regret the inconvenience many of your customers, who were booked on Kingfisher between 17th and 26th February, faced due to the unforeseen schedule disruption in our domestic network. Please do accept my sincere apologies to you and your staff for the anxiety and extra effort caused by these sudden cancellations. I totally appreciate the crucial and valuable role you and your team play between us and the guest. In order for us to be successful and bounce back on our feet, we need your support more than ever. Please be assured we are reaching out to all our valued guests who were affected during this period and personally apologizing to them. Kingfisher Airlines is on its way to normalcy. We are currently operating approximately 200 daily flights to 46 domestic and 7 international destinations. In the coming week, we will be adding more flights and our teams will keep you updated on the same. I reiterate that operating our schedule at its utmost consistent level is mine and my team’s endeavor. I request you to continue doing your valued business with Kingfisher Airlines. Your support and belief in us is something I am counting on.

Best Regards,
Sanjay Aggarwal
Chief Executive Officer

Ultimately, these issues have all arisen because Kingfisher’s business fundamentals are poor; they are not a profitable carrier, or even a solid one by any stretch of the fiscal imagination. Kingfisher may be able to work its way out of this current rut, especially if either British Airways parent IAG or Etihad Airlines invests in the carrier under India’s new foreign direct investment (FDI) regime. But in order to do so, it must first restore customer confidence, get its fiscal house in order, and win back the loyalty of its employees.

Vijay Mallya’s Letter to Kingfisher Employees

Dear Colleagues,

I want to take this opportunity to update you on our current situation amidst all the media frenzy that is taking place. The Indian media and the “paid” media that even the Prime Minister referred to are unscrupulous and they will do whatever it takes, part fact or fiction, part true or untrue to achieve their sensationalist objectives.

I have organised funding so that we can pay your seriously overdue salaries which is a source of great personal sorrow for me. We are currently handicapped as our bank accounts are frozen by the tax authorities. I have been working tirelessly to urgently resolve this issue through negotiation and I hope that these efforts will be successful early next week. We fully intend to pay our tax dues as much as we commit to paying your salaries.

Government policies can make or break any Industry. So far it has been downhill for Civil Aviation except for one Airline that defies the odds and claims to be profitable however unlikely that may be.

Finally, there seems to be light at the end of a long dark tunnel. Government has issued a notification allowing direct import of Aviation fuel which promises to save us about 15 percent of our current fuel costs.

I am hoping that the next positive move would be the formal notification permitting Foreign Airlines to invest upto 49 percent of the equity in Indian carriers. This has already been widely announced by the Minister of Civil Aviation and according to reports, has been decided upon at a Empowered Group of Ministers meeting. Recently, last week, the promoters of our airline, The UB Group and its associates acting in concert, converted its loans for an additional 5 percent equity in Kingfisher Airlines. This is the maximum permitted under law in any one financial year but clearly demonstrates the faith that I have in all of you and in our Company.

I have been overwhelmed and emotionally moved by all the widespread expressions of support and appreciation for our Company despite the turbulence we are flying through. Despite media reports, we have many many supporters, well wishers and loyal guests. And all these words of appreciation are dedicated to you. Whilst many may have left our family and many may be in the process of leaving, our family may have become smaller for now. But our family will grow with those who have the pride in their hearts of having stood by our Company through ups and downs, sometimes with great personal sacrifice. That is the true test of loyalty dedication and commitment which I am going to reward.

Please stay committed to our common cause and for good reason to smile happily when this turbulence is over. We were the biggest and best. We may not be the biggest now but we remain simply the best for our guests and our valued King Club members.

I hope to have some good news for you shortly; thannk you for your patience and understanding.

Warm Regards
Vijay Mallya
Member of Parliament
Chairman and Managing Director
KINGFISHER AIRLINES LIMITED

About Vinay Bhaskara

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