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Kingfisher fiscal year 2012 results analysis. Will Kingfisher Airlines survive?

When Kingfisher Airlines, once India’s second largest domestic airline, reported a Rs. 2,328 Crore (1 Crore = 10 Million) net post-tax loss for fiscal year 2012, it was simply an affirmation of the dire straits that a once proud airline has fallen into.

Of the Rs. 2,328 Crore net loss, a whopping Rs. 1151.5 Crores were lost in the fourth quarter of fiscal year 2012. The sad affirmation is that Kingfisher’s current financial situation, as it stands, is clearly unsustainable in the long run.

When I joined Bangalore Aviation last year, Kingfisher had some 20% of the Indian domestic market. In just seven months, their market share in April 2012, has plunged to just 5.4%. Hypothetically, FDI would do some good for Kingfisher’s finances but given their abysmal current financial performance, one has to wonder whether KFA will be able to attract any foreign investment at all. From a pure financial sense, Kingfisher makes little sense as an investment opportunity, and the prestige factor that might have once attracted suitors like oneworld founding partner British Airways has worn off as Kingfisher service standards and aircraft cabins deteriorated over the past six months.

Even though the Indian government finally appears to have moved on the issue (reports emerged yesterday that the government and all airlines, including Jet Airways were on board), foreign direct investment by airlines may arrive in the Indian market too late to make a difference at Kingfisher.

Moving on to the actual results, they were pretty much as bad as one would expect. Domestically, the carrier has lost its once robust revenue premium relative to the market, with a 9.8% year over year in domestic revenues. Whereas Kingfisher had a more than 10% revenue premium relative to competitors like Jet Airways, in Q4 2012, Jet in fact had a 10+% revenue advantage over Kingfisher.

From a restructuring perspective, Kingfisher has obviously done a decent job of weathering the storm, managing to net a Rs. 138 crore EBITDAR profit (earnings before interest, tax, deduction, amortization, and rent). But EBITDA (adding in rents) collapsed from a Rs. 271 Crore profit last year to a Rs. 470 loss this year. Even so, Kingfisher’s “problem” has never really been the operations themselves, which would have been sustainable at last year’s profitability levels for 3-4 more years, but rather the crippling debt burden and financial charges. While the nominal financial and interest charges declined somewhat year over year, thanks the precipitous collapse in revenues, interest and finance charges represent a mind boggling 38.9% of revenues.

Still, even with this factor, Kingfisher’s performance may not have been as bad as the headlines say. While the net pre tax loss was huge at Rs. 1,700 Crore, more than Rs. 1000 crore of that was due to one-off restructuring costs. Excluding such special items, Kingfisher lost just Rs. 666 Crore in Q4 of FY 2012, which translates to a net margin of -8.97%, not much worse than Jet Airways’ net margin of -6.93%. For the full year excluding special items, Kingfisher actually had a better net margin than Jet Airways, which is surprising given their relative financial problems.

This begs the question, will Kingfisher survive?

There are really two separate answers to this question, governing survival in the short run and in the long run. The second case is still very iffy; a lot will depend on whether India’s government can implement needed structural reforms within the market, whether they can attract adequate FDI capital, and the new Indian airline market picture 3-4 years down the road. But in the first case, the danger of Kingfisher ending operations entirely in the next few months is low. As I mentioned above, Kingfisher’s finances are not necessarily immediately life threatening; the carrier has managed to cut costs surprisingly well (admittedly, at the expense of Kingfisher’s wonderful employees). This is not to sugarcoat Kingfisher’s losses, but rather to say that the airline has entered a form of a “holding pattern” operating 18 aircraft to a limited network of essentially domestic destinations; survival in the short term, barring a major ($40/barrel +) oil spike, seems assured.

On the operating cost side, fuel, as per the usual was the biggest drag on results. While the rest of Kingfisher’s cost-line items reported drops of more than 50% year over year, fuel costs dropped just 18%. But there is hope on the horizon for fuel prices. While the days of non-recession $35/barrel oil are likely over, oil prices are likely to fall to around $80 per barrel and stabilize thanks to rapidly growing US production.

One thing that does worry me about Kingfisher is their insistence on regaining lost bulk.

“The company has a focused fleet re-induction plan and hopes to be back to full-scale operations in the next 12 months backed by a recapitalization plan that the company is actively pursuing and confident of achieving.”

Thanks to KF’s capacity slash, the Indian market actually has seen some revenue gains in the past few months. A Kingfisher re-addition of capacity en-masse would do inexorable harm to the Indian airline market.

About Vinay Bhaskara

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