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Kingfisher Q1 FY2013 analysis – losses exceed three times the revenue. Is the end near?

Beleaguered full service carrier Kingfisher Airlines has served notice of its dire straits, by reporting a massive Rs. 963.3 Crore net pre-tax loss in the first quarter of fiscal year 2012~2013. Even as Kingfisher Airlines chairman Vijay Mallya wrote a controversial letter to Kingfisher’s employees asking them to work without pay for the next few months, it appears that Kingfisher may not even have that much time.

The actual numbers paint a grim picture for Kingfisher. Unlike its full service rival Jet Airways and low far competitor SpiceJet, both of whom have declared profits in Q1 FY 2013, Kingfisher was unable to parlay the fall in fuel prices from the fourth quarter of FY 2011-2012 to Q1 of FY 2013 into any sort of positive trend.

What really created the decline was Kingfisher’s general deterioration in terms of revenue and passengers. Kingfisher’s revenues in Q1 have shrunk by 84% and were just 1/6th of what they were in the same quarter a year ago, mirroring the decline in Kingfisher’s domestic market share from just over 25% to less than 5% today.

What is particularly scary is that Kingfisher’s losses are more than three times its REVENUE i.e. net margin is an incredible -319.6%!!!! This is just not sustainable, now or ever.

As a point of comparison, when US based full service carrier American Airlines filed for Chapter 11 bankruptcy protection (through its parent company AMR), its net margin never crossed -15% in the last four quarters before its filing.

Despite the loss being the biggest factor, a couple of things did strike me as being odd on Kingfisher’s Profit and Loss report as well as on its balance sheet. The first was that despite reportedly not paying a dime in employee salaries for several months now, Kingfisher incurred Rs. 58.8 Crore in employee costs. Another interesting note was that Kingfisher is now planning to purchase several aircraft back from lessors after it defaulted on the payments for those aircraft; this comes even as the aircraft continues to pay for more than 20 aircraft (the price tag is over Rs. 130 Crore), even when its operations only require ten or so. There are no clear cut explanations from the company.

Unfortunately, at this point, we just don’t see a way that Kingfisher can survive. While the airline maintains that it is currently in a “holding operation,” and operating its current 20 airplane operation is a temporary measure until it can restore its former glory, the simple reality is that Kingfisher’s operations have become too fiscally unsustainable. The “holding plan” at Kingfisher is just not working, and we doubt it ever did.

Were Kingfisher run by a rational player, from an economic perspective, the airline would have already shut down. Typically speaking, a business should only stay open so long as its marginal costs are being matched by revenues. For an airline, that in effect means that its EBITDAR (earnings before interest, taxes, depreciation, amortization, and rents) should be at least zero (break even). Kingfisher has posted an EBITDAR loss that we do not even want to hazard an estimate of, given the completely tangled set of accounts presented. (See the Q1 FY2013 financial numbers here.)

Unquestionably, Kingfisher has some very important stakeholders, including several large government owned banks. But is it really better for these investors to continue throwing money at a broken airline, than to simply cut their losses and move on?

A similar explanation applies to the prospect of foreign direct investment (FDI), which many people claim would bolster Kingfisher. One has to ask the question, is entry in to the Indian market so valuable that a foreign airline would want to invest in Kingfisher and take own such a faltering operation? At this point, such an investment appears to be the equivalent of taking your money, and setting it on fire.

Even Vijay Mallya, for whom Kingfisher Airlines was supposed to be the crowning achievement, may no longer be able to fund Kingfisher. Buried in the earnings release was the fact that “UB Group provided over Rs. 750 Crore in cash support to the airline to meet its cash flow requirements”. (Read the cover note here.)

There is no explanation on the nature of the support, nor how is this cash infusion accounted in the financial statements. Is this an accounting trick masking the true extent of Kingfisher’s net loss? If one keeps the cash infusion as a separate amount, is the real loss closer to Rs. 1,500 Crore?

The UB Group makes a quarterly profit in the range of Rs. 200 Crore and that will be nowhere enough to fund Kingfisher over an extended period of time without bankrupting the entire group.

One possible, yet perverse reason, for keeping Kingfisher Airlines flying, is all the corporate and personal guarantees given by various companies of the UB Group and Dr. Mallya himself. Closure will cause banks and investors to invoke these guarantees. It is doubtful, the UB Group itself, will be able to survive the impact?

It is crunch time for Dr. Mallya. Sustaining the airline will bankrupt the UB Group in quick time, but shutting the airline will shatter the UB Group. It appears that the “King of Good Times”, stands to lose any which way he goes.

About Vinay Bhaskara

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