Riches to Rags-Part -II: India’s Kingfisher Airlines Is a Cautionary Tale
Kingfisher Airlines of India promised passengers the royal treatment — flight attendants so comely they were called “flying models,” full meals even on short flights and curbside valets to carry their bags.
Image Courtesy: Apture - Kingfisher's Vijay Mallya
Known as the “King of Good Times,” Mr. Mallya pursues a lavish lifestyle that includes a collection of hundreds of sports cars and a villa on the French Riviera. He built Kingfisher as a “premium” airline and, when passenger numbers were growing, placed big orders for planes, including five of the A380 superjumbo jets from Airbus, even though Kingfisher had never turned a profit.
Kingfisher lost 10.5 billion rupees, or $219 million, in the nine months that ended in December, the most recent figures available. India’s other large private airline, Jet Airways, reported a slight profit for the first quarter of this year, in part because of one-time tax credits. Kingfisher still owes $100 million to oil companies for jet fuel it bought in 2008, Mr. Mallya said. Those payments will be made by November.
Sorry State of India’s Aviation Business
Airlines around the world are suffering as businesses and individuals cut back on travel, but in India, by some measures, they are suffering more. And analysts say that in the months to come, Kingfisher, one of India’s top domestic carriers and one of the country’s most recognized brands, may be in for more pain than any other airline here.
Kingfisher’s troubles present a cautionary tale for investors and suppliers eager to do business in one of the few major economies still experiencing significant growth. Even as incomes and consumption continue to rise in India, success is not guaranteed — nor is a smooth ride.
Of the $9 billion that the International Air Transport Association estimates the global airline industry will lose in 2009, nearly a quarter will be lost by Indian airlines, which fly just 2 percent of the world’s passengers.
For India’s private airlines, “the next six to nine months are about survival,” said Kapil Arora, a partner with Ernst & Young’s aviation practice. To make it, they will have to cut costs relentlessly in marketing, technology and payroll, he said.
Even that may not be enough. After resisting for years, the Indian government is considering letting foreign airlines take a 25 percent stake in Indian carriers. But the rest of the world’s airlines are short of cash as well. “It’s going to take active government involvement” to keep India’s airlines in business, Mr. Arora said.
.jpg "Image Courtesy: Extra Mirchi - A Kingfisher Promise")
Image Courtesy: Extra Mirchi - A Kingfisher Promise
In an e-mail interview, Mr. Mallya brushed off suggestions that the company was struggling for survival. It will turn a profit in the next fiscal year, he said, and a $500 million loan, recently arranged by the State Bank of India and sold to an alliance of banks, is sufficient to keep the company going this year.
If that’s not enough, Mallya wants to proceed with his fleet expansion plans. Miranda Mills, vice president at Airbus, said the manufacturer had been in regular conversation with its Indian customers and was not worried about any of Kingfisher’s orders, including those for the A380. “We work a long-term game,” Ms. Mills said. In the airline business, companies do not place an “order for the next year or two and then change your business model totally,” she said.
Indian airlines grew too much, too quickly during the recent boom, analysts say. At its zenith, the industry was adding six planes a month, when there was demand for only half that number, according to the New Delhi office of the Center for Asia Pacific Aviation, a consulting and research firm. To gain market share and attract customers who may never have flown before, airlines were pricing tickets way below cost.
Adding to their problems, Jet and Kingfisher made expensive acquisitions in 2007 — Jet Airways bought Air Sahara and Kingfisher Airlines bought Air Deccan. Analysts say that the airlines paid too much for the acquisitions and have taken too long to absorb the operations they acquired.
Next, surging fuel prices forced up ticket prices just as the global slowdown cut business and leisure travel. To make things worse, Indian airlines face much higher fixed costs than carriers in many other countries, like fuel taxes that can be five times the global average.
In India, “the big boys today have huge debts, massive fleets, are confronted with a marked slowdown in domestic and on the international side,” said Kapil Kaul, chief executive for the Center for Asia Pacific Aviation in India. And, he said, “there are virtually no funds available.”
While Mr. Patel, the civil aviation minister, would not comment on individual airlines, he did say that the government would not block further consolidation or prevent a carrier from closing. Many airlines should have been better prepared, he added. “Some of these guys in the best days didn’t go big time to the markets and raise money,” he said.
But the latest Indian Government statistics show the country’s domestic passenger market shrunk 11% in May. The civil aviation minstry statement says India’s airlines carried 3.9 million passengers, up from 3.3 million passengers carried in April. Kingfisher retained the number one position it assumed in April, carrying 1 million passengers for 26% marketshare. Characteristically, Mr. Mallya is undeterred. Kingfisher Airlines “enjoys business from both” low-fare and premium passengers, he said, “which is one of the reasons why Kingfisher Airlines flew more than a million passengers in May 2009.” But recent attritition of the top management team indicate there maybe some cause for concern. Ramki Sundaram, executive vice-president at Kingfisher Airlines Ltd and former chief executive officer of Deccan Aviation Ltd, has resigned. Sundaram has been an investment banker in the aviation industry for at least a decade. He was instrumental in structuring aircraft sales and lease-back deals for Deccan Aviation, which ran Air Deccan, the country’s first low-fare airline, till it was acquired by and later merged with Kingfisher Airlines. Kingfisher Airlines’ vice-president, operations, D.D. Gandhi, one of the carrier’s first employees, left the company earlier in June. Gandhi had joined Kingfisher in 2005 after a year with Deccan Aviation to head the airline’s domestic and international expansion.
To stem the tide, last week, Kingfisher hiked its fuel surcharge on tickets by 400 rupees across both long and short haul domestic routes. The company is reportedly looking to rollover around Rs 800 crore of its short term debt. It is also learnt to be finalizing the paper work for borrowing an additional Rs 1,500 crore from Indian public sector banks. Kingfisher has also started exploring other ways to increase the traffic on its network. As of June 1, Kingfisher joined the Global Explorer, which features all members of the oneworld® alliance and some selected other airlines, which offers round-the-world fares. Members of oneworld alliance and some other non-member airlines which are part of the Global Explorer programme will now be able to offer fares for the Indian domestic network. Members of oneworld alliance serve five points in India but the addition of Kingfisher Airlines’ domestic network from today expands that to a further 62 getaways across the country. This is the first time an Indian domestic network is being offered for round-the-world fare programme.
(Source: New York Times, LiveMint.com, TravelbizMonitor)
