Vijay Mallya shifts ownership of his Airbus A319 private jet VT-VJM away from Kingfisher Airlines

In what could be a move to protect his personal toys, UB Group has transferred the operational ownership of the ultra-luxurious Airbus A319-133ACJ (Airbus Corporate Jet) used by Kingfisher Airlines Chairman Vijay Mallya out of Kingfisher Airlines.

In its previous avatar, VT-VJM used to sport a tail with the Kingfisher Airlines logo and used to operate with the radio call sign "Kingfisher 11 (one-one)".

Now the plane wears a plain white tail with the same UB Group logo near the front door, but with a conspicuous absence of any reference to Kingfisher, the beer, or the packaged drinking water, or the airline. Sources inform that the plane has also stopped using the radio call sign "Kingfisher 11", and now just uses its registration number like any other private plane does.

VT-VJM at Liege Airport when Dr. Mallya attended the Belgian Formula 1 Grand Prix. Photo copyright Jean-Marie Hanon. Used with permission of the copyright holder. All rights reserved. Do not reproduce.

Both Boeing and Airbus offer a business jet version of the popular 737 and A318, A319 airframes. Typically, the commercial A319 carries about 140 passengers, but the corporate jets have a much more luxurious interior, reducing the passenger capacity.

The price of the aircraft is reported as $61,093,550 — its standard equipment costing $33,321,040 and customised equipment $27,772,510, when purchased in November 2006. As per DGCA records the owner leasing company is C J Leasing (Cayman) Ltd., located in the tax haven of the Grand Cayman islands. This implies a sale and lease-back arrangement.

Dr. Mallya's plane has a capacity of only 22 passengers as per DGCA records. In addition to its hefty price tag, an ACJ319 typically costs upwards of Rs. 10 Crore  per year to operate. Given Dr. Mallya's many international trips to and from various Formula 1 venues across the globe, the operating costs of his private jet could be, even higher.

The picture below shows a representative business jet cabin layout, but each owner decides the level of customisation and luxury. A normal A319 will cost about $7 million above the base airframe to outfit for airline use, but Dr. Mallya's plane has cost a whopping additional $27 million. One can be reasonably sure the aircraft has a bedroom and may be even a shower, in addition to a business section.

Though the transfer of the aircraft out of Kingfisher Airlines reportedly took place sometime in May or June this year, DGCA records still reflect the old information of Kingfisher Airlines. The correct status of two Eurocopter EC-155-B1 helicopters (VT-SVM and VT-LVM) owned or operated by Kingfisher Airlines, too remains unknown.

VT-VJM was last spotted in the New York city area leaving for a trans-Atlantic flight on October 4th morning. Her current whereabouts are unknown but we can be rest-assured it will be at New Delhi on the weekend of 26~28 October during the Airtel Indian Grand Prix.

Share your thoughts on this transfer via a comment.

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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.

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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

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Kingfisher Airlines repeats fund raising plans - a move to ease market concerns?

Dr. Vijay Mallya promoted Kingfisher Airlines released this statement today. The conversion between Indian Rupees and US Dollar at a rate of Rs.47:$1 has been added by us in italics.

The Board of Kingfisher Airlines Limited, at its meeting held today, approved, subject to shareholders approval, an increase in the authorised Equity Share Capital from Rs. 900 crores [approx $192 million] to Rs. 1,650 crores [approx 352 million] and an increase in the authorised Preference Share Capital from Rs.100 crores [$21.3 million] to Rs. 2,600 crores [$553.2 million].

The Company will immediately seek to raise up to US Dollars 250 million [Rs. 1175 Crore] by way of GDR [global depository receipts] and a further Rs. 500 crores [$106.4 million] through a domestic offering subject to necessary regulatory approvals. This funding is expected to be completed within the next 3-4 months.

At the meeting of the Board of Directors of United Breweries (Holdings) Limited, the Holding Company of Kingfisher Airlines, it was resolved that a sum of approximately Rs. 650 crores [$138.29 million] provided as loans to Kingfisher Airlines be converted into Preference Share Capital.

The financials of Kingfisher Airlines are expected to be significantly strengthened by these initiatives.

Today's decisions appear to be just a re-state of earlier attempts by the airline to raise funds.

The airline has accumulated debt exceeding Rs. 7400 Crore (approx $1.58 billion) and reported a lower net loss (down 23%) of Rs.1,647.22 crore ($350.5 million) for the fiscal ended March. There is a significant erosion of the net worth of the carrier.

The airline is not alone in its financial woes. Fellow full-service carriers Jet Airways had debt of Rs. 13,759.50 crore ($2.93 billion) as of 31 March. National carrier Air India’s debt exposure was Rs. 17,000 crore ($3.62 billion) in May.

Industry sources feel that investors are more comfortable placing their funds with either Jet Airways or low fare carrier IndiGo whose initial public offering is expected within the next 12 months. However, with the government of India prohibiting foreign carriers from owning any stake in an Indian airline, it will be difficult for Kingfisher airlines to raise external commercial borrowing without a significant dilution of promoter equity. Said one source

Despite efforts, Kingfisher still does not enjoy a reputation of a lean and mean airline. If the airline does manage to raise the funds, Dr. Mallya's share will fall well below 40%; and that is a very uncomfortable position for a promoter to be in.

In May, while the Economic Times was reporting IDBI bank recalling its loans from Kingfisher Airlines, the carrier had approached its lender the State Bank of India to re-structure its debt outside the corporate debt restructuring cell. As per banking guidelines a debt re-structuring within the cell implies the loan is considered bad, and this would all but erase any hopes of the airline to raise additional debt.

In June, the State Bank of India, approached the nation's central bank, the Reserve Bank of India (RBI) with a special dispensation request to restructure the over $10 billion debt of Indian carriers after the RBI refused the bank's request to advance a loan of Rs. 2,000 Crore to Kingfisher Airlines. In July, the central bank instructed 13 of the nation's largest banks to form a common policy and consortia for debt restructuring rather than provide on- time relief to individual companies.

The airline's parent, the UB Group, has been busy selling non-core assets and business to raise funds and pare down overall debt. The lack of funds injection by the group till now, gave rise to doubts on how much additional airline burden were the shareholders of UB Group willing to bear. The move by United Breweries (Holdings) of converting Rs. 650 crores provided as loans to the airline, appears to be converting loans, that may never return, in to equity which will at least provide some buttress when external lenders demand a share of the airline.

All is not lost though. The airline has reported improved financial results for the quarter ended June 30. In its investor presentation, the airline is showing the benefits of its aggressive cost cutting. However, we do not share the airline's optimism on the benefits it will gain by its early induction in to the oneworld alliance. The alliance will surely squeeze far more concessions out of a financially weaker Kingfisher than it will concede in benefits.

While we hope we are wrong, for now we cannot shake off the feeling that this release appears to be just another attempt by the airline to ease market concerns on its precarious financial condition.

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