Kingfisher Airlines: ending in bankruptcy or survival by blackmail ?

India's fun airline which invites you to "fly the good times" is sending shock after shock to all its stakeholders. In the last two days the airline has cancelled almost 80 flights leaving passengers across the country, running from pillar to post as their travel plans went in to complete disarray.


From an earlier announcement that the airline would cancel about 10% of its 340 daily flights, a newspaper reported that Kingfisher has announced that the cancellations have been increased to 50, at least till November 19th. The sudden capacity withdrawal has caused a panic reaction in the travel market and air fares on most trunk and busy routes have already doubled in the last 24 hours. News reports claim that over a 100 pilots of Kingfisher have quit due to non-payment of salaries.

At its annual general meeting in September announced that its fleet would be re-configured. On Wednesday the airline in a statement to Bangalore Aviation said

In continuation of our earlier announcement to focus on the full-service market, KFA has initiated reconfiguration of its aircraft. This exercise will require few of our aircraft to be out of service for the next few weeks, requiring a temporary modification of some of the flight schedules. Once the reconfiguration is complete, these aircraft will be pressed back into service immediately.

The airline has not responded to repeated mails, texts, and phone calls seeking comments and information. The airline has not even provided a list of flights which are cancelled.

Sources inside the airline say that only two or three aircraft have been grounded for re-configuration. That would account for only 20 or so flights being cancelled. The exact reason for the other 30 remain unknown, though it is without any doubt, due to the absolute financial nightmare the airline is experiencing.

India's aviation regulator has sent the airline a show cause notice for violating rule 140(a) for not obtaining permission prior to cancelling these flights.

No network planning
With a "me too" approach to network planning for many years, Kingfisher has tried to copy the network of arch rival Jet Airways. Shifting from its international operations base from Bangalore, where it was the sole Indian carrier offering wide-body services, to Mumbai, the home base of both Jet Airways and Air India, Dr. Mallya forced his team to indulge in suicidal competition. Despite best efforts, the international operations which constitutes only 22% of total revenue, still continues to be a huge money drain, loosing over 5% of gross revenue.

The poor planning was reflected by the abandoning of Airbus A340-500s original ordered to do Bangalore-San Francisco flights, and the indefinite deferral of the Airbus A380 superjumbos. Yesterday, the final ignomy; the cancelling of the last two A340-500 aircraft left on order.

Overdues everywhere

The airline owes money to everyone. Airport operators, fuel companies, vendors, caterers, and on and on and on. It has even failed to remit to the government and airport operators taxes and levies which it collects on their behalf on its tickets. Virtually every vendor have the airline on "cash up front" terms, as its cheques regularly bounce like rubber.

With regular non-payment, the airline has driven lessors like GECAS to re-posses aircraft, and disputes with engine vendors Pratt and Whittney and IAE have led to significant grounding of the fleet.

The financial melt-down
Thanks to a combination of factors Kingfisher has racked up debt of over Rs. 70 billion (7000 cr). In a downright scary situation, the airline spends twice its gross operating profit or 16% of total revenue, on interest payments and debt servicing alone.

In September, Veritas, a Canadian firm, released a report titled "Pie in the Sky" in which it called Kingfisher and its parent UB Holdings Limited on the verge of bankruptcy. The report was subsequently slammed by Mr. Ravi Nedungadi, the CFO of UB Group.

The airline has tried every trick in the book to reverse the slide, but with no success. SpiceJet’s former CEO Sanjay Aggarwal was hired to steer KFA to a path of profitability, and most feel to tap WL Ross for a strategic injection of investment in to the airline. I recommend reading this good analysis on the history of the airline.

With declining investor interest in the Indian airline sector, Kingfisher is desperately trying to obtain working capital of Rs. 1,000 Crore. With the banks refusing his attempts to re-cast more of the airline's debt, the airline is now trying to pare down debt by getting lessors to release $200 million cash in safety deposit held by them in a mandatory maintenance reserve, with banks credit guarantees.

The future

Despite all these setbanks, the Kingfisher brand remains strong in the eyes of the consumer. The airline has strong load factors and was the only listed Indian carrier that declared an EBITDAR profit in the first quarter of this fiscal.

Kingfisher is due to join the oneworld alliance late next year and has been strengthening frequent flyer and code share partnerships with many oneworld members like American Airlines, British Airways, and Finnair.

For some time now, Dr. Mallya's sole hope of a bailout has been with his partners in the oneworld alliance. However, foreign airlines are not allowed to invest in Indian carriers at present. Recently the government has mooted the idea of allowing 24%~49% foreign airline share in domestic carriers. This idea is bitterly opposed by India's largest airline, Jet Airway's influential owner Naresh Goyal, who also needs an injection of funds, since he stands to lose his controlling stake.

But it appears, time is not favouring Mallya. When Kingfisher announced stoppage of its low cost operations, we opined that this was a prelude to an enforced fleet downsizing.

Recently the government bailed out national carrier Air India who has debts more than six times of Kingfisher. The rejection of the same government controlled banks to bail out Kingfisher appears to have tipped the Chairman's hand.

Dr. Mallya is reported to have said

"Decision to reschedule and cancel flights was taken to cut losses. We are only ensuring loss minimization by flight rationalization and enhanced revenue through reconfiguration."

A cancellation of just 50 out of Kingfisher's 340 daily flights has caused fares to double. Dr. Mallya knows fully well that a closure of Kingfisher will suck out 19% capacity from the market and will cause gigantic upheavals in India's airline industry, not to mention the fact that creditors know loss making operations is still preferable to no operations at all.

The government is still smarting from non-stop scandals, price increases, and an upcoming winter parliament session that promises to be more stormy than Katrina. These cancellations could be just the arm twisting Mallya is putting on government to approve foreign airline investments, banks to fund his airline some more, and creditors to give him just that extra time, to get an investor, and get out with just that modicum of respect.

What are your thoughts? Post a comment, share this story and participate in the discussion.

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Analysis: Kingfisher's LCC withdrawal may be a precursor to fleet downsizing

Last week Kingfisher Airlines Chief Executive Officer Sanjay Aggarwal issued some clarifications about the airline's decision to withdraw its Kingfisher Red LCC service. Below is our author and analyst Vinay Bhaskara's analysis of those clarifications.

Operating costs of so called low cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields.

This is a very good point, as the incremental cost of bringing the rest of Kingfisher’s operation as one would assume. Beyond the physical cost of retrofitting the aircraft in the new configuration, the only new operational costs are related to distribution and amenities.


The difference in cost per available seat kilometer (CASK) between the Red and mainline Kingfisher class was not very large. This may explain Red’s unprofitability and the decision to close.

Kingfisher has traditionally offered products that are superior to their competitors’ but at similar or lower prices. As an example, the Kingfisher First cabin product has a seat pitch of more than 47 inches while Jet Airways and Air India offer a business class with a pitch of 42~44 inches, yet the Kingfisher product is available at the same or lower price than Jet Airways. If the revenue gains are truly realised, and in the quantum as large as Mr. Aggarwal has stated, then the move can improve profitability significantly, otherwise, the downward spiral will only escalate.

In addition to large aircraft orders placed at time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market. The induction of so many additional aircraft in the low cost / low fare segment will potentially lead to substantial over capacity and a price war with declining yields.

Both SpiceJet and Jet in their comments for Q1 of fiscal 2012 noted that capacity growth exceeded demand growth (domestically) by about 5%. IndiGo has really been the only carrier to see the benefits of this growth, but the declining yields have not only hit the low cost sector, but full service economy class travel as well. Simply converting the entire network to full service will not automatically insulate Kingfisher from low cost competition.

With continuing economic growth, business related travel is increasing significantly. Businessmen and executives prefer to fly with full service carriers because of ease of buying tickets, frequent flyer program and convenience offered. They are willing to pay extra and this segment is not as price sensitive as the classic low cost / low fare segment where there is a lot of discretionary travel involved.

However, one has to consider the volume of business travellers relative to the number of leisure travellers. Currently, the second group represents more than 60% of Kingfisher’s revenue, much of it via Red, and Kingfisher may struggle to fill its planes. Moreover, growth in the Indian market as a whole is very much driven by low cost flying; we feel Kingfisher is limiting its future growth potential with this move.

A detailed study over the last six months during the high oil price regime has clearly demonstrated that Kingfisher’s full service product has generated higher yields and load factors which is consistent with the assessment that the business travel segment is more sustainable than the extremely price sensitive low fare segment. The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier. The remaining 75% is net contribution to the bottom line.

The figure of only 25% of the additional yield being wiped out by higher costs is consistent with the first bullet point. By adding more capacity to the full service segment will have a lowering effect on fares, meaning that the benefit will likely not be as large as 75% of higher fares.

While there are currently five airlines participating in the low cost / low fare segment, there are only three full service carriers namely Air India. Jet Airways and Kingfisher Airlines. While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes that are offered by each one. In short, we believe that the competition will be far more intense in the low fare space than in the full service space.

While the competition for full service passengers can be characterized as less fierce than in the low-cost sphere; one has to consider the effects of Air India on the pricing environment for full service carriers. Recent statements by the Aviation Ministry give indications that Air India will be looking to re-capture its “lost” market share. If Air India is pricing with an eye towards re-capturing market share in the full service sector, then it is likely that Kingfisher will find the competition to be just as difficult.

Kingfisher Airline is widely recognised as a premium carrier and is the recipient of 38 national and international awards. The brand and service quality image is well established. This is evidenced by the higher yields and higher load factors generated on Kingfisher’s dual cabin aircraft. For the first five months of this fiscal year, based on DGCA published data, Kingfisher Airlines has delivered highest load factors of any airline in India.

Kingfisher’s reputation amongst passengers, especially business travellers, is perhaps its greatest asset. This reputation though, has taken a significant beating due to poor maintenance, shoddy aircraft, IFE that has been switched off due to a lack of payment to the content providers, large scale groundings and cancelled flights. Re-building this reputation will be imperative to Kingfisher’s ability to succeed as a full-service carrier.

With peeling paint, this Kingfisher ATR-72-500 looks shabby

In a way Kingfisher is returning to its roots – offering a premium economy product for the price of economy. Eliminating Red will also allow Kingfisher to offer a consistent product across its network; no more connecting from luxurious Kingfisher First to low-cost single cabin flights.

Kingfisher currently operates airbus aircraft with two cabin configurations – Dual cabin full service and Single cabin no frills. This also means the Kingfisher does not offer its premium Business Class or full service economy class product on all its routes. As a result Kingfisher is losing a certain amount of business class traffic on many routes.

On the metro routes especially ex-Mumbai and ex-Delhi, where there is heavy senior corporate executive travel, Kingfisher can and will fill business class seats (especially if the configuration is reduced to 8~12 seats), but most of Kingfisher's revenue is coming from Red’s current traffic of junior business travellers and low fare leisure travel. Kingfisher should be able to replace some of Red’s flying with 2-class service, but it is doubtful they will enjoy a higher revenue.

Kingfisher’s integration into the oneworld alliance is on track. oneworld is supportive of Kingfisher’s move to focus its energy and resources on a full service and premium product which is in line with the philosophy of oneworld and its member airlines.

The shift towards full service is consistent with the oneworld branding, AirBerlin notwithstanding, and ending Red flights means that all oneworld customers connecting onto Kingfisher flights can remain in business class for the duration of their flight, unless they connect onto ATR operated flights.

Over the next 4 months Kingfisher will reconfigure all its airbus aircraft including its single cabin aircraft into dual cabin aircraft with a reduced premium business class cabin and an increased number of full service economy class seats leading to a capacity increase of approximately 10%.

A very smart and long overdue move. With most seats empty, the over-extravagant Kingfisher First class, is a drain on the effective utilisation of aircraft. With an average flight during of 1.5 hours, not too many domestic passengers are inclined to spend the five figure fares of premium classes. Increasing the number of seats per aircraft is one way for Kingfisher to reduce the seat-kilometre costs of its aircraft. However, it remains to be seen whether they will be able to fill all of those seats at profitable fares.

The economy class will offer the same comfort as it does today. The space requirement for additional economy seats will be made available by reducing the number of business class seats.

Once the aircraft are re-configured, Bangalore Aviation will assess the validity of this statement.

The reconfigured aircraft will have the seat equivalency of a low fare carrier but an opportunity to generate much higher revenue as demonstrated by current yields. Kingfisher will achieve incremental business class revenue as a result of wider and uniform availability and the airline will also generate incremental revenue through its increased full service economy class capacity.

Increased capacity tends to place downward pressure on fares, so for Kingfisher to assume that current yields will hold even with more capacity might be presumptuous. There should be certain incremental gains for having a consistent product with business class on most flights, especially with regards to passengers connecting onto Kingfisher from domestic flights.

There will be no reduction in Kingfisher’s fleet size or its network. Our guests will continue to enjoy the benefits of Kingfisher’s network that provides connectivity to 60 domestic and 8 international destinations.

It remains to be seen whether or not the entire network will stay intact. The majority of air travellers in India choose low-cost carriers. Given such an environment, Kingfisher may see fit to reduce flights, even if it does not cut destinations. Perhaps they end up with a fleet of 40-45 aircraft that is more in line with market demand for full service flights?

Kingfisher was the only publically listed Indian airline to show an operating EBIDTAR profit in the first quarter of fiscal 2011~12. Globally airlines struggle to generate 6%~8% EBIDTAR profit. Yet, Kingfisher spends an unheard of 16% of its total revenue towards debt servicing. Despite all its positives, unless debt levels are reduced, something extremely difficult in today’s bear market conditions, the future is bleak. Ulike another red and white liveried airline, Kingfisher does not have access to the tax-payer funds of the Government of India.

With the growth in aircraft demand and and the diminishing returns on A320 classic family aircraft as we get closer to the launch of the A320neo, it is very plausible that Kingfisher will have some of its fleet re-possessed by lessors, as the aircraft leases expire. As revenue falls with a smaller fleet, and debt levels remain the same, fiscal pressures will put the carrier’s very survival at risk.

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Podcast - India overview. Kingfisher LCC withdrawal, IndiGo results, SpiceJet's Q400 success

By Devesh Agarwal

In this India overview podcast Vinay Bhaskara, Addison Schonland, and myself, cover:

• the announcement of Kingfisher Airlines to withdraw from the LCC segment and what could some of the reasons behind this announcement.
• The continued financial success of IndiGo as announced by their results
• The astounding initial success of the recently commenced Q400 turbo-prop service of SpiceJet.

So please do listen and do post your thoughts and views.

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Kingfisher CEO justifies Kingfisher Red LCC service withdrawl

By Devesh Agarwal

At Kingfisher Airline's annual general meeting last week, Chairman Vijay Mallya announced a drastic change in strategy by the stoppage of the Kingfisher Red low cost service for a focus on the full service segment.

Kingfisher Red Airbus A321 all economy cabin

In response to the myriad of media articles, many of which speculated on the possible reasons for the announcement , airline Chief Executive Officer Sanjay Aggarwal clarified and justified the change in strategy. We have reproduced the statement below without comment and edit for your unbiased reading.

We will analyse the statement at a later date.

Following an announcement made last week about Kingfisher Airlines’ (Kingfisher) focus on the full service segment of air travel, there has been a lot of speculation in sections about the media around. I would like to set the record straight and clear up any misconceptions around this announcement.

It is important to carefully analyse and understand the low cost or low fare segment of the Indian aviation industry. Let me begin by answering the most common question: Why focus on the full service product?

• Operating costs of so called low cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields.
• In addition to large aircraft orders placed at time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market. The induction of so many additional aircraft in the low cost / low fare segment will potentially lead to substantial over capacity and a price war with declining yields.
• With continuing economic growth, business related travel is increasing significantly. Businessmen and executives prefer to fly with full service carriers because of ease of buying tickets, frequent flyer program and convenience offered. They are willing to pay extra and this segment is not as price sensitive as the classic low cost / low fare segment where there is a lot of discretionary travel involved.
• A detailed study over the last six months during the high oil price regime has clearly demonstrated that Kingfisher’s full service product has generated higher yields and load factors which is consistent with the assessment that the business travel segment is more sustainable than the extremely price sensitive low fare segment. The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier. The remaining 75% is net contribution to the bottom line.
• While there are currently five airlines participating in the low cost / low fare segment, there are only three full service carriers namely Air India. Jet Airways and Kingfisher Airlines. While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes that are offered by each one. In short, we believe that the competition will be far more intense in the low fare space than in the full service space.
• Kingfisher Airline is widely recognised as a premium carrier and is the recipient of 38 national and international awards. The brand and service quality image is well established. This is evidenced by the higher yields and higher load factors generated on Kingfisher’s dual cabin aircraft. For the first five months of this fiscal year, based on DGCA published data, Kingfisher Airlines has delivered highest load factors of any airline in India.
• Kingfisher currently operates airbus aircraft with two cabin configurations – Dual cabin full service and Single cabin no frills. This also means the Kingfisher does not offer its premium Business Class or full service economy class product on all its routes. As a result Kingfisher is losing a certain amount of business class traffic on many routes.
• Kingfisher’s integration into the oneworld alliance is on track. oneworld is supportive of Kingfisher’s move to focus its energy and resources on a full service and premium product which is in line with the philosophy of oneworld and its member airlines.
• Over the next 4 months Kingfisher will reconfigure all its airbus aircraft including its single cabin aircraft into dual cabin aircraft with a reduced premium business class cabin and an increased number of full service economy class seats leading to a capacity increase of approximately 10%.
• The economy class will offer the same comfort as it does today. The space requirement for additional economy seats will be made available by reducing the number of business class seats.
• The reconfigured aircraft will have the seat equivalency of a low fare carrier but an opportunity to generate much higher revenue as demonstrated by current yields. Kingfisher will achieve incremental business class revenue as a result of wider and uniform availability and the airline will also generate incremental revenue through its increased full service economy class capacity.
• There will be no reduction in Kingfisher’s fleet size or its network. Our guests will continue to enjoy the benefits of Kingfisher’s network that provides connectivity to 60 domestic and 8 international destinations.

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