Kingfisher Airlines: The Core Issue

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What’s wrong with Kingfisher Airlines (KFA)?

Over the last few days KFA has cancelled large number flights across various sectors, including the marquee Delhi-Mumbai route. Only 28 of its 64 planes are operating inconveniencing thousands of passengers.

What has prompted flight cancellations?

The company is struggling to find funds for even basic needs such as jet fuel, vendor payments and employee wages. It has been defaulting on payments to oil companies and airports, and had delayed salaries to its employees for the last two months.

Why has the company run out of cash for day-to-day operations?

The company said the prime reason for the current disruption was the “sudden attachment“ of its bank accounts by the I-T department, that has left the firm with precarious cash balances.

Why has the I-T department “attached“ KFA’s bank accounts?

“Attachment“ implies the airline cannot operate the bank account unless it clears statutory dues to the tax department. The airline has failed to deposit tax deducted from employees’ salaries and vendors with the income tax authorities for close to two years leaving tax authorities with no other option.

What about employees?

Not paid for months, employees are leaving the company in droves. Recently, 35 senior commanders quit KFA and joined rival carrier IndiGo. Large numbers of cabin crew and ground staff have also put in their papers. The airline is left with only about 100 captains on its Airbus A320 fleet. It has already shut Kolkata operations after a majority of ground staff quit.

What is KFA’s current state of finances?

The capital-starved airline hasn’t ever made profits since its inception in 2005, had a debt of R7,057.1 crore as on March 31, 2011 and reported a loss of R444.0 crore for third-quarter ending December.

What are the main reasons for this precarious state of finances?

Its problems started about three years ago after it acquired Air Deccan from Captain GR Gopinath in 2008 and renamed it Kingfisher Red. High debt and rising operating costs forced KFA close down its low-cost arm last year.

Fund-raising is only one of the myriad problems confronting KFA. High interest liability, vendor payment schedules and inability to meet its daily jet fuel payment commitments are making turnaround difficult. The sharp spike in jet fuel costs, which constitute about 40% of an airline’s operating costs, only inflicted fresh wounds.

KFA implemented a debt recast package after which loans valued at around R1,300 crore were converted into share capital. A consortium of 13 lenders led by the State Bank of India (SBI) and ICICI Bank had picked up a 23.2% stake in the airline in March of which SBI and ICICI Bank holds 5.7% and 5.3% respectively. The shares were pledged by KFA’s holding companies United Breweries Holdings and Kingfisher Finvest at R64.48 per share, at nearly 60% markup over the current market price.

What about passenger programmes such as frequent flyer schemes?

The management has not specified how it would realign the frequent flyer points in wake of the cancellations and the decision to close down Kingfisher Red.

The airline had also recently moved AmEx card holders to a co-branded card membership programme. With cancellations and withdrawals from routes, all these will be potentially affected.

What’s the way ahead for KFA?

Analysts believe the airline needs immediate capital infusion of about $500 million (about R2,500 crore). Mallya has ruled out shutting the down the airline, even temporarily. He is now banking on an early notification of the government’s proposed policy to allow foreign airlines to buy up to 49% in domestic carriers.
He has said discussions were on with three potential foreign investors to buy equity in KFA and infuse capital.

Is it safe to fly the airline?

Regulator DGCA has ordered special safety audit of KFA’s fleet to find out whether any safety parameters have been compromised. R2,500 crore KFA’s immediate capital requirements.

Other Facts

  • R9,135 crore Corporate guarantees provided by United Breweries Holdings to KFA
  • 300 pilots have quit over the last 6 months.
  • KFA is operating only 28 aircrafts out of its 6
  • DE-CODED DEBT DEAL – Last year, Kingfisher Airlines inked a master debt recast agreement with a consortium of 13 banks led by SBI. As part of the agreement, loans worth R1,300 crore were converted into equity through preference shares. These banks now own 23.2% stake in the airline. The terms of the remaining loans were also softened. The loans, after the agreement, are repayable over a nine year period including a two-year moratorium. Further, the interest rate on the recast loans was lowered to 11% and the period of repayment was extended to 9 years. Flagship promoter company -UBHL –has provided guarantees for these loans.

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