Woes continue for Kingfisher Airlines amid steep losses and unviable debt burden

Federation of Indian Airlines (FIA) secretary general Anil Baijal has similarly warned of the fragility of the industry, noting that further pressure and continued losses could lead to the closure of one or more airlines. "We feel it will be a serious matter for the economic climate if one or two go down," Mr Baijal said.

Share price slumps of over 65% in 2011 for India's loss-making listed airlines

The nation's three listed airlines - Kingfisher Airlines, SpiceJet and Jet Airways - were all unprofitable in the second quarter and have witnessed share price slumps of over 65% in 2011 (Kingfisher shares have lost around 67% of their value in 2011 and reached a record low on 11-Nov-2011, reducing the carrier's market value to around USD213 million), as they struggle to convert the increase in domestic passengers into profit and stable yields. The three listed airlines have a current market capitalisation of around USD850 million compared with short-term funding requirements of approximately USD1 billion.

Shares comparison for Kingfisher Airlines, SpiceJet, Jet Airways: Dec-2010 to Nov-2011

Source: CAPA - Centre for Aviation & Rediff

High debt levels are also affecting the financial health of the nation's airlines, and some airlines, including Kingfisher, have made expensive acquisitions. Losses mean that Indian airlines require around USD2.5 billion of new cash to maintain operations, including USD1.32 billion for Air India, according to CAPA estimates. Kingfisher needs USD400 million in the next three months alone, with the carrier seeking more bank loans to support its operations. The airline will require over USD800 million to fully fund its business plan over the next 18 months.

A key challenge going forward will be to balance the burgeoning demand with capacity discipline, to ensure yields and profitability are maintained. High costs due to fuel prices and heavy taxation, combined with fare discounting, have created an unsustainable combination, with the challenges compounded by rising interest rates and a falling rupee, which has made oil imports even more expensive. Furthermore, the Indian Government has been supporting the unprofitable state-owned carrier, Air India, which has sharply lowered fares in an effort to attract more passengers. Only one of the seven largest Indian airlines, namely IndiGo, has been consistently profitable in recent years. Kingfisher Airlines has struggled more than others, in part because of its 2008 acquisition of Air Deccan, the LCC consequently rebranded as Kingfisher Red. The airline decided in Sep-2011 it would end these services and transition to an entirely full service model. This was a bold decision in a market that is moving in the opposite direction, but there may be an opportunity for a differentiated product in an increasingly commoditised market.

See related articles:

• Kingfisher Airlines going against the trend with plans to exit low cost business by Jan-2012
• India: the world's fastest growing domestic aviation market

Kingfisher falls deep into the red in 2QFY2012 with 16th consecutive quarterly loss; net loss margin of -29%

Kingfisher Airlines, India's second largest carrier, reported a more than doubling in second-quarter (three months to Sep-2011) losses to INR4.69 billion (USD93 million), marking the 16th consecutive quarterly loss for the carrier. "As increased demand was matched with enhanced supply, there was no headroom to improve margins," CEO Sanjay Agarwal said. Kingfisher has also been battered by increasing costs, including high interest payments on its nearly USD1.3 billion in debt and a 71% year-on-year spike in fuel costs.

The net loss margin of -29% compared with -15.3% in 2QFY2011. The airline's EBITDA loss stood at INR2.71 billion (USD54.2 million), compared with an EBITDA profit of INR550 million (USD11 million) in the previous corresponding period, for an EBITDA margin of -16.7% (this compares with EBITDA margins of -32.9% in FY2009 and +2.2% in FY2011). The carrier reported losses in both domestic and international operations, with domestic operations contributing 72% of the total EBITDA losses in the Sep-2011 quarter.

Kingfisher Airlines domestic and international EBITDA: 1QFY2011 to 2QFY2012

Source: CAPA - Centre for Aviation & Kingfisher Airlines

Kingfisher Airlines, Jet Airways and SpiceJet domestic EBITDA: 1QFY2011 to 2QFY2012

Source: CAPA - Centre for Aviation & Kingfisher Airlines

8% revenue increase outpaced by 30% increase in operating costs

Revenues increased 8% to INR16.3 billion (USD326 million) in 2QFY2012 with domestic revenues contributing 77% of the total and increasing 5% year-on-year. International revenues increased 11% as the division continued to mature. Revenue growth was outpaced by a 30% increase in operating costs to INR19.0 billion (USD380.4 million). (See Appendix for division between domestic and international operations.)

Kingfisher financial highlights for three months ended 30-Sep-2011:

• Total revenue: USD326 million, +8% year-on-year;
• Total operating costs: USD380.4 million, +30%;
• EBITDA (loss): (USD54.2 million), compared to a profit of USD11 million in p-c-p;
  • Fuel: USD163.4 million, +70%;
  • Labour: USD36.6 million, +6%;
• Profit (loss) before exceptional items and tax: (USD136.6 million), compared to a loss of USD72.2 million in p-c-p;
• Profit (loss) after tax: (USD93.8 million), compared to a loss of USD46.2 million in p-c-p;
• Total revenue per ASK: USD 7.38 cents, -8%;
• Cost per ASK: USD 8.62 cents, +11%;
• Cost per ASK excl fuel: USD 4.92 cents, -6%;
• Passenger numbers: 3.0 million, +12%;
• Passenger load factor: 76%, -3 ppts;
• Capacity (ASKs): 4414 million, +17%;
• Traffic (RPKs): 3337 million, +12%;
• Departures: 32,926, +9%.

*Based on the conversion rate at USD1 = INR50

Kingfisher Airlines reported a 71% year-on-year increase in fuel costs in the second quarter due a combination of higher unit costs and increased flying. Jet fuel prices have risen by around 30% in Mumbai since 01-Jan-2011, excluding tax, according Indian Oil Corp. Meanwhile, the rupee has weakened 12% against the dollar this year, the worst performer among Asia-Pacific's 10 most traded currencies.

Yield pressures continue with RASK reductions in 2Q

At a unit level, yields continued to be pressured, with the first quarter of year-on-year RASK contractions in at least 13 quarters. RASK weakened 8% year-on-year to INR3.69 (USD 7.38 cents) driven by a 16% reduction in domestic RASK to INR4.24 (comparatively, international RASK strengthened 8% to INR2.61).

Kingfisher Airlines domestic and international passengers RASK: 1QFY2011 to 2QFY2012

Source: CAPA - Centre for Aviation & Kingfisher Airlines

In FY2009, the carrier reported a 19% increase in domestic RASK to INR3.27, followed by growth of 10% in FY2010 to INR3.61 and 16% growth in FY2011 to INR4.17 (growth of 22% in 1QFY2011, 25% growth in 2QFY2011, with growth weakening to 9% in 3QFY2011 and 8% in 4QFY2012). In the first quarter of the current fiscal year, domestic RASK increased by only 6% to INR4.50. From 1QFY2010 onwards, Kingfisher has stated its yields have been stronger than those at Jet/Jet Lite.

Domestic passenger RASK: 1Q2009 to 1QFY2011

* Kingfisher stated Jet Airways/Jet Lite data was provided via investor reports on the website. Their pax revenue = RRPKM*RPKM
Source: Kingfisher Airlines Investor Update (15-Nov-2011) sourcing DGCA

Overall Kingfisher Airlines CASK increased 11% to INR4.31 (USD 8.62 cents) in 2QFY2012, with an 8% increase in domestic CASK to INR4.90 and a 12% increase in international CASK to INR3.12. Overall CASK ex fuel weakened 6% to INR2.46 (USD 4.92 cents).

Kingfisher Airlines domestic CASK and international CASK: 1QFY2011 to 2QFY2012

Source: CAPA - Centre for Aviation & Kingfisher Airlines

3 million pax in 2QFY2012

During the three-month period, the carrier reported a 12% increase in passenger numbers to 3.0 million and an average load factor of 76%, a 3 ppts year-on-year reduction. Domestic passenger numbers increased 13% to 2.7 million, compared with an industry growth rate of 20% in the quarter.

India domestic passenger development: Oct-2009 to Sep-2011*

*Not inclusive of 2QFY2012 figures
Source: Kingfisher Airlines sourcing DGCA data

Domestic capacity increased 17%, outpacing a 12% increase in traffic (RPKs) with this level of growth below the 20% industry capacity growth rate. The carrier stated its current A320 family utilisation stands at 11.6 hours per day, with 10.9 hours/day utilisation for its ATR family fleet.

Kingfisher Airlines domestic capacity development: 1QFY2009 to 1QFY2012

Source: Kingfisher Airlines Investor Update (15-Nov-2011) sourcing DGCA

In the domestic market, the carrier has an average load factor of 77%. While the carrier's domestic load factors weakened by 5 ppts in the quarter, they still remain stronger than the industry average of 72%, as has been the case over the past nine quarters.

Kingfisher Airlines load factor vs industry load factor: 1QFY2009 to 1QFY2011*

*Not inclusive of 2QFY2012 figures
Source: Kingfisher Airlines Investor Update (15-Nov-2011) sourcing DGCA

International passenger numbers increased 2% to 314,000 in 2QFY2012, amid continued capacity additions on international routes. International load factors weakened by 1 ppt to 73%.

Kingfisher Airlines domestic passenger load factor and int'l passenger load factor: 1QFY2011 to 2QFY2012

Source: CAPA - Centre for Aviation & Kingfisher Airlines

The carrier stated it deploys capacity on eight of the 10 largest international routes for India. Total international traffic to/from India has shown growth of 13% per annum between FY2006 to FY2011. Indian airlines have around 35% of international capacity (ASKs) to/from India, with the carrier stating that "oneworld has set the growth path" for the carrier in key international markets. Mr Aggarwal has confirmed the carrier expects to join the oneworld alliance in 1Q2012.

Kingfisher Airlines international capacity development: 1QFY2009 to 1QFY2012

Source: Kingfisher Airlines Investor Update (15-Nov-2011) sourcing DGCA

Kingfisher struggles with USD1.5 billion in debt

Kingfisher is struggling with INR60 billion (USD1.23 billion) in debt maturing over the next nine years and has seen interest on its debt rising from 11% to 14% over the past year, based on multiple upward interest rate revisions by the Reserve Bank of India, which Dr Mallya noted is a "cause of concern". Earlier this year, Kingfisher entered negotiations with banks and debt holders to restructure its debt to reduce short-term repayments. A consortium of 13 banks now owns around a 23% stake in the carrier. The restructure provided the airline with an opportunity to strengthen its operations, however due to the unfortunate timing this was followed almost immediately by a sharp increase in fuel prices and a steep decline in market yields.

Due to its large debt, Kingfisher spends more than 20% of its revenue on interest, with this high level of debt becoming unmanageable and exceeding the carrier's operating profit result. By contrast, Jet Airways, the largest airline in India, allocated only 6.5% of its revenue to interest payments in the most recent quarter. Despite this predicament, Dr Mallya stated the carrier is viable and that "our level of debt is not unusual for an airline of our size. There is a private airline that has double the size of our debt".

To rectify the situation, the carrier plans to raise around INR10 billion (USD200 million) in new loans, including INR1.5 billion (USD30 million) for reconfiguring aircraft, UB Group (Kingfisher parent company) CFO Ravi Nedungadi said. It may also hold a rights issue before the end of Mar-2012 and sell property in Mumbai to raise funds, he added. An Indian investor has also approached Kingfisher about acquiring a stake in the airline, Dr Mallya said, without elaboration. He also called on the Government to ease restrictions on overseas carriers investing in Indian airlines.

Kingfisher Airlines requests banks to raise lending limits; seeking to convert domestic debt into foreign currency loans

To improve the financial foundations of the carrier, Kingfisher is seeking to reduce its debt with assistance from banks, UB Group and others, with the carrier also seeking to reduce interest costs by converting some of its INR12 billion (USD240 million) debt into foreign currency loans that attract lower rates. Mr Nedungadi stated Kingfisher has asked banks increase working capital limits by around INR6 billion (USD120 million) to INR7 billion (USD140 million), as well as seeking INR1.5 billion (USD30 million) of term loans to fund fleet reconfiguration.

The carrier is also planning to transfer INR10 billion (USD200 million) locked up as deposits with aircraft lessors to be converted into letters of credit. The company's proposal is that its banks provide letters of credit to the lessors, with Dr Mallya stating: "We are in dialogue with banks to open Letters of Credit for these lessors which we can use to recover debt and repay our high cost rupee loans." It remains unclear how the proposal is being received, although the fact that lessors have kept their aircraft with the carrier is a positive. Commenting on the situation, International Lease Finance Corp (ILFC) CEO Henri Courpon commented: "While we are always looking for backup opportunities, we don't feel that our Kingfisher fleet requires a B-plan at this time. The airline needs to address its debt load but the fundamentals are sound."

Kingfisher has also requested banks, which have an equity stake of around 23.4%, to participate in its ongoing rights issue of up to INR20 billion (USD400 million), which is expected to take place either before Mar-2012 or at the beginning of the fiscal year that ends in Mar-2013, Mr Nedungadi said. It is also considering a global depository receipt issue, Mr Nedungadi added. Both plans have been stalled by weak markets but are seen as central to a financial recovery of the carrier. This is subject to banks agreeing to participate.

"We have not applied for any restructuring of debt by banks. We have not asked for a concession. We have not asked for a hair-cut. Our demands with the banks are mainly two-fold. One is to meet short-term capital needs which have gone up and concession on interest. We are in dialogue with banks to open letters of credit which can help us recover debt and repay our high cost rupee loans," Dr Mallya said, adding the carrier is focused on ways to reduce its high interest costs and reappraise working capital requirements.

The banks, however, are seeking greater commitments from the promoters and the airline management. State Bank of India (SBI) chairman Pratip Chaudhuri earlier this week said Kingfisher Airlines would need to provide a credible operational and fiscal turnaround plan if it is to successfully approach banks for an INR5 billion (USD100 million) working capital loan. Kingfisher's owners would also need to raise USD160 million in equity for the carrier. SBI and 12 other lenders hold approximately INR70 billion (USD1.4 billion) in Kingfisher Airlines equity and debt. SBI is the largest Kingfisher shareholder not tied to Dr Mallya, with equity of 5%, after it led a group of 13 lenders that agreed to convert debt to equity earlier this year. SBI has an exposure of INR14 billion (USD79 million) to Kingfisher Airlines but stated the carrier is not a defaulter. He added the carrier would not subscribe to a potential rights issue, stating: "We are not a part of the equity game, we are part of the debt game".

Meanwhile, Dr Mallya and his "friends, relatives and well wishers" have sourced INR7.63 billion (USD151.7 million) for the carrier in 2011, via unsecured loans, as confirmed by Mr Nedungadi. That debt may be partly or completely converted into equity of the carrier during the rights offer, he noted. Looking forward, Mr Nedungadi stated the UB Group will now take care of the airline's immediate financial needs and has infused around INR15.5 billion (USD29.6 million) in the last 30 days to "keep pace with the requirements of the airline". Dr Mallya, who controls 58% of Kingfisher Airlines through holding companies and associations, said he would not "cross-subsidise" the airline from other businesses. But he added that his holding companies and friends would stand behind the airline.

To provide further debt relief, the promoters also might convert some of the loans they have made to the carrier into equity. Dr Mallya said the airline does not need to pay interest to its banks until 2013 as part of a debt-restructuring programme and the interest payments can be made over nine years. The company expects to file for permission to launch a rights issue, Mr Nedungadi said.

Public debate over potential government support; Kingfisher denies need and want for bailout

The Kingfisher Airlines situation has created debate in India over the Government's role and whether it should provide aid to a private carrier and prevent a major failure that could seriously impact India's commercial-aviation sector. For now, the airline's business partners appear willing to let Kingfisher work to resolve its problems. SpiceJet CEO Neil Mills said he does not see any logic in a government-backed bailout for Kingfisher Airlines, as the carrier is a private sector entity.

Dr Mallya has denied having ever sought and wanting a bailout from the Government. "We have not asked for any bailout from government. We have not asked the government to dip into the taxpayers' money. We have never done it, we will never do it," he said, adding: "We have not applied for any restructuring of debt by banks. They have not formally told us to infuse any equity. What we asked for is to address our working capital needs and to help reduce interest costs." He also commented: "UB Holdings has created wealth for many shareholders. UB Group has demonstrated that whatever the cash needs of the airline are have been met and the intention is to recapitalise the company".

State Bank of India (SBI) chairman Mr Chaudhuri similarly confirmed Kingfisher Airlines has not requested the bank for additional funds or for any debt restructuring. "Last week, we (bankers) took stock of things and the company had a board meeting yesterday. After that, the company has not requested for any money," he said. Responding to a question on whether the SBI is concerned over repayment by Kingfisher Airlines, he said: "No, none whatsoever, no not at all."

Kingfisher believes Government should provide relief for state oil taxes

However, Dr Mallya said the Government should provide relief to airlines from state taxes that make already expensive jet fuel even pricier. He noted the entire Indian aviation industry is operating in a tough environment where heavily taxed fuel accounts for nearly half the cost, with yield per seat declining.

On an average, fuel costs are around 60% higher in India than in other countries. Taxes range by state, with Tamil Nadu charging the highest sales tax on fuel at 29% while Hyderabad has the lowest charge among the metro cities at 20%. "It is a very challenging environment," he said. "The state governments are enjoying windfall profits directly at the cost of the aviation industry...This is something that needs serious attention of our state governments and our Central Government."

To ease its fuel bill, Dr Mallya stated the carrier is working on plans to directly purchase jet fuel from overseas to avoid Indian taxes. "We have also applied to the Ministry of Commerce for direct import of jet fuel. If we import directly for our own consumption, we do not pay sales tax. Fuel costs account for more than half of our operating costs, and the ad valorem tax by state governments on top of the high fuel prices have ensured that the state governments are enjoying windfall profits at the cost of the aviation industry," he said.

Taxes make jet fuel in India 60-70% more expensive than the global average. Fuel costs account for over 50% of the carrier's operating cost, Dr Mallya said, adding this cost "gets increased due to the sales tax charged by various state governments". Dr Mallya commented on the high cost of fuel, stating: "Other than in 2008, we have never seen fuel prices as high as they are today."

Kingfisher has not defaulted on interest payments; pays bills to two of three main fuel suppliers

Dr Mallya also stated the carrier has not defaulted on interest repayments. It has also paid off bills with two of its three main fuel suppliers, Dr Mallya added, stating: "We have fully repaid the Indian Oil Corporation and Bharat Petroleum. As far as Hindustan Petroleum is concerned, from a level of INR600 million of unsecured credit, we have given bank guarantees and our outstanding is down to INR400 million."

Hindustan Petroleum has reportedly stopped the supply of jet fuel to Kingfisher Airlines, which reportedly owes INR6 billion (USD120 million) to the fuel supplier. Bharat Petroleum is also not supplying fuel to the airline following an ongoing court case over alleged non-payment of around INR2.5 billion (USD50 million). Indian Oil Corporation has put the carrier on a cash-and-carry basis.

Meanwhile, the carrier reportedly entered talks with ILFC, Investec Global Aircraft Leasing and GE Commercial Aviation (GECAS) earlier this month over changing the terms of aircraft leases resulting from defaults on payment of some leased aircraft. Kingfisher is streamlining its fleet and cutting capacity to increase yields and lower losses, with plans to eliminate its low-cost domestic operation.

Delhi and Hyderabad airports, both run by GMR Infrastructure-led consortiums, reportedly plan to put Kingfisher Airlines on a pay-as-you-go schema, unless it can clear half its debts for take-off and landing charges to the airports this week. Kingfisher Airlines' INR150 million (USD3.0 million) cheque to Airports Authority of India (AAI) reportedly bounced earlier this month, resulting in the AAI placing the airline back on daily cash-and-carry system. AAI has now started to accept some part payment but has reportedly requested the carrier to make its stand clear on its INR2 billion (USD40.4 million) outstanding debt.

Jobs safe, salaries paid

Dr Mallya has stated the carrier is not planning any large scale layoffs as part of its cost-cutting exercise, stating: "We value our employees, they are our most important assets…. We want to protect them...not resort to large scale layoffs." The carrier is likely able to retain its staff as it has lost a considerable number of staff through poaching by other carriers.

Kingfisher Airlines has reportedly seen 100 pilots resign in the past three months, with 30% of its cabin crew staff also reportedly resigning. The carrier employs almost 7000 employees, including 1800 cabin crew and around 650 pilots. The carrier confirmed it has not cancelled flights "due to lack of pilots or other staff" since the carrier has a sufficient number of pilots and a "robust pipeline of new pilots" to continue to operate its scheduled flights.

Mr Aggarwal noted the carrier has suffered a "few days delay" for the last two to three months in payment of employee salaries. However, all employees have been paid in the month the salaries are now due, he added.

Moving away from 'bloodbath' to 'top end of the pyramid'

As part of its operational restructuring efforts, Kingfisher Airlines is taking a number of "strategic" steps to improve its financial position. The carrier is changing its business model, reconfiguring its aircraft with more seats, rationalising its route network, investing in its product and brand and seeking to reduce input costs. The carrier is also considering spinning off its ATR operations, loyalty programme and MRO operations.

Dr Mallya said Kingfisher's decision to focus only on the high end of the market is a strategic one and that phasing out its Kingfisher Red, low-fare business, will improve the group's financial performance.

"With capacity addition taking place in the low-fare market, we believe the bloodbath will be at the bottom end," Dr Mallya said. "That's where the bloodbath is going to be. We don't want any part of that bloodbath. The main business offers better margins and has less competition. At the top end of the pyramid, you have more tempered competition," he said. Mr Aggarwal similarly noted: "Low-cost service is not a viable model in India and there could be a bloodbath happening in the low-cost business." He added the company has not provided Jet Airways with an advantage through its Kingfisher Red closure.

See related article: Kingfisher Airlines going against the trend with plans to exit low cost business by Jan-2012

Kingfisher flight cancellations 'not because we could not afford to fly': Vijay Mallya

Dr Mallya also stated the recent spate of flight cancellations were "not because we could not afford to fly" and have been "blamed on wrong reasons". He confirmed the cancellations were required to facilitate the reconfiguration of its widebody fleet. "The cancellation has been blamed on wrong reasons. It was only a commercially prudent decision to reconfigure aircraft ready for full-service operation as opposed to lost cost carrier (LCC)," Dr Mallya said.

He, however, admitted the reconfiguration exercise could have been better handled to avoid so many cancellations and also regretted the inadequate communication of the cancellations, stating: "We could have handled it better. Sometimes mistakes do happen, but there is always room for improvement".

The carrier cancelled more than 250 flights last week. India's Directorate General of Civil Aviation (DGCA) last week requested Kingfisher Airlines to explain the cancellations, which have occurred since 07-Nov-2011. The carrier will now operate 300 daily services, down from 340 previously, as it ends the Kingfisher Red operations. The carrier has placed its new schedule online to avoid confusion, amid the grounding of 10-12 aircraft for reconfiguration. "Whatever the number of flights are published on the website, we will be flying from today. Changes will happen only after March, when the entire plane revamp will be over," Mr Aggarwal said, adding: "Overall, we have grounded 10-12 aircraft, or 55 flights, out of the 66 planes. But, we also added some flights by additional frequencies and are starting Mumbai-Udaipur from next month."

Jet Airways COO Sudheer Raghavan stated the carrier's yields have increased by 20% in the first 14 days of Nov-2011 compared to the same period in Oct-2011 as mass cancellations by Kingfisher Airlines have resulted in increased fare levels. "We feel that there will not be any undue pressure on the yields in the coming months," he added.

Ceasing unprofitable routes

Dr Mallya defended the carrier's "commercially prudent" decision to stop operating on unprofitable routes and criticised government policy on forcing private Indian carriers to operate non-profitable routes. "We cancelled flights not because we couldn't afford to fly. We cannot, as a private company, afford to fly on routes that are heavily loss-making," he said. "We have very, very carefully evaluated, over the last several months including the lean monsoon months, the yields that we get in all the three classes of service that we offer, Kingfisher First, Regular Kingfisher Class, Full Service Economy," he added.

He continued: "We are not in the same arena as a national carrier such as Air India that perhaps has a national duty to perform with the Government as its shareholder. We are accountable to our banks, we are accountable to our shareholders and therefore we did cut flights that were heavily loss making, but in doing so what we have not been able to present to you appropriately, which we hope to today is that we are acutely conscious of the importance and need for connectivity in India," he added.

Despite the cancellations, Dr Mallya stated the carrier has the widest network of air connectivity in India, stating: "There are destinations to which we fly exclusively and no other airlines flies to those destinations". On the carrier's route rationalisation exercise, he added: "We haven't dropped anyone of those routes because we are conscious of the fact that irrespective of profit or loss, connectivity has to be maintained and it's an integral part of our country's economic growth".

The carrier operated a network of 60 domestic and eight international routes as at Jun-2011, although following its network rationalisation, it now offers 300 daily services to 54 cities, down from 340 weekly services previously. The carrier stated it continues to have the most comprehensive domestic network, operating to all major business and leisure destinations, covering more than 95% of the addressable passenger base. It has 10 unique destinations in India not serviced by another other airline.

Kingfisher Airlines network*

* As at 30-Jun-2011
Source: Kingfisher Airlines Investor Update (15-Nov-2011)

Kingfisher A380 deliveries pushed back; some A320 deliveries delayed due to reconfiguration efforts

Dr Mallya stated the carrier's A380 deliveries "have been pushed back to a yet unspecified date" due to market conditions. He added he does not expect deliveries to commence in the next five years. "The deliveries have been pushed back to a yet unspecified date. We are going to discuss with Airbus, but I don't see A380 deliveries at least for the next five years," he said.

Dr Mallya also stated the carrier will delay delivery of some A320s as reconfiguration of its existing fleet will increase capacity. The reconfiguration initiative will require up to three aircraft to be out of service over the next three months at any one time for this exercise to be completed. It will reduce the number of fleet configurations from seven to three, improving operational flexibility, and will add more seats to its fleet, improving revenue production of each aircraft. The carrier is also reportedly set to cancel orders for two A340 aircraft.

Kingfisher Airlines urges ease in airline ownership regulations; interested in foreign airlines as equity partner

Dr Mallya stated he is interested in having a foreign airline as an equity partner. The carrier has appealed to the Government to change its policy to allow foreign airlines to obtain stakes in Indian aviation companies. "It makes no sense. When the Government allows 100% FDI (foreign direct investment) in airport companies, why should airlines be discriminated against?" Dr Mallya said, adding: "Who else understands the airline business better than an airline itself? I hope the Government will consider this seriously."

He continued: "The Government should consider allowing foreign direct investment (FDI) in aviation", reiterating the company cannot afford to fly heavily loss-making routes. The "entire issue in aviation space needs to be addressed, the whole sector is facing problems and the stated policy of the Government is to encourage FDI".

Currently, the Government allows only non-airline foreign companies to invest in Indian aviation companies up to a limit of 49%. According to Dr Mallya, given the future potential in the fast growing Indian aviation market, foreign airlines will be interested in investing in local carriers. The Indian Government is, however, looking at changing the regulation. India's Industry Secretary, R P Singh, in late Oct-2011 stated the Government is "likely" to approve plans to permit foreign airlines to invest in Indian airlines.

However, the Department of Industrial Policy and Promotion and the Civil Aviation Ministry differ on the size of the stake that foreign airlines could potentially acquire. While the Industry Ministry wants foreign airlines to be allowed to take a 26% stake (the level required for the investor to obtain a board position and have the right to block a special resolution), the Civil Aviation Ministry wants it capped at 24%.

India allows foreign investment of up to 49% in Indian carriers, but foreign airlines are not allowed to invest directly or indirectly in domestic carriers. The Cabinet will shortly consider the FDI proposal and the Industry Ministry has circulated a draft cabinet note for inter-ministerial consultations after approval from the Civil Aviation Ministry.

Kingfisher Airlines has previously stated it supports the plan, with the carrier rumoured to be a potential IAG target, while Jet Airways has questioned the need for foreign airline ownership in the aviation sector. Meanwhile, the FIA cautions: "It is important that India seeks reciprocal opening of the airline industry in other countries, before allowing open access of its market to foreign carriers". "A proposal has come from the Civil Aviation Ministry and it is receiving our active consideration," India's Commerce and Industry Minister, Anand Sharma said recently.

Vijay Mallya looks for strategic partner for Kingfisher Airlines; to maintain 56% stake

Dr Mallya also stated he may find a strategic partner to bring fresh equity to recapitalise the airline, adding the carrier is in talks with Indian investors and private equity players. He added that he has been approached by a "large Indian investor", which is seen as a potential strategic investor, but confirmed he has no plans to sell UB Group's 56% stake in the company. Asked about how much stake will be offered to the partner, Dr Mallya said it is premature to discuss all these as everything will depend on the valuation and the share premium the company can obtain.

Mr Nedungadi added that the promoters of Kingfisher Airlines are willing to reduce their stake from 58.61% to 26% to strategic domestic investors. The promoters are "willing to pare their holdings on the same lines as the recent Force One deal with Sahara and the UB Group deal with Heineken signed in 2009," he said.

Problems at Kingfisher reflect wider industry woes

Investors have grown increasingly worried over the future of Kingfisher Airlines in a fast-growing but loss-making industry. Noting the carrier's cash flow problem, the carrier has appointed SBI Capital Markets to study the financial requirements of the airline and suggest options to the carrier that has never made a profit since its 2005 launch.

However, the problem extends further than Kingfisher Airlines alone, with Jet Airways and SpiceJet also reporting losses in the second quarter and the entire industry, extending to airports and general aviation, also struggling to operate in the black. Dr Mallya similarly said Kingfisher's predicament was not unique and the Indian aviation sector was currently a "very, very difficult and tough operating environment". The current volatility in the Indian aviation market is in fact quite serious, with the financial status of the nation's domestic carriers very fragile.

Despite passenger traffic being on track to grow 17-18% in the full-year, CAPA expects Indian airlines to lose at least USD2.5 billion in the current fiscal year through Mar-2012, with state-owned Air India likely to account for more USD1.75 billion to USD2.0 billion. Meanwhile, Air India continues to initiate below-the-belt pricing, resulting in intense competition and a significant deterioration in the domestic yield environment. Like many business sectors in India, aviation has also been hurt by a huge rise in interest rates in the last year.

Indian aviation will likely continue to face turbulence for the near future, until the high-cost, low-yield imbalance is rectified. This is not expected to occur in the near-term, with growth continuing to be stimulated by below-cost fares. Only closely held IndiGo, India's largest airline, is likely to report a profit in the extremely challenging operating environment. However, even IndiGo's operational profits will take a large hit in present conditions.

These losses will further pressure already-high debt burdens, which are standing at approximately USD16 billion, largely on the balance sheets of the Big Three carriers. This includes vendor-related debt of approximately USD2 billion. Meanwhile, Indian banks have exposure of around USD6 billion in the aviation industry in working capital and term loans (they have additional exposure on aircraft related financing). Further financing is required, with the nation's carriers estimated to need around USD2.5 billion in immediate financing, according to CAPA estimates, including USD1.32 billion for Air India.

Accordingly, it has become evident that the industry needs some structural reforms. Indian airlines' fuel costs are 60-70% higher than the global average because of taxes. Airport charges are also rising, and increased interest rates are pressuring already stretched finances at the nation's airlines, creating a cost environment that does not match up with the pricing policy in the highly-competitive market.

Meanwhile, as part of efforts to overcome the troubles in the airline industry in India, Kingfisher is focused on three key areas: interest reduction, operational restructuring and growth management. The carrier has decided to rationalise its network, drop unprofitable services and expedite its fleet reconfiguration. This initiative will improve the long-term profitability of the airline, although this alone will not be enough to push the carrier on the path of profitability in an increasingly high-cost operating environment.

APPENDIX: Kingfisher Airlines 2QFY2012 financial results

Kingfisher Airlines operating parameters: 2QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines profit and loss statement: 2QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines domestic operating parameters: 2QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines domestic profit and loss statement: 2QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines international operating parameters: 2QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines international profit and loss statement: 2QFY2012

Source: Kingfisher Airlines