In the red

The domestic private carrier Kingfisher Airlines is in serious trouble and there are enough reasons to doubt its ability to survive.

in Bangalore

IT might be too early to write the epitaph of the beleaguered Kingfisher Airlines (KFA). But mounting losses, huge cutback in flight operations, the strike by its pilots, its inability to raise sufficient funds or pay back various term and working capital loans, and the ignominy of having its bank accounts frozen are enough reasons to suspect the sure death of the private domestic airline company's capability to survive. Yes, the airline from the UB Group which until recently was India's second largest private airline continues operations despite its myriad woes. But for how long?

On the ground, things are getting worse. While passengers unfortunate enough to have booked their tickets on the airline sit in airport lounges with their fingers crossed, hoping that their flights would not be abruptly rescheduled or, worse, cancelled, KFA employees have been left wondering where their December salaries will come from. And the banks have all but pulled the plug on funding. A consortium of banks, including state-owned banks, did bail KFA out last year when it converted a third of the then outstanding debt, amounting to Rs.1,303 crore, into shares. That deal left the banks owning 23.37 per cent of the airline. But they are now saddled with a potential loss of over Rs.465 crore since the value of a Kingfisher share has plummeted from around Rs.64 a year ago to Rs.24.48. The banks are burdened with three-fourths of KFA's present debt.

The uncertainty about KFA's survival has meant far fewer prospective passengers, more airplanes on the ground than in the air (as per its latest schedule it will operate only 28 of its 64 aircraft) and employees seeking pastures elsewhere.

The airline, which started commercial operations in 2005, has never had a profitable year since. It has defaulted on payments to the government-run oil companies, private and government airports, aircraft leasing companies, and various vendors. Worst of all, in recent times it has defaulted on service tax payments and has not credited the tax collected from its employees to the national exchequer. Non-compliance of its tax requirements has been the primary cause of its latest belly landing.

With accumulated losses of Rs.6,524 crore and outstanding loans totalling Rs.7,057.08 crore, KFA is deep in the red. A number of banks, including the State Bank of India (SBI) which heads the consortium of banks that have lent money to the airline and UCO Bank, have already classified their loans to the airline as non-performing assets. The precarious financial situation has forced the SBI (which at Rs.1,400 crore has the maximum exposure among the banks) to state that it will not consider any fresh loans to KFA until the airline raises new equity. Besides this, any decision by the banks to lend KFA fresh capital will be taken only after the SBI studies the viability report prepared by its investing banking arm, SBI Capital Markets.

So, has the time come for KFA to fly into the sunset? That is hardly how KFA's chairman, the liquor baron and entrepreneur Vijay Mallya, sees it. At the Farnborough (England) Airshow in 2008, Mallya had famously stated that his group had huge cash flows and if it meant seeing Kingfisher through turbulent times it would. Kingfisher is not as vulnerable as the other Indian airlines, he had then said. Despite the present hard times, the self-styled King of Good Times insists that the airline whose Kingfisher logo is also that of India's by far the largest selling beer, which is produced by his group will keep flying. Mallya recently told reporters that he was absolutely committed to keeping the airline going unless some government agency wishes to ground it. He added that KFA's bank accounts had been frozen by the income tax authorities suddenly and that had crippled the airline, leading to massive disruptions of flights for a week in mid-February. Mallya has conveniently forgotten that his company's failure to remit personal taxes collected from its employees had prompted the IT Department to take action. KFA claimed that the freezing of bank accounts had severely affected the airline's ability to make operational payments, leading to the curtailment. The cancellation of flights in February was the second such in recent months; the previous one was in last August when over 40 flights were cancelled on a single day.

Acting as per the directive of the Directorate General of Civil Aviation (DGCA), KFA filed a fresh flight schedule on February 22, wherein it brought down its operations to 170 daily flights (cutting back on operations to some major and several Tier 2 cities) using 28 aircraft. Reports indicate that KFA may be returning some leased aircraft, but the remaining grounded aircraft would bleed the airline's coffers continuously. Lease amounts for aircraft in the KFA's fleet could range from $300,000 to $400,000 a month. The airline will also have to shell out parking fees for its grounded aircraft but can expect no revenue from them. The 170 flights (schedule effective until the end of March) are also a far cry from the 418 daily flights that KFA had earmarked for the 2011-12 winter schedule (October-March) and had indicated to the DGCA last November. But, in effect, though the airline was operating only 269 daily flights.

According to aviation expert and pilot Capt A. Ranganathan, KFA had in its heyday successfully sought and blocked over 600 slots (it was later downgraded to 418) even when it knew it did not have the business or the aircraft to use them. This not only robbed other potential carriers of the spots but also deprived airport operators of revenue. For KFA, the worst fallout of the recent large-scale flight cancellations will be the loss of several prime-time slots. (A time slot is a time period within which the aircraft has to take off.)

In the wake of the cancellations, the DGCA has also launched several safety checks on the 28 KFA aircraft. Mallya, who has been extremely piqued by the negative headlines that his airline has been generating, stated on the social networking platform Twitter on February 22 that he was glad the DGCA wanted to do special daily audits on KFA. He tweeted: We welcome the opportunity to prove that our aircraft are entirely safe. Also, in a memo sent to the airline's employees, Mallya explained that salaries could not be paid because the company's accounts had been frozen, and offered a Rs.5,000 cash advance to help them meet immediate requirements. But under pressure from the DGCA, the airline has promised to pay December and January salaries before the end of March.

Aviation experts opined that if KFA was to stay in operation, Mallya needed to infuse a few thousand crores either of his own or from a deep-pocketed investor (domestic or foreign airline or non-airline company) into the flagging carrier. Mallya has been helped by the government, which, prompted by the Kingfisher crisis, has decided to allow airlines to import aviation fuel directly (in a bid to avoid the high tax rates it attracts in India) and also initiated steps to allow foreign direct investment (FDI) up to 49 per cent by foreign airlines in Indian carriers. Whether KFA will be able to save substantially or not by directly importing fuel, it is unlikely at present to attract investors or partners. KFA does have a code-sharing agreement with British Airways. But as of now, there are no foreign takers who would like to use the Indian domestic sector to feed into their international operations. The deterrents for foreign players include poor infrastructure, abysmally low fares and the absence of enough business class and first-class seats which are the money-spinners to be sold.

To survive, Mallya needs to optimise operations, reduce size and cut losses. (He has, of course, got rid of his low-cost brand, Kingfisher Red, which he had acquired from Air Deccan.) In other words, he has to reinvent his entire business model, which, according to aviation experts, has for long been flawed, and is one of the primary reasons for the situation that his airline finds itself in. But many insiders are still unable to pinpoint why KFA has logged losses of Rs.444 crore during the third quarter of 2011-12, while Jet Airways, which operates over a 100 aircraft and compete in the same environment as KFA, posts a loss of Rs.101.22 crore only.

Financial observers aver that KFA is looking for loans between Rs.2,000 crore and Rs.3,000 crore from its bankers in order to continue with its daily operations. And though there have been reports that Mallya had received re-capitalisation offers worth Rs.800 crore from two Indian investors who together would get a 24 per cent stake in the airline for their efforts, nothing has as yet materialised. An earlier offer from an Indian entrepreneur was shot down by Mallya since the former had insisted that the airline be renamed.

But given Mallya's clout, there might be saviours for his company. Deputy Governor of the Reserve Bank of India K.C. Chakraborty, during a recent visit to Bangalore, said that banks were not just commercial but also risk-taking entities.

Ranganathan, who was a member of the DGCA's core group on Approach and Landing Accident Reduction, asks: Is the government going to arm-twist public sector banks to provide loans to help out a private airline? Paramount Airways started with just Rs. 2.5 million as investment. Yet, public sector banks gave close to Rs.100 million and ended up with a loss of Rs.500 crore. Have they not learnt a lesson? Questions need to be raised about accountability and why public sector banks are lending airlines without (sufficient) collateral.

Mallya may, and quite justifiably so, cry himself hoarse about India's aviation policies and poor infrastructure, and high taxes on aviation fuel, and on his airline being forced to operate uneconomical routes. But when he floated the airline amidst much glitz and fanfare in 2005, he was fully aware of the ground realities. So why lament now? What is in store for KFA now? While there are no provisions in India for companies to declare themselves legally bankrupt, analysts said that the airline could simply shut down overnight if it fails to secure fresh equity.

Experts are sceptical of the government's argument that passengers would be hit if KFA goes belly up.

With so much available capacity in other Indian carriers, passengers would still pay fares 30 per cent lower than what they should be and be spoilt for choice.