Deep in Red, Kingfisher closes low-cost business

Vijay Mallya?s low-cost aviation dream has been grounded. The chairman of Kingfisher Airlines on Wednesday said the carrier will exit the low-fare segment of the market and concentrate on the full-service offering instead, in a bid to improve its financial position. The airline’s low-cost operations are run under the Kingfisher Red brand.

Kingfisher Red is the rebranded Air Deccan, which Mallya acquired from low-cost aviation pioneer Capt GR Gopinath in 2008.

Expensive jet fuel and a weakening rupee have hurt an already bleeding sector, and Mallya warned that airfares will go up further if oil prices rise again.

?The industry is facing a huge challenge. Customers prefer a full-service airline as there is an adequate supply of low-fare seats,? Mallya said, trying to offer a rationale to the exit the low-cost business. Kingfisher Airlines? shares fell 1.2% on the BSE to close at R24.75 each on Wednesday.

Mallya, who has faced flak from investors ever since his airline took to the skies, assured them that Kingfisher will implement further measures to reduce its debt of around R7,000 crore. On Wednesday, at the company?s AGM, shareholders approved its R2,000-crore rights issue, even as Kingfisher tries desperately to raise fresh capital in the wake of continuing losses.

The company has also taken up initiatives like selling and leasing back aircraft and monetising land to reduce debt and cut costs. ?We continue to believe that Kingfisher is a great investment opportunity,? Mallya said.

In the April-June quarter, the airline’s losses climbed to Rs 264 crore from Rs 187 crore during the previous corresponding period. Kingfisher had posted a loss of Rs 1027 crore for the fiscal year 2010-11 on a revenue of Rs 6359 crore, compared to a loss of Rs 1647 crore in the previous fiscal.

Kingfisher, with a market share of 20%, had partially restructured its loans to bring down interest costs. The company had recast 30% of its debt in April as equity to a State Bank-led consortium of 13 lenders, which now hold 23.36% shares in the airline, as of June.

?Kingfisher continues to work with the consortium of banks with a view to further reduce the interest cost,? he said, adding that it would look at converting part of its rupee loans into low-cost forex loans based on existing forex cash flows.

Referring to the recent observation by the company’s auditors that the financial statements had been prepared on a ‘going concern’ basis despite the erosion of its net worth, Mallya told shareholders that the auditors had clarified that it was not an adverse opinion or ?that they disagreed with the management’s assessment of the going concern assumption?.

Mallya told reporters that the company has started a reconfiguration of aircraft to increase capacity by at least 10% while it plans to sell and lease back around 35 Airbus planes. ?That is one of the initiatives that we have, but I understand that other airlines are also considering the same. With the rising interest costs, we are obviously looking at all available ways and means to reduce the interest,? he said, adding the full impact of the reduction of interest following the master debt recast package would be seen this year. ?All is not gloom and doom as people love to report.?

Mallya said the airline was awaiting approval for several night-time overseas routes in order to improve aircraft utilisation. Kingfisher operates over 360 domestic flights a day.

UB Holdings solid company: Mallya

Excerpts from Kingfisher chairman Vijay Mallya’s interaction with the media on Wednesday:

Will margins improve as a result of exiting Kingfisher Red?

Clearly the margins of Kingfisher Class are higher than KF Red, that’s because the yields are better and reconfiguration of aircraft have already started and it should be completed over the next few months.

How would you look back on the Air Deccan buyout?

The acquisition of Deccan gave us much needed infrastructure, departure and arrival slots, parking slots at various airports, hangar-age. I could not get a hangar for Kingfisher Airlines despite my best efforts, the acquisition of Deccan actually gave us three hangars. The acquisition gave us scale, increased marketshare but more importantly infrastructure.

What are the plans for capital infusion?

The shareholders today unanimously approved the R2,000 crore right issue. The GDR could not be launched due to various external environmental factors such as the high crude oil price regime but there are always opportunities that show up and we are obviously examining all options available to us including the rights issue approved today.

How would you respond to the reports that UB Holdings is over-leveraged?

UB Holdings is a solid company. You cannot automatically assume that all the guarantees that it has given are going to be called upon. Kingfisher Airlines itself has assets that goes towards its own liabilities. UB Holdings has traditionally over the last several years given guarantees on behalf of its subsidiary companies.

What are the plans for land monetisation?

We have all moved into a new building in Mumbai, the existing office is obviously redundant to our needs so we will look to sell it. Any initiative that we can take to reduce debt we will.