The king of good times has never had it so bad. Kingfisher Airlines chairman Vijay Mallya has to buy time from lenders and suppliers seeking settlement of outstanding bills. The airline, according to broad estimates, owes around R2,000 crore to its vendors.
The financial health of the airline is so precarious that it is partly grounding its flights to save on cost. However, Mallya is quick to point out that the carrier is not alone, and that the Indian aviation industry is posting losses and struggling for survival. In short, the company?s problems are linked to those of the industry, so it becomes an industry issue and not a company-specific problem.
It may be true to some extent since the airlines have been posting losses and companies like Jet Airways and SpiceJet have reported losses as late as during the July-September quarter. However, it is also true that the Kingfisher fares worse than its competitors on all parameters. For instance, other carriers have not asked ? at least so far ? for restructuring of their debt. They are not being put on credit hold by banks. And vendors are not threatening them to stop providing services. Surely then, there must be something wrong with either its business model or the way the company is being run.
Mallya first launched an all-economy class airline in 2003-04, a good decision as the low-cost airline business was untapped at that time. But in 2005 he decided to introduce business class seats and sent its aircraft for reconfiguration. ?The cost of reconfiguring the airplane is huge. It takes almost $2.5 million in reconfiguring seat of one aircraft. On top of this, the airline loses cash as the plane is not in operation for almost a month,? said a senior executive of a private carrier.
In 2007, Mallya acquired low-cost carrier Air Deccan along with its liability, hoping to gain market share and also the opportunity to fly abroad. Regulatory guidelines mandate five years of domestic operation as a condition to start overseas operation, a criterion Air Deccan fulfilled but Kingfisher did not at the time. However, instead of consolidating the Air Deccan brand, which had significant reach in smaller cities, Mallya decided to reverse merge Kingfisher with Air Deccan.
In September this year, the airline announced its decision to exit the low-cost market, in marked contrast to market leader Jet Airways, which continues to add low-cost flights. More than 62% of the 50 million domestic passengers fly low-cost.
Kingfisher is today heavily burdened with the short-term debt that attracts an interest rate of 11-12%, causing significant cash outgo. The airline?s share capital is much lower than its debt. The airline borrowed each time it needed cash without infusing fresh equity, adding to the high interest burden. ?The main problem…is interest. It is one of the main factors pushing the carrier to the edge,? said an industry expert.
A a former Kingfisher Airlines executive said, ?The airline planned to start flights to San Francisco. Everything was decided. The lounge was taken for guests. But suddenly it was decided that it would not operate on that route. It had a cost. It?s a small example. The airline has lost heavily for taking wrong decisions.?
Even if Kingfisher manages to get a bailout package by the banks at the behest of the government, it remains to be seen how it moves forward and manages its affairs.