Three scenarios for Kingfisher

Mumbai/New Delhi: Shares of Kingfisher were down 4.8% to Rs.10.90 apiece at 10.15am on Monday after India’s aviation regulator suspended its licence on Saturday.

Is this the end of the road for Kingfisher? The grounded airline owes $2.49 billion (around Rs.13,400 crore today) to creditors and had accumulated $1.9 billion in losses by 30 June, according to the Centre for Asia Pacific Aviation (CAPA), a consultancy. It posted losses of Rs.2,328 crore in the fiscal year ended 31 March and Rs.1,027 crore and Rs.1,647 crore in the preceding two years. Does it have a future at all? Three experts presented three varying scenarios.

Scenario I: THE END

“It’s over,” said Neeraj Monga of Veritas Investment Research of Canada, blaming a poorly conceived business plan based on flawed assumptions of the airline industry.

“Kingfisher Airlines has no future. It needs to be re-capitalized with approximately Rs.4,000 crore, needs a new business plan and better management,” Monga said. “To the extent other UB group companies have loaned funds directly to Kingfisher Airlines, they will not recover anything. To the extent guarantees have been provided to financial institutions, those will need to be funded with cash. Banks will have to sell the collateral to recover dues.”

On 31 March, Kingfisher Airlines had a total debt of Rs.7,500 crore. Mallya, who is chairman of the UB Group that makes Kingfisher beer, had managed to restructure his airline firm’s debt in 2010.

A group of 13 lenders, including State Bank of India and ICICI Bank Ltd, bought a 23.21% stake in the carrier in April 2010. The airline converted Rs.750 crore of its debt into equity at a 61.6% premium over its share price in what many considered a sweetheart deal. It allotted shares to lenders on 31 March 2011 at Rs.64.48 apiece.

State Bank of India chairman Pratip Chaudhuri has asked Kingfisher to raise at least Rs.1,000 crore before the banks can lend it more money.

Monga had sounded the death knell of Kingfisher a year ago. Both parent UB Holdings Ltd and Kingfisher Airlines are teetering on the brink of bankruptcy, he said in a report co-authored with Varun Raj, advising investors to sell both stocks.

“We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India’s premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions,” Monga and Raj wrote in a report dated 12 September 2011.

SCENARIO II: KINGFISHER FLIES, SANS MALLYA

The only way for the firm to survive is to hand it over to the employees, lenders and creditors, according to Shakti Lumba, a former vice-president with IndiGo and former head of Air India subsidiary Alliance Air.

Once the employees own the company, it will be in their collective interest to make sure the company operates so as to protect their investment. The airline can then concentrate first on paying its taxes so its bank accounts will be unfrozen. Lenders will also have to throw more good money after bad, according to him.

“Wooing other investors now then becomes easier,” Lumba said. He also suggested sacking the entire senior management and Mallya handing over control to an executive board. “It can still be a great airline with a revamped business plan to be followed religiously with no changes allowed by an individual’s fancy but only by a executive board that has both employee and debtor representation,” Lumba said. “Find someone to get the show on the road and take control of flight KFA.”

SCENARIO III: MALLYA WORKS A MIRACLE

The best-case scenario for Kingfisher is Mallya putting in $350-400 million initially, followed by funding from banks and, at a later date, a foreign airline buying out the airline, Kapil Kaul, consultancy Capa’s South Asia chief, said.

“It will be another start-up for him (Mallya). And you have to emotionally go through it again, having sunk $1 billion already. It needs a lot of courage. You must be emotionally up to it,” Kaul said. “Finally you have to assess which one is more prudent, putting $400 million or closing it down.”