Kingfisher Airlines Ltd’s move to restructure debt will help it save crores of rupees and plan the future with more certainty, but India’s second largest airline by passengers carried should guard against adding fresh debt and losing senior executives, analysts said.
The Vijay Mallya-owned carrier has accumulated debt of Rs 7,000 crore and some of its planes are grounded. It appointed SBI Capital Markets Ltd to restructure part of its debt.
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On 25 November, the airline informed stock exchanges that it has approved a debt recast package with lenders following a one-time relaxation in restructuring guidelines by the Reserve Bank of India (RBI). The recast entails conversion of part of the debt into equity and a reduction in interest rates.
“We expect the debt restructuring exercise to be concluded by the end of financial year 2011. We estimate Rs 450 crore savings in interest costs per annum and expect gearing to decline from 17.1 times in fiscal year 2010 to 1.8 times in fiscal year 2012 as a result of the debt restructuring,” writes Princy Singh, analyst at international brokerage JPMorgan Securities Llc, in a 2 December report.
Kapil Kaul, chief executive, Indian subcontinent and Middle East, at the Centre for Asia Pacific Aviation, an aviation consulting firm, said reducing net debt level is crucial to the airline, even if the promoter holding dips below 40%.
“Debt recast was very critical for the future of Kingfisher Airlines. It has allowed the airline to think about its future with certainty. It needs a more competitive cost position, especially distribution and maintenance costs, more effective network plan which eliminates the strategic flaws in low-cost and full-service networks, re-energize the workforce and align it to restructuring goals and more important, consolidates and optimizes the current fleet,” Kaul said.
He added that from the October-December quarter of the current fiscal, the airline won’t require any financial intervention to support its operations.
Rashesh Shah, analyst at ICICI Securities Ltd, said although the details of debt restructuring are yet to be disclosed, the airline is expected to save Rs 122 crore a year.
“But the debt level of Kingfisher Airlines has increased by Rs 1,000 crore in the last quarter compared with its preceding quarter. Also, several senior management executives are leaving the company. The policy of one step forward and one step backward would not help,” Shah cautioned.
Prakash Mirpuri, vice-president of corporate communications, Kingfisher Airlines, declined to comment.
The JPMorgan report said the carrier would be able to avail of discounts from vendors and rationalize its operations after the debt recast.
“Kingfisher Airlines also has high outstanding credit on aviation fuel and airport charges, as a result of which it is unable to avail of discounts offered for lower credit periods,” it said. “Discounts offered on fuel can be as high as 10% of listed prices, as per our estimates, while Kingfisher Airlines could have a 15% benefit on airport charges if it were to pay within the stipulated credit period.”
The report said it’s expected that Kingfisher Airlines would be able to receive the benefits once the debt restructuring programme is put in place. This “will reduce its cash flow stress and allow it to put in place better terms with its vendors,” it said.
The report added that the airline management team is in the process of rationalizing cost structures and operations. Key cost reduction initiatives include employee rationalization and renegotiation of aircraft lease rentals as they come up for renewal. In addition, airline seats are being reconfigured in line with shifts in demand. More business seats are being added on some routes, while they are being reduced on some others.
Kingfisher will save Rs 450 crore a year because of the conversion of debt to equity and a substantial reduction in financial leverage, according to analysts.
They feel that the easing of cash flows will have operational benefits as the airline would be able to negotiate better terms for fuel and airport charges.
Kingfisher Airlines is looking at raising $300 million (Rs 1,362 crore), which is expected to further lower interest costs.