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Exiting low fare segment a risky bet by Kingfisher

Exiting low fare segment a risky bet by Kingfisher
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First Published: Wed, Oct 05 2011. 11 58 PM IST

Mix signals: Mallya’s strategy to exit from the low-fare segment is confusing as it comes at a time when the global economy is slowing. Photo: Hemant Mishra/Mint
Mix signals: Mallya’s strategy to exit from the low-fare segment is confusing as it comes at a time when the global economy is slowing. Photo: Hemant Mishra/Mint
Updated: Wed, Oct 05 2011. 11 58 PM IST
Mumbai: Vijay Mallya, promoter of Kingfisher Airlines Ltd, was never really comfortable with the carrier’s low-fare association following the purchase of Air Deccan. At a board meeting in 2007 soon after that purchase, Mallya made a point about finding airports dustbins filled with Air Deccan baggage tags as passengers didn’t want to be seen as having flown by the low-fare airline.
Mix signals: Mallya’s strategy to exit from the low-fare segment is confusing as it comes at a time when the global economy is slowing. Photo: Hemant Mishra/Mint
“I replied to him that the tag line of the world’s largest corporation by revenue, Walmart Stores Inc., is ‘everyday low prices’ and is one of the most successful companies. And nobody flaunts Walmart tags,” recalled G.R. Gopinath, who introduced India to low-fare aviation with Air Deccan, which in its pre-Mallya days sold tickets for as low as Rs 1.
Last week, Mallya said he was exiting the low-fare segment, completing the circle for Air Deccan, rebranded Kingfisher Red. Mallya said he had bought Air Deccan out of necessity—for infrastructure such as airport hangars and expensive slots.
“Vijay was never comfortable with the low-fare segment,” said Gopinath. “There are brands for the masses and exclusive brands for the elite.”
Kingfisher, beset by losses and debt of Rs 7,057.08 crore as on 31 March, will go back to being a dedicated full-service airline with first and economy class seats as it seeks to improve its financial performance.
Experts say Mallya’s move is aimed at shrinking Kingfisher’s fleet and serving largely profitable metro routes.
Some of them say this will increase the cost base of the airline and Mallya will find it difficult to draw investors, who typically have a preference for low-fare carriers.
Indeed, Kingfisher’s larger and closest rival, Jet Airways (India) Ltd, like most other airlines, is increasing the number of low-fare seats and converting more of its fleet into no-frills planes. Kingfisher may have to drop prices on its full-fare airline to protect its market share.
Moving out of Red
Kingfisher said in a statement that first class has a seat occupancy of 50% in the planes that have the pricier section. On the one hand, it will reduce the seats section to 8-12 from 21-32 and, on the other, extend it across its fleet. That will eventually lead to a 10% increase in first-class seats.
“I would say he made the right decision to exit from Kingfisher Red as it will avoid blurring of brands—Kingfisher Class and Kingfisher Red. For instance, Singapore Airlines kept Tiger Airways as a separate low-cost brand,” said Gopinath.
According to him, Kingfisher’s strategy went awry in two respects. The first was blurring any distinction between the airline’s full-fare and no-frills brands, which resulted in the cannibalization of passengers from the mother brand by Kingfisher Red.
The second was making Kingfisher Red costlier and “in his (Mallya’s) words, sexier than SpiceJet and IndiGo”, which drove passengers to rival low-fare airlines, said Gopinath.
An airline consultant, speaking on condition of anonymity, said considering Mallya’s business acumen, his move to exit Kingfisher Red could be a prelude to a broader strategy of equipping the airline for offloading some stake to international airlines once the government allows this.
“On the face of it, his idea is to shrink his fleet and focus on only metros with his Airbus planes. But if he is counting business class passengers on domestic routes, it is suicidal,” he said.
Kingfisher may also have plans not to renew the lease agreements of its small planes, many of which are grounded for various reasons, he added.
Another expert, who also did not want to be identified, said Kingfisher will not be able to fill business class seats for flights to small cities, or fetch good prices for economy class seats during non-peak hours.
Kingfisher’s exit from the low-fare segment, he said, is confusing as it comes at a time when the economy is slowing and companies are putting their workers on low-fare carriers.
“Things will get worse when other airlines lower prices. Kingfisher will be forced to offer cheaper tickets while its cost structure is high,” he added.
Kingfisher’s exit from the low-fare segment is interesting and a bold move, said Kapil Kaul, chief executive, Indian subcontinent and Middle East, at Centre for Asia Pacific Aviation, or Capa, an international aviation consulting firm.
“I hope this would be the final change in their business model as there have been too many changes in Kingfisher Airlines’ business model over the last six years,” he said.
Kaul also sees some positives in the decision, as reducing first class capacity will allow more room in the economy cabins.
“Adding more economy seats across Airbus A320/A321 fleet will add capacity equivalent to two A320s at the current cost base. This strategy also resolves the strategic conflict with different brands and reduces complexities internally as well as externally,” he said.“Kingfisher Airlines has had a cultural conflict with the low fare model from the beginning and this finally stands resolved.”
Higher yields
Kingfisher Airlines’ chief executive Sanjay Aggarwal said in a statement on Wednesday that the operating costs of the low- and full-fare services in terms of fuel, airport charges, engineering and maintenance and crew costs were similar. Full-service carriers, in fact, incur additional costs on in-flight catering, ground amenities and frequent flier programmes, but these are “more than recovered through higher yields”, said Aggarwal, adding businessmen and executives prefer flying on full-service carriers because of the ease of buying tickets, frequent flier programmes and the convenience offered. “They are willing to pay extra and this segment is not as price-sensitive as the classic low-fare segment, where there is a lot of discretionary travel involved.”
Aggarwal, a low-fare advocate in his previous role as the head of SpiceJet, said a study during the months of high oil prices showed Kingfisher’s full-service product generated higher yields and load factors. “The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full-service carrier. The remaining 75% is net contribution to the bottom line,” he said.
Kingfisher will not reduce its fleet size or network, he added.
Beyond full service
Experts argue India’s aviation market affords growth only to low-fare airlines.
“Probably it would have been prudent to keep Kingfisher’s domestic fleet an all-economy single brand and international flights, full-service” as European airlines do, said Gopinath, India’s low-fare aviation pioneer.
Capa’s Kaul said Kingfisher has to redefine the full-service concept, beyond meals and frequent flier points, without increasing its cost base.
“Kingfisher needs to bring its cost base closer to the low-fare carriers without comprising its front-end (first-class) product. This will be difficult, but most critical and will be key to the success of this strategy,” Kaul said.
Another challenge is to find investors, particularly when Kingfisher is scouting for funds to stay afloat.
The airline wants to raise up to $350 million (around Rs 1,720 crore today) through the sale of global depository receipts (GDRs) and domestic offerings, which will also help lower its debt burden of Rs 7,057.08 crore as on 31 March. It made a loss of Rs 1,027 crore in the fiscal ended 31 March.
“Investor appetite for this strategy will be initially low, unless it is proven to be successful. This is a major challenge as Kingfisher Airlines is critically dependent on fund infusion,” said Kaul. “This also means that fund infusion in the near term will be totally dependent on the promoter group. No strategy will work without large infusion of funds.”
He added that Kingfisher should restructure its top management as well.
Citing poor market conditions for a GDR issue, Kingfisher is considering a rights offer of Rs 2,000 crore.
pr.sanjai@livemint.com
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First Published: Wed, Oct 05 2011. 11 58 PM IST