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Kingfisher to exit low-fare segment

Kingfisher to exit low-fare segment
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First Published: Thu, Sep 29 2011. 01 15 AM IST

File photo of chairman of KingfisherAirlines, Vijay Mallya
File photo of chairman of KingfisherAirlines, Vijay Mallya
Updated: Thu, Sep 29 2011. 09 32 AM IST
Mumbai: Kingfisher Airlines Ltd, India’s second largest airline by passengers carried, will exit the low-fare segment, chairman Vijay Mallya said, adopting a strategy that’s diametrically opposite to that of market leader Jet Airways (India) Ltd.
Customers want a full-service airline and there is an adequate supply of low-fare seats already, he told shareholders of the airline at the 16th annual general meeting (AGM) in Bangalore. He intends to do away with the Kingfisher Red low-fare unit as part of this exercise.
“At this time, Kingfisher will be dropping the Kingfisher Red class of service. This effort will be concluded in the next four months,” the company said.
The change in strategy comes at a time when Indian carriers need to squeeze every rupee they can out of a market in which costs have been spiralling as jet fuel becomes pricier, although there have been recent fluctuations in the price of crude oil owing to global uncertainty.
File photo of chairman of KingfisherAirlines, Vijay Mallya
“Having a high-end, full-service branding for all Kingfisher flights would definitely help create a differentiated offering in a market which is fast getting commoditized,” said Amber Dubey, director (aviation) at global consultancy firm KPMG. “However, given the current high-cost scenario in the aviation sector, whether the value-conscious Indian passenger is ready to pay for these services on a typical 1.5-2 hour domestic flight remains to be seen.”
Jet Airways, the country’s largest airline by passengers carried, is raising the proportion of low-fare flights as carriers such as IndiGo, SpiceJet Ltd and GoAir have gained. State-owned Air India Ltd has, meanwhile, been cutting prices as it seeks to regain market share after two strikes in the recent past that led to customer desertions.
Almost three out of every four tickets Jet Airways sells are in the low-cost segment. In August, founder chairman Naresh Goyal told shareholders at the AGM in Mumbai that the company was “undertaking an in-depth review of the business model” to offer more low-fare seats.
Kingfisher entered the low-fare segment through its 2007 acquisition of Deccan Aviation Ltd, which started the pioneer in the segment, Air Deccan. The unit was renamed Kingfisher Red.
Kingfisher Airlines is also reconfiguring cabins to add seats. “This reconfiguration will increase capacity by 10% at minimal incremental cost,” Mallya said. “With Kingfisher’s domestic economy load factors running in the mid-80s, this additional capacity will result in significantly improved revenue. There are numerous other initiatives under way to make Kingfisher a more efficient airline.”
Kingfisher said in its release that its medium-sized Airbus SAS planes will have a first class with an incremental addition of economy seats. The smaller ATRs will continue with a single configuration and offer full service with free food.
The capital-starved airline, which hasn’t made a profit since its inception in 2005, had debt of Rs 7,057.08 crore on 31 March. It posted a loss of Rs 1,027 crore on sales of Rs 6,496 crore in the year ended 31 March, compared with a Rs 1,647 crore loss on sales of Rs 5,271 crore in the previous year. Loss in the June quarter widened to Rs 263.54 crore from Rs 187.34 crore in the year earlier.
Mallya said the promoter group of Kingfisher Airlines is committed to supporting the carrier and is working out ways of further cutting debt. Mallya is also chairman of the promoter, UB Group. “I have also personally stepped in to provide a third level of comfort to the lenders, who have been extremely supportive of Kingfisher,” he said.
The airline’s recent debt recast was “achieved under the aegis of an RBI (Reserve Bank of India) dispensation, and after exhaustive studies on the sustainability of the industry and the viability of Kingfisher conducted by the banks”, Mallya told shareholders on Wednesday.
“The banks have not only given relief to Kingfisher in the form of a moratorium on repayment, extended tenor of the loans and reduced interest rates, but also converted 30% of their outstanding loans into preference and equity capital,” he said.
Further commitments have been made to reassure lenders, Mallya said.
“I too have given my personal comfort to the lenders over and above the securities provided by the company and the additional collateral of United Breweries Holdings Ltd (UBHL) guarantees,” he told shareholders.
Mallya said the promoter group had consistently supported the airline through direct investment, advances and guarantees from the holding company, besides securing third-party funds to meet exigencies in Kingfisher.
“The total investment by UBHL till date in the form of shares is Rs 2,118 crore,” he said. “This includes a sum of Rs 745 crore, which was converted, alongside the banks, on 3 January into preference shares and, thereafter, on 31 March into ordinary equity shares at the Sebi (Securities and Exchange Board of India) specified price.”
Besides this, UBHL has also got third-party funding from associates by way of optionally convertible debentures, amounting in all to Rs 710 crore, Mallya said.
“This cannot be counted as debt as the holders have agreed to convert these into equity, subject to regulations. UBHL has provided Kingfisher with corporate guarantees totalling Rs 9,135 crore,” he said. “Each of these primary obligations is supported, in the first instance, by Kingfisher’s assets and cash flows. UBHL guarantees are by way of additional collateral to further strengthen the promoters’ commitments.”
Earlier this month, auditors B.K. Ramadhyani and Co. raised questions about the carrier as a “going concern”, or the company’s ability to function as a business, unless it infused the requisite funds to meet obligations. The auditors said that accumulated losses of the airline were more than 50% of net worth.
However, Mallya said a realistic estimation of UBHL’s total assets, both quoted and unquoted (carried in the balance sheet at cost), would exceed Rs 12,000 crore.
Mallya also clarified that the airline continues to work with lenders with a view to further reduce interest cost. The proposed initiatives include sale and lease-back of some aircraft and other assets to reduce loans, and converting part of its rupee loans into low-cost overseas currency loans based on existing foreign-exchange cash flows, he said. The consortium of banks is currently appraising the enhanced working capital request to cater to strong growth and higher fuel costs.
Kingfisher Airlines lost 1.2% to Rs 24.75 on BSE on Wednesday. The benchmark Sensex index fell 0.47% to 16,446.02.
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First Published: Thu, Sep 29 2011. 01 15 AM IST