Kingfisher draws up three-month revival plan

Kingfisher draws up three-month revival plan

Mumbai: Kingfisher Airlines Ltd, riddled with debt and with 13 of its planes grounded, has drawn up an emergency three-month turnaround plan to restore the financial health of the Vijay Mallya-owned carrier. The strategy includes a debt recast, putting grounded planes back on the flight roster and slowing down the expansion of loss-making overseas operations.

As part of a Reserve Bank of India-sanctioned relief package for the airline industry, SBI Capital Markets Ltd, representing a consortium of 15 banks, will announce a debt-recast plan for the carrier. Interest rates will be cut by at least 3.5 percentage points and Kingfisher will get seven years to pay back its loans with a two-year moratorium on principal repayments. The carrier’s debts amounted to 7,413 crore as of 31 December. Under the plan, the loans will be pooled, allowing the banks to share the risk.

“The (interest) rates will come down to 11-11.5%. Also there will be a moratorium of two years," said SBI Caps officials who did not want to be named.

The banks are likely to draw up the debt recast package in a few weeks’ time, Ravi Nedungadi, president and chief financial officer at UB Group, told Mint. UB Group is the parent of Kingfisher Airlines.

The airline will raise up to $350 million (around 1,550 crore) by February-end through the sale of global depository receipts (GD and domestic offerings, which will also help lower the debt burden.

“Investor sentiments were positive for the road shows held in Europe and the US," Nedungadi said. “Interest from foreign institutional investors is strong as they have already sampled the international product of Kingfisher Airlines. We are likely to conclude our GDR issue in January to February." He refused to divulge details about the debt-recast plan or potential investors in the GDR issue.

The airline, which recently appointed Sanjay Aggarwal as its chief executive officer, will also put six Airbus SAS A320 planes, out of the 13 that are grounded, back into operation as it seeks to take advantage of peak season demand. The airline lost 35 crore in the first quarter of the current fiscal due to the grounding of planes following technical issues with aircraft engines. Earnings for the second quarter, traditionally a weak one for Indian carriers, haven’t yet been announced by the company.

“We confirm that an agreement has been reached with the engine manufacturer after one month of intense negotiations led by Mallya personally," Prakash Mirpuri, vice-president (corporate communications), Kingfisher Airlines, said in an emailed response on 2 November. “Consequently, six Airbus A320 aircraft which are currently on the ground, will fly this month, thereby significantly boosting our capacity in the peak season."

The remaining seven planes, also A320s, will start flying before April, helping the airline return to profitability, said a senior Kingfisher Airlines executive on condition of anonymity.

Kingfisher Airlines made a loss of 1,647 crore in the last fiscal year, during which it incurred 640 crore expenditure, of which 240 crore was on account of the grounded aircraft. It posted a loss of 187.34 crore in the first quarter of the current fiscal. Rivals such as Jet Airways (India) Ltd and SpiceJet Ltd posted a profit in the first two quarters of the fiscal.

The debt recast and the restoration of planes to flight duty will perk up Kingfisher Airlines, analysts said. Given the sustained revival in the Indian airline business, the carrier should be able to whet the appetite of international investors as well, they said. In the September quarter, airline passenger growth rose 12%, which is likely to improve as the third and fourth quarter are traditionally the peak season for airlines.

“Not much of capacity will be added in the next 12-16 months and, therefore, the demand and supply mismatch is here to stay for a while," said Rashesh Shah, analyst at domestic brokerage ICICI Securities Ltd. “Kingfisher Airlines could fly back to profitability if it gets a good debt-recast plan."

Some of the demand will be met by rivals. Jet Airways, along with its low fare arm JetLite (India) Ltd, started 76 new flights on 1 November to capitalize on the surge in demand.

As part of efforts to raise money through the GDR issue, Kingfisher Airlines executives met Wilbur L. Ross Jr, chairman and chief executive officer of the eponymous New York-based private equity fund WL Ross and Co. Llc, along with other international investors, according to an airline consultant. Ross, who specializes in turning around distressed companies, is familiar with the Indian airline story, having just exited profitably from SpiceJet when he sold his shares to current controlling stakeholder Kalanithi Maran.

“Till now, nothing has been finalized by Ross on investing in Kingfisher Airlines," said the consultant cited above. Ross did not respond to Mint’s questions.

The airline has decided to go slow on the expansion of its international operations, which incurred an operating loss of 51 crore in the first quarter, during which it posted an operating profit of 177 crore on domestic operations.

The Kingfisher Airlines executive cited above said the airline already has a presence in all international markets key to India such as London, Hong Kong, Singapore, Dubai and Bangkok.

“Why would we need to fly to all international destinations when we are going to join the oneworld alliance?" asked UB Group’s Nedungadi. Kingfisher Airlines plans to join the oneworld alliance, a global grouping of airlines, by 2011, giving it better access to the US, European and Asia-Pacific markets.

The turnaround programme will be helmed by new CEO Aggarwal, formerly of SpiceJet. The CEO will report directly to chairman and managing director Mallya, while the executive vice-presidents will report to Aggarwal.

“Sanjay (Aggarwal) is very clear about what he wants. Now there is a weekly meeting with all department heads who will have to submit their reports under two heads: mission and target. There is a fresh energy flowing in," said another Kingfisher Airlines executive who did not want to be identified.

Investors appear to have anticipated better prospects for Kingfisher, with the stock having risen 58.6% in the past three months, during which the benchmark Sensex has risen 15.6%. The shares have risen amid the strong demand for air travel and the improved performances of rivals such as Jet Airways and SpiceJet.

“We have solved the engine troubles for the airline. There is strong demand. And Sanjay (Aggarwal) is also on board. These all should augur well for Kingfisher Airlines," Nedungadi said.