Rs1,081 crore blow to Kingfisher in first half

Rs1,081 crore blow to Kingfisher in first half

Mumbai: Kingfisher Airlines Ltd, India’s second largest private airline by passengers carried, made a consolidated operating loss of Rs1,081 crore in the first half of fiscal 2009 after its March 2008 merger with Deccan Aviation Ltd, according to a presentation made to its investors in Bangalore in late September that has been reviewed by Mint.

The loss, made largely on account of high fuel costs, is the first financial detail of the airline’s consolidated operation that is coming to light.

Last week, Kingfisher Airlines announced a loss of Rs188 crore for the nine-month period ended 30 March on revenue of Rs1,441.4 crore. Those numbers, however, were just the financials of the erstwhile Deccan Aviation which got merged with Kingfisher.

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In June 2007, Kingfisher acquired a 26% stake in Deccan Aviation, which was operating the country’s largest low-fare carrier Air Deccan. The stake was raised to 50% and eventually, in April, Kingfisher was merged with Deccan with the latter choosing to keep the former’s name.

The operating losses of the merged entity are on a total revenue of Rs2,634 crore between April and September when the carrier spent Rs1,694 crore on fuel, the presentation said.

A company’s operating loss is arrived at before accounting for expenses such as interest, taxation, depreciation and amortization.

The loss indicates the poor health of Indian airlines that have been hit by higher fuel prices and slowing passenger traffic. Domestic carriers are expected to post a combined loss of $2 billion (close to Rs10,000 crore) this year.

A year ago, passenger traffic was growing at 40%, in August, it declined by 19%.

With their losses mounting, airlines have started cutting down flights, returning planes to lessors, trimming staff strength and increasing fares.

Owing to high fuel costs, Jet Airways (India) Ltd, India’s largest private carrier, made a net loss of Rs384.53 crore for the quarter ended 30 September 2008 against a net profit of Rs28.36 crore for the same period a year ago.

Its wholly owned subsidiary JetLite India posted a loss of Rs273 crore for the quarter against a loss of Rs86.3 crore for the quarter ended 30 September 2007.

The turmoil in the aviation market had seen two arch rivals joining hands for a first of its kind alliance primarily aimed at reducing costs. On 13 October, Kingfisher Airlines and Jet Airways forged an alliance to share infrastructure, jointly purchase fuel and rationalize their network.

“Bleeding airlines are now even looking at trimming the size of boarding cards to cut costs. Every rupee counts at this economic turmoil and passengers shifting away from airlines. Jet-Kingfisher alliance would also look at cutting cost," said an aviation analyst with an international brokerage, who asked not to be named because he is not authorized to speak to the media.

Though the details of this alliance are yet to be finalized, the two airlines are expected to soon start joint marketing initiatives and renegotiate fuel purchase agreements with suppliers.

Cost-cutting measures

Ahead of this, Kingfisher Airlines, after integrating Deccan with itself, has started re-negotiations with vendors, among other initiatives, to save at least Rs45 crore a month.

The domestic operations of Kingfisher lost Rs960 crore between April and September. The airline’s international operations that started on 3 September lost Rs121 crore.

According to the presentation, the monthly losses in domestic operations of around Rs160 crore are expected to come down by Rs25 crore a month, every month between October and March on the back of the cost-cutting initiatives.

The integration with Deccan has already resulted in savings of Rs36 crore a month: Rs14 crore in fuel, Rs4 crore in lease rentals, Rs10 crore in salaries following the retrenchment of 300 employees, and Rs8 crore in catering, insurance, engineering and ground handling expenses.

Kingfisher Airlines’ executive vice-president Hitesh Patel said there were several areas, such as fleet management, the check-in process, ticketing systems and ground handling, where costs could be cut.

Mark Martin, an analyst at audit and consulting firm KPMG, said Kingfisher Airlines started integrating the operations of Air Deccan, such as common pilots and engineering, from day one, resulting in huge cost savings. “It does not make any sense if you are not integrating a company that you have acquired."

“Jet Airways could have made similar cost saving by completely integrating JetLite into Jet," he added

Jet Airways had acquired JetLite Ltd—formerly Air Sahara—in April 2007. Last week, Jet and JetLite started sharing codes and a reservation system, besides merging departments and services such as network planning, sales, marketing, human resources, finance, and training facilities, according to a 25 October presentation by Jet to investors.

A Jet Airways executive who did not want to be named would not speak on the impact of this on costs but said it had helped rationalize the capacity of the airline by 15%.

Kingfisher Airlines—which has reduced its daily flights 21% since July—has already returned two Airbus planes to the lessors and is scheduled to return four more without any penalties, a move that is expected to save the carrier Rs12 crore a month.

“We are in the process of returning four ATR-42 type planes. Since we need these planes for short-haul routes, three returns are being swapped with ATR-72 types with a large seating capacity than the current ones," said a Kingfisher executive who did not wish to be identified.

Other cost reduction initiatives being put in place by Kingfisher, according to the presentation, include: converting its maintenance payments to a letter of credit facility, instead of the current practice of paying by cash; negotiating for a 20% fee reduction with firms that handle the ticket distribution software that could translate into a saving of Rs90 crore a year; and stopping from November the practice (along with other airlines) of paying travel agents a 5% commission on every ticket sold.

Dealing with oil firms

Kingfisher Airlines is also in the process of working out an innovative deal with oil companies from whom it buys fuel to reduce incidence of sales tax. Instead of paying Rs13-14 in sales tax per litre for the jet fuel that is refined after being imported by oil marketing companies, Kingfisher has applied to the ministry of petroleum and natural gas for a licence to import oil directly from global markets and giving it to the oil companies to refine at a fixed fee of Rs4-5 a litre. If granted, the licence is expected to save the airline Rs25 crore a month, the Kingfisher presentation said.

Beginning July 2008, Kingfisher Airlines has reduced its overlap with Deccan on 49 routes to 22. This has been further cut to 14 in the winter 2008 schedule filed with Directorate General of Civil Aviation, or DGCA, the aviation industry regulator. The carrier has also reduced flights with negative gross margins by discontinuing 100 flights on 50 routes. Post-merger, Kingfisher Airlines has increased its focus on the high-volume Mumbai-Delhi route, while reducing Deccan’s frequency, resulting in a revenue increase of 20% on that route.

The presentation claimed that Deccan’s increased focus on Kolkata-Chennai sector and a simultaneous reduction in Kingfisher Airlines’ frequency resulted in a 100% growth in revenue.