Neelam Mathews
Orient Aviation
May 3, 2011
Reeling under a
massive debt burden
and escalating
costs of operations,
India’s Kingfisher
Airlines, owned by liquor tsar
Vijay Mallya, is struggling to
cope in a domestic market
experiencing aggressive budget
carrier expansion and escalating
fuel bills.
Following a freeze on fleet
expansion- Kingfisher has a fleet
of 66 aircraft – the carrier is
adjusting its fleet plans to meet
the needs of a changing market.
A debt restructuring exercise
is also presently underway.
Following a buy-out and merger
with Air Deccan, Kingfisher’s
debt has risen from just $400
million in the financial year to
March 31, 2007 to $1.5 billion at
the end of the 2009-2010 year.
Analysts say there is little
likelihood of Kingfisher making
any progress as an airline until
the debt is restructured.
“I don’t see the debt
problem being resolved in the
next two years. The stock will
continue to be pretty volatile,”
said fund manager Phani Sekhar,
at Mumbai-based broking
firm, Angel Broking, in a recent
interview with moneycontrol.
com He recommended a sell on
Kingfisher stock.
The stock slumped to $1 a
share in early April after touching
a high of around $2.5 in the
last fiscal year. This was despite
a robust domestic passenger
market that expanded 18%
in 2010, carrying 52 million
passengers.
Looking at infusing funds,
Kingfisher has appointed the
State Bank of India (SBI) to help
it restructure its debt. Under a
new exception, sanctioned by
the Reserve Bank of India, it has
been allowed to convert a bank
debt of about $300 million into
share capital.
Kingfisher parent, UB Group,
can now convert its debt of up to
$150 million into share capital.
Kingfisher, which is in debt
to a dozen banks, has reached
agreement with its lenders to
reschedule repayment of the
remaining debt over nine years.
This includes a moratorium of
two years on the loans and an
additional sanction of just over
$100 million as part of the deal.
Kingfisher also plans to open
its global depository receipts
(GDR) issue by listing on the
Luxembourg Stock Exchange
with the hope of raising up to
$250 million to ease cash flow.
However, the GDR has
been stalled.
Since its launch in 2005,
Kingfisher has accumulated
heavy losses. It saw its share of
the domestic passenger market
fall from 23% last year to 19%
by February 2011.
“In the process of rapid
expansion it has accumulated
heavy losses, accentuated by
one-off events such as the
grounding of (15) aircraft due
to engine related issues,” said
a report from financial services
company, J.P.Morgan.
“Decline in passenger traffic
(due to the global recession)
immediately after the acquisition
of Air Deccan further stressed
the balance sheet. In addition,
Kingfisher’s international
operations are in an investment
phase and making losses.”
Last year, more than 15
A320s were grounded following
technical issues with their V2500
engines. Most engines have now
been restored to the airline’s
fleet, allowing it to recommence
domestic flights on previous
schedules and connect to more
destinations in the Middle East
and Southeast Asia.
However, competition is
expected to be even tougher this
year as budget carrier, SpiceJet,
plans to add 15 Q400s to its
fleet and launch regional flights,
directly impacting on Kingfisher’s
market.
Also, India’s most successful
low-cost carrier (LCC), IndiGo,
looking at flying international
routes, will add 14 A320s to
its fleet this calendar year. Jet
Airways has plans to add around
10 aircraft.
More than 65% of seats
offered in India are low-cost.
Kingfisher is addressing this
challenge by restructuring its
fleet of A320 narrowbodies
to a dual class configuration
of 20 business class seats with
the remainder reconfigured as
no-frills economy. The airline
recently hired former low-cost
carrier SpiceJet boss, Sanjay
Aggarwal, as CEO.
“We expect [Kingfisher]
earnings to turn around by
2012. Its grounded fleet is being
redeployed, which should arrest
the cash burn and enhance
margins,” said J.P.Morgan,
adding the caveat that oil prices
needed to remain stable. “(The)
management team is in the
process of rationalization of cost
structures and operations. Focus
has shifted towards consolidating
international operations
before embarking on further
expansion.”
The carrier is also hoping
pending membership of
the oneworld alliance
will improve its
bottom line. ■
Orient Aviation
May 3, 2011
Reeling under a
massive debt burden
and escalating
costs of operations,
India’s Kingfisher
Airlines, owned by liquor tsar
Vijay Mallya, is struggling to
cope in a domestic market
experiencing aggressive budget
carrier expansion and escalating
fuel bills.
Following a freeze on fleet
expansion- Kingfisher has a fleet
of 66 aircraft – the carrier is
adjusting its fleet plans to meet
the needs of a changing market.
A debt restructuring exercise
is also presently underway.
Following a buy-out and merger
with Air Deccan, Kingfisher’s
debt has risen from just $400
million in the financial year to
March 31, 2007 to $1.5 billion at
the end of the 2009-2010 year.
Analysts say there is little
likelihood of Kingfisher making
any progress as an airline until
the debt is restructured.
“I don’t see the debt
problem being resolved in the
next two years. The stock will
continue to be pretty volatile,”
said fund manager Phani Sekhar,
at Mumbai-based broking
firm, Angel Broking, in a recent
interview with moneycontrol.
com He recommended a sell on
Kingfisher stock.
The stock slumped to $1 a
share in early April after touching
a high of around $2.5 in the
last fiscal year. This was despite
a robust domestic passenger
market that expanded 18%
in 2010, carrying 52 million
passengers.
Looking at infusing funds,
Kingfisher has appointed the
State Bank of India (SBI) to help
it restructure its debt. Under a
new exception, sanctioned by
the Reserve Bank of India, it has
been allowed to convert a bank
debt of about $300 million into
share capital.
Kingfisher parent, UB Group,
can now convert its debt of up to
$150 million into share capital.
Kingfisher, which is in debt
to a dozen banks, has reached
agreement with its lenders to
reschedule repayment of the
remaining debt over nine years.
This includes a moratorium of
two years on the loans and an
additional sanction of just over
$100 million as part of the deal.
Kingfisher also plans to open
its global depository receipts
(GDR) issue by listing on the
Luxembourg Stock Exchange
with the hope of raising up to
$250 million to ease cash flow.
However, the GDR has
been stalled.
Since its launch in 2005,
Kingfisher has accumulated
heavy losses. It saw its share of
the domestic passenger market
fall from 23% last year to 19%
by February 2011.
“In the process of rapid
expansion it has accumulated
heavy losses, accentuated by
one-off events such as the
grounding of (15) aircraft due
to engine related issues,” said
a report from financial services
company, J.P.Morgan.
“Decline in passenger traffic
(due to the global recession)
immediately after the acquisition
of Air Deccan further stressed
the balance sheet. In addition,
Kingfisher’s international
operations are in an investment
phase and making losses.”
Last year, more than 15
A320s were grounded following
technical issues with their V2500
engines. Most engines have now
been restored to the airline’s
fleet, allowing it to recommence
domestic flights on previous
schedules and connect to more
destinations in the Middle East
and Southeast Asia.
However, competition is
expected to be even tougher this
year as budget carrier, SpiceJet,
plans to add 15 Q400s to its
fleet and launch regional flights,
directly impacting on Kingfisher’s
market.
Also, India’s most successful
low-cost carrier (LCC), IndiGo,
looking at flying international
routes, will add 14 A320s to
its fleet this calendar year. Jet
Airways has plans to add around
10 aircraft.
More than 65% of seats
offered in India are low-cost.
Kingfisher is addressing this
challenge by restructuring its
fleet of A320 narrowbodies
to a dual class configuration
of 20 business class seats with
the remainder reconfigured as
no-frills economy. The airline
recently hired former low-cost
carrier SpiceJet boss, Sanjay
Aggarwal, as CEO.
“We expect [Kingfisher]
earnings to turn around by
2012. Its grounded fleet is being
redeployed, which should arrest
the cash burn and enhance
margins,” said J.P.Morgan,
adding the caveat that oil prices
needed to remain stable. “(The)
management team is in the
process of rationalization of cost
structures and operations. Focus
has shifted towards consolidating
international operations
before embarking on further
expansion.”
The carrier is also hoping
pending membership of
the oneworld alliance
will improve its
bottom line. ■
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