King's gambit
Billionaire Vijay Mallya had probably decided enough was enough when he led the initiative by airlines to call a strike and ground all aircraft on August 18 to protest the lack of help from the government. The strike did not happen, but it showed the desperation of the the 54-year-old liquor baron, who had become a frequent flyer to Delhi over the past year in his bid to get government help for the industry.
As Chairman of Kingfisher Airlines, he was till June 2009 India’s largest airline operator by market share— and its biggest private sector victim too. But, even in August 2008, when fuel prices had hit their peak, he had not given up hope. When BT met him in November (Saving Kingfisher, issue dated December 14, 2008), he had said his airline would clear its accumulated losses in three years. And he maintained his scale of operations even as the business climate worsened following the financial meltdown.
A year later, Kingfisher has more red on its balance sheet than on the livery of its crew and aircraft, what with the surge in fuel costs, the reluctance of state governments to lower sales tax rates on fuel and rising airport charges.
The only good thing: the government has appreciated the case for cheaper fuel. A group of ministers (GoM) will now look into the high base price of aviation turbine fuel (ATF) in India compared with international benchmarks and high sales tax rates.
Kingfisher reported an operating profit of Rs 18 crore in the first quarter of the current fiscal, but the net loss was Rs 242 crore, against a loss of Rs 1,609 crore in the full year 2008-09. As of end-June, the airline had an accumulated loss of Rs 2,820 crore. No one knows how it is servicing its loans or paying airport charges and fuel bills. Mallya is now trying to raise Rs 500 crore by way of equity—either a rights issue or an FPO or depository receipts.
Does he have any chances of survival?
Flying in a Thunderstorm
As things stand now, the combined net profit of his five listed UB Group companies last year was less than onethird of Kingfisher Airline’s losses. Over 70 per cent of Kingfisher’s network has now gone low-fare—a model Mallya had initially pooh-poohed.
In the financial year 2008-09, passengers flown across airlines declined 10 per cent, but the capacity shrank only three per cent. In January-March this year, the industry cut capacity by 11 per cent—but passenger traffic fell more steeply, by 12 per cent. As Wolfgang Prock-Schauer, CEO of rival Jet Airways (which edged past Kingfisher in the market share in July), told an analyst call on May 22: “Currently the industry is operating at seat factors of mid-sixties and yields have been on the decline due to low occupancy in the business class.”
So it was not surprising that the first thing Giovanni Bisignani, Director General and CEO of the International Air Transport Association (IATA), did on Praful Patel’s appointment as Civil Aviation Minister in the new government was to write to him calling for immediate relief to Indian carriers.
R. Ramakrishnan, Partner at Bangalore-based audit firm R. Ramakrishnan & Co., reckons that Kingfisher’s actual loss for 2008-09 should be Rs 2,747 crore after factoring in the change in accounting treatment. As the losses mounted, so has the debt. Last year, the airline paid Rs 696.23 crore as interest; this year, it has so far paid Rs 170 crore.
Going by the interest payment, Ramakrishnan estimates the airline’s debt to be no less than Rs 7,000 crore. Kingfisher’s latest balance sheet was not made public at the time of filing this report.
For shareholders and Mallya, the big question is: how long can the group bear the airline’s losses? Apart from Kingfisher, Mallya has five listed companies in his group. These companies, including the flagship United Spirits (USL), reported a combined net profit of Rs 452 crore last year. Add Kingfisher’s losses, though, and this turns into a loss figure almost four times the profit.
Then, Mallya has pledged half the promoters’ shares in the airline and about 15 per cent of those belonging to UB Holdings to keep Kingfisher airborne. There is a silver lining: Kingfisher has a deferred tax asset of Rs 1,171 crore as at March-end from unabsorbed depreciation. But it can’t realise this until it starts making profits.
“In that sense, it’s not an asset to consider for net worth,” says Ramakrishnan. “If the airline losses continue, the other UB Group concerns will feel the suffocation.’’
He says any valuation that Kingfisher commands in the market comes from its market share and brand value, and not from its net worth, now in negative territory.
Deccan Cargo Chairman Capt. G.R. Gopinath, the low-cost pioneer who had to sell out to Mallya, finds the approach of the airlines flawed. According to him, only two per cent of Indians travel by air, and no amount of capacity addition will suffice if they can get even a small percentage of the rest to fly. “Globally, it is the low-cost airlines that are driving growth. They are run efficiently and are profitable,’’ says Gopinath.
But the Good News Is...
First, in the April-June period, the industry’s capacity shrank by eight per cent while passenger de-growth was five per cent. That means fewer seats—and better yields. Then, fuel prices have almost halved now from their peak of Rs 73,674 per kilolitre (Mumbai) in August 2008. “If rationalisation of capacity continues and passenger traffic improves, yields will go up in the domestic market. An airline’s profitability depends on how aggressively it is doing it,” says Hemant Patel, an analyst with Enam Securities.
Kingfisher has been busy making the best of this situation. Even as it cut capacity where necessary, it has turned 70 per cent of its network into low-fare flights. As a result, Kingfisher’s yields or the rupee per revenue passenger km, progressed from Rs 4.90 in January-March to Rs 5.70 in April-June, industry sources say. And the loss of Rs 242 crore in the first quarter came right after the Rs 554-crore loss it reported in the quarter-ended March.
Mallya declined to comment for this story. But a Kingfisher release had said that, despite a sharp cut in capacity, its first quarter revenue was only six per cent lower sequentially on account of higher yields. Kingfisher’s interest burden has also come down to Rs 170 crore in the latest quarter from Rs 261 crore in January-March.
Most importantly, Civil Aviation Minister Praful Patel has acknowledged the fact that fuel accounts for more than 40 per cent of the operating cost of most domestic airlines against the international average of 20-25 per cent. Kingfisher owed over Rs 950 crore to the state-run oil companies as of July.
The airline, meanwhile, has stepped up its global operations. On August 14, it launched daily flights between Kolkata and Bangkok. After the launch of its first international route with a Bangalore-London flight in September 2008, Kingfisher has expanded into Colombo, Dhaka and Dubai.
Mahantesh Sabarad, Senior Analyst with Centrum Broking, does not see much risk from these new routes as, he says, they are more like expansion of domestic network. "The Gulf sector is picking up faster from its lows since this summer and South-East Asia is somewhat insulated from the global turmoil. These two sectors do offer avenues for growth," Sabarad says.
As for the performance of the UB Group’s liquor flagship, a recent IDFC SSKI report strikes a positive note though with a caveat that higher molasses prices could impact near-term profitability. Says Nikhil Vora, Managing Director of IDFC SSKI: “Most of the other operational businesses in the UB Group are in the comfort zone. There is an overcapacity in the domestic aviation, but given the low capital environment which almost everyone in the industry is up against, we think that incremental bleed in the sector is now on the way south.”
Safe Landing
An analyst says Mallya’s airline has cut capacity, gained market share and improved its yield even during the recession. “But the airline’s legacy costs are so huge that all this has not made any significant impact on its finances. Instead, its losses are compounding,” he says. According to Vora, Kingfisher has to get its funding plans going, either directly or via UB Holdings, to protect its domestic turf and power its international offerings.
So while the weather seems favourable for Mallya’s plan to tap retail investors (Kingfisher’s scrip has climbed from Rs 22 in November 2008 to Rs 50 at close on August 14, 2009), the skies are not clear yet. As Vora of IDFC SSKI points out, Kingfisher still faces a plateau in passenger growth and only a defined funding plan can keep it flying.
