After foxing move, Vijay Mallya may cut fleet

Vijay Mallya’s decision to exit the low-cost airline business on Wednesay left competition and analysts cross-eyed.

Thriving and not-so-thriving low-cost carriers are wondering what the arithmetical persuasion is, with one rival saying the additional cost of running a full-service carrier would more than nullify greater yields in the full-service segment.

Neeraj Monga, analyst with Veritas Investment Research based in Toronto, Canada, pointed out that the domestic operations of Kingfisher contribute a bulk of the company’s Ebidta or operating profit, while international operations are Ebidta negative.

“Thus, to shut down a part of the domestic operations is likely to result in significant transition costs till the operations attain a new equilibrium,” Monga told DNA from Toronto.

“Moreover, India is a cost-conscious market and that implies Kingfisher would be catering to a smaller segment of the market. It could succeed but that requires time and additional resources,” he said.

Monga was in the news early this month for a withering analysis of the airline, which he more or less dubbed bankrupt.
Another analyst with a foreign brokerage said Kingfisher will have to go for fleet and workforce rationalisation, apart from rethinking aircraft acquisition and inventory strategies.

“It will be interesting to see how the lessors react and what happens to all the planes on order. The management must know something that we don’t. How the lease returns/cancellations will be handled is something the management will have to tell investors,” this person said, requesting he be not named.

Sources said Kingfisher may also pull out more than 30 aircraft, practically halving its fleet of 66. This could include ATRs, which the airline has been unable to use effectively.

The airline operated 383 flights a day up to March 31, according to a company presentation in June.

The aforementioned rival said manpower costs will reduce drastically because Kingfisher Red comprises 70-75% of the airline group’s costs at present.

To Sharan Lillaney, analyst at Angel Broking, however, the gambit makes sense from a standpoint that there is not much capacity in the full-service segment.

“The low-cost segment, on the other hand, faces intense competition from players such as IndiGo and SpiceJet and Go Air. In the full-cost section, as Air India grapples with its own issues, Kingfisher would be left to deal with only Jet for market share,” he said.

“Right now, we are all in a wait-and-watch mode,” Lillaney said.
Meanwhile, another senior official with a rival carrier said while Mallya’s reasoning that yields on full-service are better is correct, these get easily offset by increased costs.

“Food is an extra expenditure on an full-service carrier. Extra manpower is needed to cater to business class clients, more has to be spent on in-flight entertainment … on an average, Kingfisher Red yields are about Rs3,600-3,700 per seat versus about Rs5,000 for Kingfisher. But the differential, according to my calculation, is much less than the additional cost needed to run a full airline. So exiting Kingfisher Red does not make sense to me.”

Mallya may be trying to improve load factors by exclusively targeting corporate clients, this person guessed. “But the economy and companies have to do well to benefit from it. At present neither is.”

Another analyst tracking the aviation sector said perhaps the gains that accrue from sale and leaseback of aircraft would bring in much-needed cash in the short term.

A senior DGCA official said that the airline owes about Rs200 crore to the Airports Authority of India (AAI) and has recently agreed to pay Rs10 crore every month plus current dues to AAI. Then, dues to oil companies are over Rs700 crore.

An analyst with a leading international aviation consultancy said ever since Mallya bought the erstwhile Deccan Aviation (which he rebranded Kingfisher Red), he has been uncomfortable with the idea of a low-cost carrier. “He merely gained more routes through this acquisition.”

So much so, G R Gopinath, the low-cost aviation pioneer who founded Air Deccan in 2003 has often lamented over the way the carrier was treated. “When I sold it in mid-2007, it was like giving away your daughter. But when she’s ill-treated, one is at pain,” Gopinath had said at the time of the launch of his biography, Simply Fly, last year.

But another analyst said the acquisition of Deccan helped Kingfisher fly to foreign destinations faster.

“Rules say airlines have to fly for 5 years domestically before they can wing abroad. Since Deccan had done five years, Kingfisher didn’t have to wait for that long. And guess what, instead of the low-cost Red flying abroad, it’s main Kingfisher that does,” pointed out the analyst.

As per a filing with the Director General of Civil Aviation, Kingfisher’s fleet comprises eight A321-232 aircraft; five A330-223; three A319-131; thirteen A 320-232 and 10 A 320 aircraft.

It also has twenty five ATR 72-212 and another two ATR 42-500.
Unconfirmed reports suggest that between 12-15 of Kingfisher aircraft are grounded now due to maintenance issues.

Earlier this year, Kingfisher cut debt through restructuring and issuing shares to 14 banks such as the State Bank of India and ICICI Bank, which now together own 29% of the airline.

The company’s share price has dropped by 63% in value over the last year alone.