ANALYSIS: Good times ending for Kingfisher?

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Anyone looking for an example of how hard times can reverse fortunes in the airline business need look no further than Kingfisher Airlines and its flamboyant boss, the high-living Indian booze baron Vijay Mallya.

Once a leading light among the new, private ventures poised to profit from India's burgeoning wealth and seemingly insatiable appetite for domestic and international air travel, Kingfisher - named after one of the most popular brands in Mallya's United Breweries, one of the world's biggest drinks companies - has stumbled into 2012 with a crushing debt burden, a crippled fleet and a desperate need for a financial saviour.

At its height, Kingfisher ran an extensive domestic network, targeting the business traveller in particular. The airline built a fleet of 60 Airbus and ATR aircraft with nearly 150 on order or option and, between the main operation and low-cost subsidiary Kingfisher Red, according to Flightglobal's ACAS database. Mallya's aviation business controlled nearly 28% of the Indian domestic market in 2008 - compared with just 16.3% for Air India.

However, 2008 turned out to be the summit for Kingfisher. In November of that year, after three years of operations, Mallya shelved plans to develop regional and long-haul international services because of poor market conditions.

Just how poor soon became evident. After years of double-digit passenger growth fuelled by the launch of carriers such as Kingfisher and ticket prices driven low by competition, rising operating and fuel costs led to ticket price hikes - and passenger numbers fell by nearly 5%.

For Kingfisher, over-investment has proved costly. In its fiscal year to 31 March 2011, Kingfisher lost Indian rupees (Rs) 10.3 billion ($227 million), a result which did reflect some stabilisation after a loss of Rs16.5 billion the year before. However, the carrier is going backwards again, having lost Rs4.69 billion in its most recent second quarter, more than double its loss for the comparable year-ago period.

Whether Kingfisher survives to carry out a plan - supposedly from next month - to exit the low-cost market and concentrate on higher-margin premium passengers remains to be seen. Earlier this month, India's aviation regulator, the Directorate General of Civil Aviation (DGCA), recommended Kingfisher be wound up because it feared the carrier's financial strife was compromising safety; the DGCA found that nearly a third of Kingfisher's fleet was grounded because of a lack of spares, engines and other components, and the airline was actually cannibalising aircraft to keep others flying.

Then, last week, ATR removed Kingfisher's 38-aircraft order from its backlog, describing the airline as an "unreliable customer".

Kingfisher is reported to be seeking to raise funds through sale and lease back of its aircraft. "This is a typical process that airlines have adopted during more challenging economic times. However, against a background of increasing oil prices, taxes on fuel and pressures on margins, it is questionable how effective such strategies will be in the longer term and without major investment," says Suzanne Rab, a partner in London law firm King & Spalding.

Kingfisher, in any case, clearly needs more than a sale-leaseback cash boost. It owes $1.23 billion to a consortium of 13 banks led by State Bank of India (SBI) that took a 23% stake in the airline as part of a debt restructuring deal. Recently, SBI chairman Pratip Chaudhuri publicly called the carrier a non-performing asset, declaring it in default. Its soaring debt burden has resulted in a backlog of non-payments to lessors, vendors for spares, catering, groundhandling, airport charges, fuel companies and overdue salaries to its own staff.

If it is any comfort to Mallya, at least he has company. Other major privately owned airlines in India - certainly including Jet Airways and SpiceJet although possibly excluding IndiGo - are in dire need of fresh equity investment. All are suffering in part from the relative devaluation of the Indian rupee compared with the US dollar, which exacerbates the rising cost of dollar-denominated fuel. In addition, state-owned Air India is widely regarded as a sink for government funds, which keep it flying while distorting the Indian market with subsidised fares.

A proposal backed by the aviation ministry to permit foreign investors to own up to 49% equity in Indian domestic carriers may provide help for struggling airlines. However, the amassed debts of Kingfisher have led to some analysts questioning whether foreign carriers, themselves facing tough economic times, will be willing to invest.

As for Kingfisher, if it can survive long enough there is some hope; the carrier is scheduled to join the Oneworld alliance of 11 member and 20 affiliate airlines from February. "This should give it better access to global routes, potentially allowing it to become more competitive," says Rab.

Hope, of course, is always a reserve currency for airline bosses. As Mallya himself put it last year when dismissing speculation on the potential collapse of his carrier: "To write the epitaph of Kingfisher Airlines is neither fair nor accurate. We shall survive and flourish and prove you all wrong."

Additional reporting by Dominic Perry in Paris