The Financial Mess That Is Kingfisher (Guest Post)

It’s baby time, and I’m taking a couple weeks off from blogging to get to know the little guy. This is the first of the guest posts that I’ll be putting up over the next couple weeks, and it focuses on one mess of an airline.
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Could there ever be an airline as bad as Air India, who Cranky named the worst airline ever in August of 2011? Well, at least from a financial perspective Kingfisher Airlines is approaching that level. Yes, that Kingfisher Airlines; the one with a 5 star rating from Skytrax.

Now some of you might be shocked at this statement, and I am engaging in a bit of hyperbole; but since Cranky named Air India the worst airline ever in August of 2011, the fiscal situation at Kingfisher has denigrated to such an extent, that it can be placed in the same ballpark as the mess at Air India.

Don’t believe me? Well let’s play a little game. Pull up Cranky’s post from August and read these next few statements and compare them to some of the events in the Air India.

• On July 18th, 12 Kingfisher flights were cancelled due to non-payment of fuel dues to 3 Indian fuel companies (Air India has had more than 25 flights cancelled for this same reason over the past 4 months.
• In August, Kingfisher deferred payment of salaries to its employees due to a lack of cash.
• Over the summer, Kingfisher had its in-flight entertainment shut off for non-payment
• Up to 13 Kingfisher flights were cancelled on September 27th for “Scheduled Maintenance”
• In late September a report from Veritas Investment Corp proclaimed Kingfisher to be bankrupt.
• Over the past 3 months, Kingfisher have had 7-15 of their fleet of 27 ATR turboprops grounded due to “maintenance issues” which has prevented Kingfisher from returning these aircraft to lessors.
• In late November, lessors began to re-possess Kingfisher aircraft, starting with a pair of AerCap owned A320s.
• Kingfisher lost a ton of money during the US 3rd quarter period, paying nearly 22% of its quarterly revenue in interest and finance charges; their debt situation makes American’s look positively appetizing.
• In early December, Kingfisher was put on a cash and carry operation at its hub in Mumbai; under which the carrier has to pay for its operations (landing and parking amongst others) at the beginning of the day in cash, or they will not be permitted to operate flights from Mumbai on that day. Airlines typically pay for larger blocks of time (at least a month) using checks, but enough of Kingfisher’s checks bounced that the airport decided that it couldn’t afford to rely on Kingfisher’s shoddy credit.

And just to top it all, in early November, Kingfisher pulled an almost Qantas-esque move, announcing plans to cancel more than 30, then 50 daily flights; representing around a 15% capacity cut. While these types of schedule changes are not unprecedented (see Delta pulling down a ton of trans-Atlantic flights during this fall period), Kingfisher’s management of the whole situation was pretty bad. They gave their passengers no advance notice that the cancellations would hit . . . . None. Passengers were literally informed the day of; leaving thousands stranded around India. Certainly business travelers were alienated by the move; business travel in India does not work exactly the way that it does in the US, but reliability is still hugely important to such passengers. This sort of surprise move tends to spook most travelers (like Qantas’ fleet grounding did), and could affect Kingfisher’s revenue performance moving forward. Given that Kingfisher was in dire financial straits at the time (and is still looking for an equity partner), the move might not have been so bad had Kingfisher not stated less than a month before that it planned to re-align its strategy to capture a larger share of the business travel market.

In mid October, Kingfisher announced that it would be dropping its low-cost arm Kingfisher Red; and focusing on the full service business. This move was almost universally criticized by aerospace analysts in the region who pointed to the fact that air travel growth in India is mostly occurring in the low cost sector. However, I believe that it was the correct move. Kingfisher has such high unit costs (even at their “low cost” subsidiary), that any attempt to match India’s true LCCs on pricing would basically be selling tickets at a loss. Aiming for high value business travelers to offset higher costs makes sense; but not if you alienate those very passengers with your next move.
Given the picture I painted above, one might question whether Kingfisher will be in business for very long, and if OneWorld really wants Kingfisher in its alliance. Neither question is much of a concern. See [Kingfisher CEO] Vijay Mallya is a bit like Richard Branson in that Kingfisher is his pet dream project, not the core business. As with Richard Branson’s various Virgin media brands, the true source of funding behind Kingfisher is Mallya’s United Breweries conglomerate, which makes some of India’s most popular alcoholic beverages among other things. But the UB Group has tired of paying for Kingfisher’s sustained losses and accumulated debt, so Mallya is looking for an outside investor. However, Vijay Mallya is a very well connected businessman both in financial and political circles. There is no doubt that Kingfisher will get the funds it needs to stay in business for the immediate future.

His connections in politics have also paid dividends; already the Indian government is re-considering its stand on Foreign Direct Investment (FDI) in Indian airlines of up to 26%. He has also managed to at least start discussion about the burdensome regulations and taxes levied on the Indian aviation sector. In fact, there is plenty of noise around a potential joint OneWorld equity investment in Kingfisher. Which brings me to my second point, OneWorld needs an Indian partner too much (after going 0 for China) to simply give up on Kingfisher. Moreover, Kingfisher is still a superb service airline. Their flight crew is top notch, and the IFE on their domestic flights is as good as, if not better than that of most US carriers. In fact, Kingfisher’s service will remind you of the 80s and 90s in the US, when checked bags were free, and in-flight meals plentiful. Thus you shouldn’t regard my discussion of their finances above as an admonishment not to fly Kingfisher. They are in no danger of going out of business any time soon, and financial relief is forthcoming (hopefully) from the Indian government. Kingfisher is currently scheduled to enter the oneworld Alliance on February 10th, 2012, and unlike Air India I’m almost certain that Kingfisher will seal the deal.

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Vinay Bhaskara is an up-and-coming aviation analyst and history buff based in the United States. He covers the global aviation industry with Bangalore Aviation and Aspire Aviation. You can follow him on Twitter at @TheABVinay.