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Kingfisher: lost in the air

india Updated: Feb 21, 2012 22:52 IST
Tushar Srivastava
Tushar Srivastava
Hindustan Times
Highlight Story

What’s wrong with Kingfisher Airlines (KFA)?

Over the last four days KFA has cancelled large number flights across various sectors, including the marquee Delhi-Mumbai route. On Tuesday, it operated only 28 of its 64 planes inconveniencing thousands of passengers.

What has prompted flight cancellations? http://www.hindustantimes.com/Images/HTEditImages/Images/22feb_biz5.jpg

The company is struggling to find funds for even basic needs such as jet fuel, vendor payments and employee wages. It has been defaulting on payments to oil companies and airports, and had delayed salaries to its employees for the last two months.

Why has the company run out of cash for day-to-day operations?

The company said the prime reason for the current disruption was the “sudden attachment” of its bank accounts by the I-T department, that has left the firm with precarious cash balances.

Why has the I-T department “attached” KFA’s bank accounts?

“Attachment” implies the airline cannot operate the bank account unless it clears statutory dues to the tax department. The airline has failed to deposit tax deducted from employees’ salaries and vendors with the income tax authorities for close to two years leaving tax authorities with no other option.

What about employees?

Not paid for months, employees are leaving the company in droves. Last week 35 senior commanders quit KFA and joined rival carrier IndiGo. Large numbers of cabin crew and ground staff have also put in their papers. The airline is left with only about 100 captains on its Airbus A320 fleet. It has already shut Kolkata operations after a majority of ground staff quit.

What is KFA’s current state of finances?

The capital-starved airline hasn’t ever made profits since its inception in 2005, had a debt of Rs 7,057.1 crore as on March 31, 2011 and reported a loss of Rs 444.0 crore for third-quarter ending December.

What are the main reasons for this precarious state of finances? http://www.hindustantimes.com/Images/HTEditImages/Images/22feb_biz6.jpg

Its problems started about three years ago after it acquired Air Deccan from Captain GR Gopinath in 2008 and renamed it Kingfisher Red. High debt and rising operating costs forced KFA close down its low-cost arm last year.

Fund-raising is only one of the myriad problems confronting KFA. High interest liability, vendor payment schedules and inability to meet its daily jet fuel payment commitments are making turnaround difficult. The sharp spike in jet fuel costs, which constitute about 40% of an airline’s operating costs, only inflicted fresh wounds.

KFA implemented a debt recast package after which loans valued at around Rs 1,300 crore were converted into share capital. A consortium of 13 lenders led by the State Bank of India (SBI) and ICICI Bank had picked up a 23.2% stake in the airline in March of which SBI and ICICI Bank holds 5.7% and 5.3% respectively. The shares were pledged by KFA’s holding companies United Breweries Holdings and Kingfisher Finvest at Rs 64.48 per share, at nearly 60% markup over the current market price.

What about passenger programmes such as frequent flyer schemes?

The management has not specified how it would realign the frequent flyer points in wake of the cancellations and the decision to close down Kingfisher Red.

The airline had also recently moved AmEx card holders to a co-branded card membership programme. With cancellations and withdrawals from routes, all these will be potentially affected.

What’s the way ahead for KFA?

Analysts believe the airline needs immediate capital infusion of about $500 million (about Rs 2,500 crore). Mallya has ruled out shutting the down the airline, even temporarily. He is now banking on an early notification of the government’s proposed policy to allow foreign airlines to buy up to 49% in domestic carriers. He has said discussions were on with three potential foreign investors to buy equity in KFA and infuse capital.

Is it safe to fly the airline?

Regulator DGCA has ordered special safety audit of KFA’s fleet to find out whether any safety parameters have been compromised.