Kingfisher Airlines Financial Woes May Culminate In Bankruptcy

Posted on January 6, 2012 by Rohit Rao

Source: Kingfisher Airlines Kingfisher is in really terrible financial shape. The DGCA (Indias aviation regulator) is concerned that the financial difficulties might spill over into safety issues, to the point where they are considering revoking Kingfishers operating certificate. Things are bad Kingfisher hasnt been in good shape for the last couple of years, but their financial issues first really came into national spotlight back in September, when it came to light from the Indian Tax Ministry that Kingfisher had not been paying the taxes that had been deducted from employees paychecks. In October, they were put on cash & carry basis with some of their fuel suppliers due to not paying their debt.

A Kingfisher Red Aircraft Falling Apart - Parked At Delhi; Photo Credit: Sankaps Then, in early November, Kingfisher started grounding aircraft and cancelling many flights, because they couldnt afford to operate them any more. Between November 7th and 10th, over 120 flights were cancelled. A senior executive blamed the cancellations on reconfigurations of aircraft from Kingfishers low cost brand to full service. The curtailment of flights has been due to process of reconfiguration of our aircraft, Kingfisher CEO Sanjay Agarwal told PTI from Mumbai on November 8th. It turned out that only a few planes were being reconfigured, however, and the rest of the planes were grounded due to maintenance issues or inability to pay costs. A 15 crore (150 million rupees) check to the Airports Authority of India bounced. Kingfisher was promptly put back on cash & carry. To add to their problems, Kingfisher started suffering from crew shortages. Approximately 130 pilots quit, moving to different airlines. Cabin crew also began to walk out of the job. Kingfisher was cancelling flights anyway, so it turned out that the crew shortage didnt matter in the grand scheme of things.

Kingfisher Red A320 Falling Apart In Delhi; Photo Credit: Sankaps

On November 19th, Kingfisher published a list of flights that they were cancelling, as part of their massive downsizing. Their market share during the month of November went from 2nd nationally to 2nd to last, only beating GoAir. On November 24th, the Wall Street Journal reported that 2 A320s were going to be repo-ed by the lessor. This was the first repo of many to come. During the month of December, they continued to downsize operations and cancel flights at the last minute, due to lack of maintenance spares. They cannibalized parts from parked planes in order to try to keep their operation going. A slight glimmer of hope for the airline appeared when they were accepted into the oneworld alliance. Yesterday, it came to light that the DGCA is considering revoking their operating permit. They were considered a safety hazard that needed to be solved quickly. Even worse for the airline, the State Bank of India, their largest creditor, declared Kingfisher Airlines to be a non-performing asset, in default. This opens the door to an involuntary bankruptcy for Kingfisher. I predict that they wont last long enough to ever join oneworld. While it is clear enough that Kingfisher Airlines is in serious financial difficulties, an important question to ask is why is Kingfisher in this trouble in the first place? The answer is the fundamentally flawed split business model that Kingfisher used. It took 4 years and 4 months for the airline to learn the lesson, but they learned it clearly. Running 2 completely different business models in a single airlines is a recipe for disaster, especially in a country with as high Low Cost Carrier penetration as India.

JetLite; Source: Wikimedia The airline hasnt been able to remove the Red from their balance sheet since they bought Air Deccan, and rebranded it Kingfisher Red. Kingfisher copied a mistake that has been made throughout the world. Many other airlines, like Uniteds Ted and Deltas Song, have failed with the same business model. The difference is that their parent companies survived. In this case, Kingfisher has become too dependent on Kingfisher Red to be able to pull itself out of the throes of bankruptcy. Running a Low Cost Carrier and a Full Service Carrier in the same airline doesnt work well for many reasons. Full Service Carriers focus on product differentiation, trying to lure high yield passengers. In contrast, Low Cost Carriers focus on delivery the best bang for the buck. Trying to combine the 2 tends to end up as a muddled airline: with costs higher than LCCs, but a product worse than traditional FSCs. With a poorer product, the airlines cant command as much of a yield premium, while their fares cant match true LCCs with lower costs. The airlines which have been successful with this kind of model, like Singapore Airlines, have kept the management and operations of these airlines very separate to avoid this problem. In India, only SpiceJet and Indigo have focused and clear business models, and therefore have been able to maintain relative profitability.

Source: Jet Airways

Jet Airways fell into the same trap. However, Kingfisher has been very poorly managed in comparison to Jet Airways. Even Air India, often the laughingstock of the aviation industry, has been managed better than Kingfisher has. Kingfishers executives are largely incompetent. Watching a few interviews with senior executives is enough to make my head hurt. It will be interesting to see if my prediction comes true. I will take the bold step of issuing my own prediction: Kingfisher Airlines will not exist in July 2012. Anybody want to place a bet?