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KINGFISHER AIRLINES: KINGFISHER RED’S PLEA FOR EUTHANASIA
Is this Mallya’s last gambit to save Kingfisher Airlines?
Can this king make bad times good for an airline whose stock has shed 69.64% of its value since the year began? What can he do to make his call to close down Kingfisher Red work?
Issue Date - 27/10/2011
 
Conventional wisdom holds that Kingfisher Airlines (KFA) – which years back, was touted as one of the most promising private players in the Indian aviation circle for the next decade – is now toast. Mallya has had plenty of problems to tackle with – mounting losses, piling debt, fuel price woes and a cyclical demand being among them. He recently discovered another. And it came in the form of a fault-line in KFA’s very own hybrid operational model.

The airline declared on September 28, 2011, that it would discontinue its Kingfisher Red operations – its low-cost (LCC) arm – while continuing to serve the Indian market as a full-service carrier (FSC). Reason: the unviable passenger load factor and yields in its LCC business. Was the decision – about which Mallya and his CEO Siddhant Sharma seemed convinced about – received well by the market? No. Since the announcement, the stock is down 18.59% (as on October 11, 2011) – a clear indication that news of the culling of Kingfisher Red has not gone too well with the investors. This one was unexpected. The market seems to be turning its head away from a management that has ‘finally’ chosen to rationalise operations and restore order in a troubled house that during the past eight-and-a-half years has burnt cash to the tune of Rs.177.90 billion (including debt and acc. losses). But there is reason for it.

There is potential in this strategic decision to plug a gaping cash-eroding hole. But there is a downside to the tale. The company (through an official statement by CEO Agarwal on October 5, 2011) has clarified that despite the closure of the LCC business, “there will be no reduction in Kingfisher’s fleet size or its network”. This could prove a blunder, which could undo any good that might occur as an outcome of the strategy. Understood, at present, the airline’s fleet of 66 aircraft, is of the right size, given that the airline carries 1.13 million passengers every month (3.41 million passengers carried during Q1, FY2011-12, to 60 domestic and 8 overseas destinations). In other words, this amounts to a total annual passenger count to fleet (TPF) ratio of 205,455. If you look at the six most profitable airlines in the world – KFA is much better placed in this regard than most of them: TPF ratio of Delta is 218,569; United-Continental – 204,425; Southwest – 189,233; American Airlines – 168,531; Lufthansa – 175,632; and China Southern Airlines – 221,739. But here is the alarm bell: this ratio will not stand justified four months later, when KFA’s decision to drop its LCC arm comes into practice. Why? The airline cannot maintain the footfalls at the current levels, especially in the light of the fact that 75% of its seats during the past six months were sold in the “low-fare” category. In this sense therefore, to maintain a load factor (LF) of 83.6% and above going forward (making KFA’s LF amongst the highest in the industry, only behind IndiGo’s 84.3% during the January-July 2011 period), will prove the biggest challenge if this move is to make any economic sense.

 
There is another worry – that of the new aircrafts that are set to join the KFA family. According to industry sources, 10 more aircrafts (6 A320s & 4 A330s) would be added to the fleet. This will therefore prove a downside, reducing the TPF ratio to 178,421, even if we assume that the all-new FSC option will remain as attractive a travel option over the next 16 months, as the erstwhile combination of LCC & FSC and as other budget “profitable” carriers.

Second, routes. To balance the possible loss of passenger count, the airline not only has to move away from unprofitable spokes in its domestic routes like Guwahati and Panaji, but also has to add new profitable routes to its network. This, given the new FSC model, would call for expansion on the international routes through code-sharing and joining an airline group. Says Amber Dubey, Director – Aviation, KPMG to B&E, “KFA may have to discontinue certain routes where passengers are not ready to pay a premium for FSC offerings. However, due to DGCA’s route dispersal guidelines, KFA has to deploy a specified percentage of its metro flights on tier II & III routes.”

There are a couple of other points that Mallya’s CEO needs to note. As a network carrier which wants to grow internationally, KFA cannot ignore management principals and do without partnerships. In cases where revenues are generated through partnerships, capacity management is optimised and the opportunity to maximise yields on international services increases. Simply providing a great product is not enough. For instance, Emirates has a great product, but it also has a great feeder network. All that KFA is doing is launching direct flights – to London, New York, Kathmandu, Bangkok, Dubai, Singapore, and Hong Kong. But it has nothing in the name of a feeder network to take its customers to most parts of the world. Even government-run Chinese airlines today offer huge feeder networks through partnerships, so that they are not exposed to “one” traffic flow. In this regard, Kingfisher’s entry into the OneWorld alliance in February 2012, is a potential life-saver. Given that the alliance has 12 airlines in the club (including the likes of American Airlines, British Airways, Cathay Pacific, Finnair, Japan Airlines, Qantas, Royal Jordanian et al) that serve 750 airports across 150 countries, KFA, will benefit by being able to provide its customers a greater range of connectivity to destinations covered by the member airlines. Experts opine that this entry could help boost KFA’s topline by anywhere between 10-15%, through creation of new revenues streams as partners co-ordinate their schedules and pricing to maximise what KFA brings to their own network. However, it is a known fact that entry into any alliance does not guarantee any increased revenue stream – it only stabilises the current, with a chance to grow bigger if the airline conducts itself well and supports member airlines. But that in itself is good news to begin with.

          

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