Kingfisher Air to Exit Low-Cost Business

Debt-strapped Kingfisher Airlines plans to exit its low-cost business in the next four months and focus on the premium model, Chairman Vijay Mallya said, breaking with rival carriers which are mostly betting on the budget space.

Kingfisher, India's second-largest private airline, run by liquor baron Mallya who also has interests in sports businesses, operates the budget arm under the Kingfisher Red brand.

We are doing away with Kingfisher Red because we do not intend to compete in the low-cost segment, Mallya told reporters on the sidelines of Kingfisher's shareholder meeting.

We believe that there are more than enough guests who prefer to travel the full service Kingfisher class and that shows through in our own performance where load factors in the Kingfisher class are more than Kingfisher Red, he said.

Kingfisher, which started business as a full service carrier in 2005, entered the low-cost segment when it bought out Air Deccan, India's first budget airline, in 2008 and the merger resulted in Kingfisher Airlines being publicly listed.

The flamboyant Mallya has never shied away from proclaiming his airline's premium service despite its foray into the budget space and refers to it as a five star airline.

The margins of Kingfisher class are higher than Kingfisher Red. That's because the yields are better, Mallya said.

Indian airlines have aggressive growth plans, with orders worth $50 billion in the pipeline to planemakers Boeing and Airbus as the growing economy spurs business travel and low-cost carriers make flights affordable for the middle class.

But cut-throat competition and rising costs, including for fuel, means most big Indian carriers lose money. State-owned Air India is operating on government life support.

Kingfisher's move marks a departure from the current trend in Indian aviation where three of the six major airlines are budget carriers.

Jet, India's largest carrier by market share, which also runs a premium service, said last month it aims to increase domestic low-fare capacity to 80-85 percent of the total fleet from the present 72 percent.

SHORT OF CASH

The auditors of Kingfisher, which has never reported a profit, have noted the firm needs extra cash as the airline struggles to survive in a challenging market.

Kingfisher had aimed to raise $250-$350 million through an issue of global depositary receipts in January but did not follow through on the plan. It also tried to attract private equity investment in 2008 and 2009 but no deal was forthcoming.

Earlier this year, Kingfisher cut its debt through a restructuring by issuing shares to 14 banks, including State Bank of India and ICICI Bank.

Kingfisher has a huge debt pile and has utilised all other options to restructure debt. They are also finding it difficult to raise money from the markets. So the only other option left is to reduce the size of the business or capacity, said Rashesh Shah, analyst at ICICI Securities.

Kingfisher is also working with a consortium of banks to further reduce interest costs and raise working capital as the carrier looks to restructure its fleet by selling and leasing back 35 aircraft to lower debt, Mallya said.

In late August, Kingfisher said its board approved a rights issue of shares to raise up to 20 billion rupees.

The airline also plans to convert part of its rupee loans into low-cost forex loans based on existing cash flows, he said.

The airline continues to work aggressively to raise fresh capital, Mallya said, admitting it would not be an easy task.

The high cost of ATF (aviation turbine fuel) coupled with a weakening rupee is the biggest challenge that the whole aviation industry in India is currently dealing with and we are no exception, Mallya said.

Mallya said Kingfisher, which operates 370 flights a day, aims to increase its overall capacity by 10 percent by reconfiguring its aircraft, which will significantly improve revenues. There are also plans to cut unprofitable routes.

ICICI analyst Shah said Kingfisher could consider the option of selling the low cost business as it will bring fresh funds into the airline, helping cut its debt.

Shares of Kingfisher Airlines, valued at about $253 million, have lost 62 percent in 2011 so far. They closed at 24.7 rupees, down 1.59 percent in a weak Mumbai market.