India's Kingfisher flies into debt turbulence

MUMBAI Fri Nov 11, 2011 9:12am EST

A Kingfisher Airlines Airbus passenger aircraft prepares to take off for Mumbai airport, in this April 11, 2007 file photo. REUTERS/Punit Paranjpe/Files

A Kingfisher Airlines Airbus passenger aircraft prepares to take off for Mumbai airport, in this April 11, 2007 file photo.

Credit: Reuters/Punit Paranjpe/Files

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MUMBAI (Reuters) - India's civil aviation minister sought to cool a crisis over debt-hobbled Kingfisher Airlines (KING.NS) on Friday as investors bailed out, alarmed by scores of flight cancellations and reports that its leasing firms wanted their planes back.

Named after the country's most-famous beer, Kingfisher has climbed to become India's No. 2 private carrier since it began operations in the heady days of 2005 as the economy was booming and forecasts for passenger growth reached for the skies.

But it has become one of the main casualties of high fuel costs and a fierce price war between a handful of airlines which, between them, have ordered hundreds of aircraft for delivery over the next decade in a long punt on the future.

The Centre for Asia Pacific Aviation CAPA.L has forecast a record $2.5-$3 billion loss for Indian airlines for the year ending March 2012, with state-run Air India alone likely to account for more than half of it.

As shares in Kingfisher slumped 18 percent on Friday to their lowest level since it was launched by the flamboyant liquor baron Vijay Mallya, Civil Aviation Minister Vayalar Ravi said he would approach the finance minister to seek emergency bank assistance for the cash-strapped company.

Shares in India's top two lenders, State Bank of India (SBI.NS) and ICICI Bank (ICBK.NS), which each hold more than 5 percent of Kingfisher, fell sharply on concern that their loans would turn sour.

The country's main opposition party made it clear on Friday that it would oppose a state bailout for Kingfisher, which means the pressure will remain on Mallya's United Breweries (Holdings) (UBHL.NS) to keep the airline in business.

"I think it will be difficult for the UB Group to bail them out again and again," said an aviation analyst at a domestic brokerage, who asked not to be named.

"The airline needs fresh funds and there will be a question mark on its survival if it is unable to raise the funds."

Group firm United Breweries has pledged its shares with lenders including ICICI Bank as collateral against loans.

SCORES OF FLIGHTS CANCELLED

Kingfisher Chief Executive Officer Sanjay Aggarwal sought to shore up confidence in the company on Friday after it had cancelled scores of flights daily since Sunday in an effort to cut capacity and minimize costs, leaving passengers stranded just as the country's travel season enters its peak period.

"There is no doubt in our mind as a management team or Dr Mallya as a promoter of the airline, or the UB Group, about the credibility or the future of the airline," he told NDTV Profit.

The Economic Times reported that some companies that had lent aircraft to Kingfisher planned to take them back, and in Europe two industry sources said on Thursday that the carrier was set to cancel orders for two A340 Airbus EAD.PA aircraft.

India's aviation regulator, meanwhile, said it was starting financial surveillance of all airlines to ensure there was no corner-cutting on safety and said it had asked Kingfisher to explain why they had cut back drastically on scheduled flights.

Kingfisher is one of India's most successful brands, ranked 116 by Campaign magazine in its top 1,000 Asia brands list for 2011, with only one Indian brand - Amul - higher.

Much of its success can be tied to the effort it has made to beat rivals on service quality: one of its promotional lines is "a world without passengers," assuring its clients that they are "honoured guests."

It offers more legroom and bigger seats on its "funliners," which fly as far as London, and it became the first Indian airline to put individual video screens in its economy cabins.

"Like Air India, Kingfisher is also a difficult duck to drown," said Rajan Mehra, executive director at Asia Pacific Academy for Aviation and Hospitality.

"They are in very bad shape, but whether they will sink I am not too sure. Mallya will have to take some very serious and stern steps ... The loss of brand is the biggest loss for Kingfisher," he said.

LOW-COST SERVICE TO GO

The company confirmed on Friday that about 100 pilots had quit in recent months.

Six weeks ago Kingfisher announced plans to recast its business model by doing away with its low-cost service.

Kingfisher shares have lost more than 67 percent of their value so far this year. The airline, which listed when it bought out budget airline, Air Deccan in 2008, has never made a profit.

Its auditors noted in the annual report this year that the firm needs extra cash 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. Its current debt is about $1.2 billion.

Last week it said it had written to banks for further help.

"The only way out is they sell a stake to a foreign airline company - if the government passes the rule anytime soon, which I think they can, given the circumstances of the whole industry," said Sharan Lillaney, an analyst with Angel Broking.

India allows foreign investment of up to 49 percent in Indian carriers. However, foreign airlines are not allowed to invest directly or indirectly in domestic carriers, a rule the government has said is likely to be scrapped.

India's aviation woes are not limited to Kingfisher. State-run Air India lost 70 billion rupees before tax in the year that ended in March 2011.

Rising crude prices, depreciating rupee and cut-throat competition have eroded airlines' ability to raise fares despite passenger growth of about 19 percent this year.

Jet Airways (JET.NS), India's top carrier, and Spicejet (SPJT.BO) reported losses of 7.13 billion and 2.4 billion rupees, respectively, for the September quarter.

(Additional reporting by Swati Pandey; Writing by John Chalmers; Editing by Rosemary Arackaparambil and Tony Munroe)

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