UPDATE 2-India Kingfisher staff return, licence still suspended
* Staff to refrain from protest at Formula One race-engineer
* Shares rise by their daily limit
* Aviation minister says challenges go beyond salaries (Adds details on agreement, comments, background)
NEW DELHI, Oct 25 (Reuters) - Employees of India's grounded Kingfisher Airlines Ltd, unpaid since March, agreed on Thursday to return to work although the debt-strapped carrier must still convince the aviation regulator to reinstate its licence.
The deal appears to avert potentially embarrassing protests by disgruntled staff at this weekend's Formula One auto race outside New Delhi, where Kingfisher Chairman Vijay Mallya's Force India team will compete.
Kingfisher, once India's second-largest airline, has not flown since the start of October after an employee protest turned violent. On Saturday, India's Directorate General of Civil Aviation (DGCA) suspended its licence after Kingfisher failed to address its concerns over safety.
"All employees have agreed to resume duty right now. They are on duty as we speak ... We are all in this together and looking forward to getting the airline going in the next few weeks," CEO Sanjay Aggarwal told reporters at the Delhi airport after meeting staff members.
He did not give further details and it was not immediately clear how the airline would fund salary payments.
"We will now finalise and present our resumption plan to the DGCA and hope to get their concurrence soon," the airline said in a statement.
Kingfisher has never made a profit since its launch in 2005 and has debt of nearly $2.5 billion, according to an estimate by the Centre for Asia Pacific Aviation. The consultancy has said it would cost at last $1 billion to turn around Kingfisher, which has failed in efforts thus far to bring in new capital.
S.C. Mishra, who represents Kingfisher engineers based in Delhi, said the airline had agreed to pay March salaries immediately, April salaries by Oct. 31, May salaries by the Diwali holiday on Nov. 13, and June salaries between Dec. 20 and Dec. 31, after which payment would be made monthly.
The remaining three- to four-month lag in salary payments would be addressed "after the company regains financial health and gets recapitalised," Mishra told reporters.
He said employees will not hold demonstrations.
Shares in Kingfisher closed up 4.83 percent, effectively at their 5 percent daily limit, after falling by a similar amount in each of the four previous sessions.
Kingfisher has been scrambling to find investors to bring in fresh capital, and had lobbied for a recent Indian rule change that allows foreign carriers to buy up to 49 percent of an Indian airline. However, no carrier has publicly expressed interest in taking a stake.
Mallya's liquor business, United Spirits Ltd, is in talks to sell a stake to UK drinks giant Diageo Ltd, which could potential free up funds for him to invest in Kingfisher.
"All Kingfisher team members back at work and fully supportive. I sincerely thank all of them for their faith and continuing commitment," Mallya, known as the "King of Good Times" for his flashy lifestyle, said on Twitter.
The country's civil aviation ministry said meeting payroll commitments was not Kingfisher's only challenge.
"The salary is a big issue and the employees should be paid. But the larger issue than that is their fiscal assurance to the DGCA," Ajit Singh, India's civil aviation minister, told the ET Now TV channel earlier on Thursday.
"They have a lot of outstanding (debts) to the airports authority, to oil companies, to the leasing companies. So it's not just a question of salary ... To allow them to fly again, DGCA is to be satisfied on many more things," Singh said.
DGCA officials were not immediately available for comment.
Even before it stopped operations, Kingfisher had grounded most of its fleet and defaulted on payments to banks, airports, leasing companies and others but was still permitted to continue flying.
That prompted criticism from many in India that authorities were going easy on Mallya, who is a member of parliament and one of India's highest-profile businessmen.
Most of Kingfisher's lenders are state banks, which rarely force corporate liquidations. (Additional reporting by Kaustubh Kulkarni in MUMBAI; Writing by Tony Munroe; Editing by Daniel Magnowski and Sophie Hares)