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?
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.
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.
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