Parody Kingfisher Airlines Investor Presentation

The Indian aviation sector might be in rough shape, but some humor never hurts.

Kingfisher Gets Reinstated In IATA Clearing House: Finally Some Good News For Kingfisher

After weeks and weeks of bad news for Kingfisher, some good news has finally arrived. The IATA announced today that Kingfisher Airlines has been reinstated into its clearing house. This news comes a little over a week after Kingfisher’s membership was suspended

.

Kingfisher’s financial woes have

been

well

documented

on the blog, so I won’t go into detail about it.. However, this temporary suspension has had serious consequences for Kingfisher. Its entry to oneworld was put on hold because of this suspension – being a member in good standing of the IATA Clearing House is a contractually required prerequisite to alliance membership. Even after being reinstated, Kingfisher’s entry will be pushed back for months, if it happens at all.

Kingfisher also had trouble with bilateral interline agreements due to the IATA Clearing House issue. Cathay Pacific, Korean Air, and Dragonair all terminated their bilateral interline agreements, leaving passengers stranded and leaving Kingfisher in a bad position. Kingfisher got a lot of bad press for these issues in the Indian media as well. Cathay Pacific’s termination in particular is a massive blow to Kingfisher since Cathay will be a major alliance partner of Kingfisher once (if) they join oneworld.

Hopefully this good news is a sign of Kingfisher turning around and becoming profitable. I don’t have my hopes up though…

Kingfisher Airlines’ OneWorld Membership Deferred, Suspended From IATA Clearing House

 

A Kingfisher Red Aircraft Falling Apart – Parked At Delhi; Photo Credit: Sankaps

There has been a lot of coverage on this blog about Kingfisher Airlines’ financial woes, like this post

, this post

, this post

, and this post

. Now, Kingfisher Airlines has had a rough enough couple of days to warrant yet another post on the topic. Yesterday, it was suspended from the IATA clearinghouse. Today, it was announced that oneworld alliance is deferring its application until it can get its financial side in order. These are massive blows to Kingfisher from which it won’t recover easily from. 

Kingfisher Red A320 Falling Apart In Delhi; Photo Credit: Sankaps

Yesterday, it was announced that Kingfisher Airlines has been suspended from the IATA Clearing House due to non-payment of debts. The IATA Clearing House is the way that airlines do interline and service transactions with each other. Kingfisher Airlines being suspended means that other airlines have to deal directly with Kingfisher to get payment for tickets issued by Kingfisher. That means that other airlines will find it very difficult for other airlines to accept tickets issued by Kingfisher. This will certainly have an adverse effect on Kingfisher.

However, the bigger problem for Kingfisher is the fact that their membership with oneworld is being deferred. As I explained:

Joining oneworld will help the airline in many ways. Kingfisher’s King Club frequent flyer program will be fully integrated with other oneworld partners. Earning and redeeming miles will be possible on any airline throughout the alliance, and status will be recognized by all carriers. This is expected to bring a significant number of passengers to Kingfisher from other domestic airlines, as many people want to earn miles and have their status recognized. In addition, Kingfisher will gain interline and ticketing agreements with all other oneworld partners. This means that tickets from other alliance airlines will use Kingfisher for domestic segments  over competitors. Currently 7 oneworld airlines serve India. These airlines will provide feed for Kingfisher’s operations.

 

Kingfisher Will Not End Up Joining This Group Of Carriers Soon After All; Source: Kingfisher Airlines

 

All of these advantages are gone with this one decision. Kingfisher will not get the loyalty of oneworld elites flying to and within India. This will hurt Kingfisher’s load factors and revenue significantly. With the cash crunch that Kingfisher is facing today, that pain will not be easy to deal with.

Kingfisher is second airline in India to have its entrance to an alliance deferred. Air India had the same issue last year with Star Alliance. Some have been saying that the Airlines of India are jinxed, and will never be able to join an alliance. Perhaps they are right…

This decision also came on the same day that another oneworld member, Malev, ceased operations. A post about Spanair and Malev ceasing operations will be posted early next week.

ATR Announces 2011 Results, Cancels Orders Of Kingfisher Airlines

ATR announced its results

for 2011:

Turboprop manufacturer ATR doubled its order intake in 2011, selling 157 of its regional aircraft which comfortably eclipsed 2010’s total of 80.

With its backlog now standing at 224, worth $5 billion, it is also well-ahead of Canadian rival Bombardier, where sales of the Q400 have been virtually non-existent and backlog stands at just 29 aircraft.

In 2011 the company took orders for 13 ATR 42s and 144 ATR 72s, giving the airframer an 80% market share. Order intake was 40% above its previous record year in 2007.

The company also holds options for a further 79 aircraft.

It delivered 54 units during the period, against 51 a year earlier, including its first ATR 72-600.

ATR recorded revenue of $1.3 billion in 2011.

The ATR has very handily outpaced Bombardier’s Q400, despite the Q400 being regarded as a “better” aircraft in many aspects. More analysis on that soon.

 

Kingfisher Airlines ATR 72-500

In ATR’s announcement, some planes which I expected to be counted in the backlog were not. They are the 38 ATR  72-500s that Kingfisher Airlines had on order. These airplanes are nowhere to be seen in the order backlog.

FlightGlobal Editor Dominic Perry

had an explanation to why the orders are missing from the backlog: they have been cancelled because it hadn’t met the pre-delivery payment schedule which it had agreed to. ATR says that Kingfisher is “not in a financial position to take the aircraft anytime soon.”

It’s no secret that Kingfisher Airlines’ has been going through some very difficult financial times

, with recent repos of some of its fleet by lessors and almost 1/2 of its fleet grounded due to lack of spare parts. Therefore, it’s not much of a surprise.

Just another step on Kingfisher’s journey to bankruptcy.

Kingfisher Airlines’ Death Spiral

 

Source: Kingfisher AIrlines

Kingfisher is in really terrible financial shape. The DGCA (India’s aviation regulator) is concerned that the financial difficulties might spill over into safety issues, to the point where they are considering revoking Kingfisher’s operating certificate. Things are bad

Kingfisher hasn’t been in good shape for the last couple of years, but their financial issues first really came into national spotlight back in September, when it came to light from the Indian Tax Ministry that Kingfisher had not been paying the taxes that had been deducted from employees’ paychecks. In October, they were put on cash & carry basis with some of their fuel suppliers due to not paying their debt.

 

A Kingfisher Red Aircraft Falling Apart – Parked At Delhi; Photo Credit: Sankaps

Then, in early November, Kingfisher started grounding aircraft and cancelling many flights, because they couldn’t afford to operate them any more. Between November 7th and 10th, over 120 flights were cancelled.  A senior executive blamed the cancellations on reconfigurations of aircraft from Kingfisher’s low cost brand to full service. “The curtailment of flights has been due to process of reconfiguration of our aircraft,” Kingfisher CEO Sanjay Agarwal told PTI from Mumbai on November 8th. It turned out that only a few planes were being reconfigured, however, and the rest of the planes were grounded due to maintenance issues or inability to pay costs. A 15 crore (150 million rupees) check to the Airports Authority of India bounced. Kingfisher was promptly put back on cash & carry. To add to their problems, Kingfisher started suffering from crew shortages. Approximately 130 pilots quit, moving to different airlines. Cabin crew also began to walk out of the job. Kingfisher was cancelling flights anyway, so it turned out that the crew shortage didn’t matter in the grand scheme of things.

 

Kingfisher Red A320 Falling Apart In Delhi; Photo Credit: Sankaps

On November 19th, Kingfisher published a list of flights that they were cancelling, as part of their massive downsizing. Their market share during the month of November went from 2nd nationally to 2nd to last, only beating GoAir.

On November 24th, the Wall Street Journal reported that 2 A320s were going to be repo-ed by the lessor. This was the first repo of many to come.

During the month of December, they continued to downsize operations and cancel flights at the last minute, due to lack of maintenance spares. They cannibalized parts from parked planes in order to try to keep their operation going.

A slight glimmer of hope for the airline appeared when they were accepted into the oneworld alliance.

Yesterday, it came to light that the DGCA is considering revoking their operating permit

. They were considered a “safety hazard” that needed to be solved quickly. Even worse for the airline, the State Bank of India, their largest creditor, declared Kingfisher Airlines to be a non-performing asset, in default. This opens the door to an involuntary bankruptcy for Kingfisher. I predict that they won’t last long enough to ever join oneworld.While it is clear enough that Kingfisher Airlines is in serious financial difficulties, an important question to ask is “why is Kingfisher in this trouble in the first place?”

The answer is the fundamentally flawed “split business model” that Kingfisher used. It took 4 years and 4 months for the airline to learn the lesson, but they learned it clearly. Running 2 completely different business models in a single airlines is a recipe for disaster, especially in a country with as high Low Cost Carrier penetration as India.

 

JetLite; Source: WIkimedia

The airline hasn’t been able to remove the Red from their balance sheet since they bought Air Deccan, and rebranded it Kingfisher Red. Kingfisher copied a mistake that has been made throughout the world. Many other airlines, like United’s Ted and Delta’s Song, have failed with the same business model. The difference is that their parent companies survived. In this case, Kingfisher has become too dependent on Kingfisher Red to be able to pull itself out of the throes of bankruptcy.

Running a Low Cost Carrier and a Full Service Carrier in the same airline doesn’t work well for many reasons. Full Service Carriers focus on product differentiation, trying to lure high yield passengers. In contrast, Low Cost Carriers focus on delivery the best bang for the buck. Trying to combine the 2 tends to end up as a muddled airline: with costs higher than LCCs, but a product worse than traditional FSCs. With a poorer product, the airlines can’t command as much of a yield premium, while their fares can’t match true LCCs with lower costs. The airlines which have been successful with this kind of model, like Singapore Airlines, have kept the management and operations of these airlines very separate to avoid this problem. In India, only SpiceJet and Indigo have focused and clear business models, and therefore have been able to maintain relative profitability.

 

Source: Jet Airways

Jet Airways fell into the same trap. However, Kingfisher has been very poorly managed in comparison to Jet Airways. Even Air India, often the laughingstock of the aviation industry, has been managed better than Kingfisher has. Kingfisher’s executives are largely incompetent. Watching a few interviews with senior executives is enough to make my head hurt.

It will be interesting to see if my prediction comes true. Anybody want to place a bet?

DGCA’s Financial Surveillance Report Full Of Controversy

Last Thursday, the DGCA (India’s aviation regulator) finalized their 2011 financial surveillance report. The findings of the report are making waves throughout the industry. The report focused on the financial state of airlines in India, finding that financial issues are endemic in the sector, and that this financial sickness is affecting safety standards.

The most controversial part of the report said: “A reasonable case exists for withdrawal of [Kingfisher Airlines] airline operator permit as their financial stress is likely to impinge on safety.” The report also had similar findings about Air India Express (AIX), a surprise considering that AIX was relatively profitable compared to the rest of Air India and was being hailed as a success story by many aviation analysts. I must admit that I belong to that category myself, considering AIX to be a great step for Air India.

Audits of Jet Airways, JetLite, SpiceJet, and GoAir also yielded poor results. The DGCA found “major financial distress issues” that could lead to safety issues. The reports also talks of “some rapid growth issues” about IndiGo Airlines. The audit of Air India is not yet finished.

 

Source: Kingfisher Airlines

When I look at that list, I’m not really shocked. The report seems to list every single Indian airline as under “financial distress.” It’s great that the DGCA is finally figuring this out. The Indian aviation market is structurally challenged. Despite being one of the fastest growing economies in the world, Indian airlines are unable to make profits. This is due to high fuel prices, extremely high taxes, and poorly negotiated bilateral treaties, among other issues. It is excellent that the DGCA is actually investigating these issues before it becomes too late and safety standards crash.

What may seem really surprising is that the DGCA is considering taking the extreme step of revoking operating permits. However, after looking closely at the financial issues that Kingfisher is facing, it may not seem that drastic of a step at all. A post tomorrow will go into more detail about Kingfisher’s financial woes.

 

Source: Wikimedia

With regards to Air India Express, it is surprising how scathing the report is. 2 years ago, the airline was involved in the Mangalore air crash which claimed 158 lives. However, it wasn’t clear to me how poor the safety culture at the airline is until today when I did some more poking around during research. There is shortage of pilots, check airmen, instructors, examiners and cabin crew… The airline is not able to operate its entire fleet due to shortage of pilots. Flight duty time limitation monitoring is carried out manually (unlike most airlines, including its parent Air India, which use computerized systems). Training of pilots is carried out on Jet Airways’ simulator as AI Express simulator remains unserviceable most of the time.”  This is a bad situation to be in for any airline.

Other airlines have been having similar issues as well. Jet Airways, JetLite, IndiGo, SpiceJet, IndiGo, Air India Regional, and GoAir all were found to be experiencing “financial difficulties” and “growing pains” in their operations. Crew shortages, poor quality training programs for pilots and cabin crew, and a lack of important software that can improve safety were found in some of these airlines, among other problems.

Any safety issues are always extremely worrying. However, despite all these concerns, the airlines of India are still some of the safest in the world. The fact that the regulator is being vigilant enough to ensure that these problems don’t become too severe is an extremely good sign.

Tune in tomorrow for a closer analysis of Kingfisher Airlines’ financial problems.