The trigger — to the raging debate over one of India’s leading private carriers — went off on the night of February 17 when word spread like wildfire that something was amiss at Kingfisher’s Kolkata station. As it turned out, the airline’s staff had gone on a flash strike, protesting against non-payment of salaries.

Earlier that week, the income tax department had frozen the airline’s bank accounts for non-payment of tax deduction at source (TDS). By the evening of February 18, the problem had become serious enough for the airline to issue a statement. But it was too late.

A massive disruption of flight operations had begun. The airline staff had even stopped making direct bookings for metro destinations such as Kolkata and Hyderabad.

But what led to the latest edition of the trouble that has plagued Kingfisher? After all, just three months ago, Kingfisher flyers had witnessed similar disruptions. A look at the statistics reveals why. Kingfisher has notched up a debt of over Rs7,000 crore. Just recently, the airline reported a loss of `444 crore for the third quarter of the current financial year.

The airline was already struggling to make payments for the salaries of its employees, for aviation turbine fuel due to which state-owned oil firms were growing restive, and to various other government agencies.

The dues were mounting and Kingfisher was again hoping for a further bailout from the banks. A consortium of banks led by the largest public-sector State Bank of India (SBI)-that owned about 23 percent of the airline-already had substantial exposure.

But how did things come to such a pass for Kingfisher, that always had the image of a premium airline where the hospitality was king-size.

“Kingfisher got their strategy wrong. It targeted the upper-end of the market. In India, the public is not ready to pay for frills. They want a clean aircraft, air-safety, on-time performance and point-to-point connectivity. Kingfisher lost out since it thought it could capture the market by offering frills,” a prominent aviation analyst told this newspaper on condition of anonymity.

Most believe that Kingfisher’s troubles actually began a few years ago when it acquired low-cost carrier Air Deccan. The acquisition quickly turned into a nightmare when the recession of 2008 hit hard. Global oil prices started shooting up.

“For Kingfisher, it was a mish-mash of business models. Their’s was a flamboyance-based aviation model. Then they acquired a low-cost carrier like Air Deccan but did not leverage it,” the analyst added.

Former executive director of national carrier, Air India, Jitender Bhargava, feels that several wrong strategic decisions are responsible for Kingfisher’s financial woes. Describing acquisition of Air Deccan as one of the mistakes, he feels the poor business model pursued by Kingfisher is also responsible for the mess the airline finds itself in.

But Mr Bhargava, nevertheless, believes that there are deeper systemic flaws affecting all carriers which too are responsible.

“The business climate in India is just not conducive for profitability in airline business. High operational costs and below-cost level fares will inevitably result in losses.
Kingfisher, which has structured its business policy for the upper segment, should undertake a review because the Indian market is highly price-sensitive. Sustained losses over a long period is what has led Kingfisher into a debt trap,” he says.

Top Civil Aviation Ministry sources told this newspaper, “The main problem is that global oil prices have been shooting up. The airlines do not increase fares proportionally due to intense competition among themselves. The result is more losses. Then they need more working capital from the banks and this cycle never stops.”

Kingfisher, on its part, says that the airline industry as a whole is going through a rough patch. “The airline industry in India is going through a tough period due to high costs and lower yields. This is evident from the unprecedented losses recently reported. Kingfisher has not made any bailout request to the Government. We have only asked our banks for an increase in limits due to significant increase in operating costs caused by increase in fuel prices and rupee devaluation,” the airline had stated last year.

But just who will the market forces make the biggest beneficiary if Kingfisher shuts shop. Low-cost carrier IndiGo which is making profits is now viewed as the most successful airline with a sound business model.

Last year, it unveiled ambitious plans to hire scores of pilots and cabin crew.
Already, there are reports of an exodus from Kingfisher to IndiGo. “The success of the LCCs proves the price-sensitive nature of the Indian consumer. And that includes not just a common man from a tier-two or tier-three town but also the upper-end corporate traveller. We see this in sector after sector, aviation being no exception. The key to success in the hotly competitive airline market is a relentless focus on on-time performance (OTP), keeping the fleet young and safe, efficient service and right pricing,” says Amber Dubey, director (aviation) at global consultancy firm KPMG.

Many aviation analysts feel that IndiGo has got its business model right and that it had the “late mover advantage” in the market. Aviation analyst Kapil Kaul, CEO (South Asia) of the Centre for Asia-Pacific Aviation (CAPA), says the Kingfisher crisis 'reflects poorly on the government for failing to provide a strategic framework in terms of policy, regulatory and fiscal issues' and also 'reflects poorly on the airlines as well for building over-aggressive business plans without adequate capitalisation and preparation, having poor very risk management, under-estimating the impact of structural challenges and more important, operating continuously with below-cost pricing'.

While it is generally believed that the other airlines in the market will gleefully pick up Kingfisher’s market-share in due course, a rise in air-fares is also being looked upon as an obvious outcome.

“All airlines will gain. The average seat capacity utilisation of all airlines on domestic routes is currently 75 percent. If Kingfisher’s capacity share of over 20 per cent is discounted, there will be no surplus capacity left and flights will operate on full capacity on many sectors. In such a scenario, fares are bound to skyrocket making air travel unaffordable for many,” feels Mr. Bhargava.

But what is the road forward for Kingfisher or is it pretty much the end of the road? While many privately believe that it’s time Kingfisher chairman Vijay Mallya finds a buyer for the airline and exits the aviation business, there are others who feel there is some hope. Aviation-watchers say Kingfisher needs to sell equity.

In a recent media interview, Dr Mallya had indicated that there were three investors ready to pick up stake in the airsline but added that they were waiting for Government announcements on FDI to become policy.

Soon after civil aviation minister Ajit Singh took over office late last year, he moved swiftly to push in a series of reforms that are seen as long overdue. The government is now set to approve a 49 percent FDI limit for foreign airlines in Indian carriers.

Indian carriers will also now be able to import ATF directly from abroad and will therefore be able to avoid paying exorbitant sales tax on ATF to states.

Private carriers are also set to bag more slots to fly abroad. Kingfisher has welcomed the above initiatives. But it’s the proposed 49 percent FDI limit that is awaited with much anticipation. Speculation is rife about both European and Middle-Eastern carriers being interested in picking up stakes in Kingfisher.

As Mr Bhargava points out, there is still some hope for Kingfisher but the road ahead will not be easy. “A total and urgent overhaul is needed. Only infusion of more funds can ensure the revival. There has to be a sound and well-thought out business model as the airline cannot afford to go wrong again. Costs have also to be scaled down. There are too many things to be done. I sincerely hope Vijay Mallya can do it because Kingfisher has been a great brand in the Indian market”.