Kingfisher Airlines: Survival hinges on improving yields, rights offer

While its cost and debt reduction plans are in the right direction, pricing will decide the air carrier’s fate.

Even as other aviation stocks slumped, pulled down by an increase in Aviation Turbine Fuel (ATF) prices, the Kingfisher Airlines (KFA) stock was up 14 per cent on Wednesday, after the company announced cost-cutting measures as well as plans to cut debt. The stock has had a volatile run in recent weeks on the back of a spate of flight cancellations and debt issues. The company, which faced losses to the tune of Rs 1,027 crore in 2010-11, has indicated that if the various changes (financial and operational) are implemented, it is likely to see profits before tax by the end of 2012-13.

While it is an uphill task, the sector’s second-largest player could also turn around, given that both Jet Airways and SpiceJet had reported full-year profits for 2010-11, feel analysts. Two areas will decide if it is successful. The first is pricing and the second the airline’s decision to move out of the low-fare segment. Rationalisation of domestic taxes and allowing Foreign direct investment (FDI) are wild cards for KFA and the industry, which could change their fortunes for the better.
 

HOBBLED BY FUEL COSTS
In Rs crore	Q2’ FY12	Q2’ FY11	% Change
Operating revenues	1,528	1,434	7.0
Fuel costs	817	480	70.0
Fuel as a % expenditure	49.4	39.7	973 bps

Ebidtar-23307– Ebitda-27155– Interest 333363-8.0 Loss-469-231

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% Change y-o-y, Ebidtar includes rentals                                   Source: Company

ATF COST RAISED, PRICING KEY
While the company has made plans to cut costs at both the operational and balance sheet levels, the key, according to analysts, is pricing. Angel Broking analyst Sharan Lillaney says: “Given the cost base, if ticket prices don’t go up, nobody will make money.” Higher ticket prices have become critical, especially after the oil marketing companies (who control the supply of aviation turbine fuel) raised prices by 2 per cent on November 15. These are up 6 per cent in the current month itself. Airline companies may increase prices to pass on the costs as the sector is in the midst of the peak season and yields had gone up for companies such as Jet Airways in October. HSBC analysts Mark Webb and Rajani Khetan, however, say these could be short-term gains. “While seasonality offers some support on yields (due to the current peak season), in the medium to long term, the fate of the industry will be decided by discipline, both in terms of capacity and pricing, of all players,” they said. While excess capacity is unlikely to be a problem due to the replacement of existing fleet for low-cost carriers, if Air India were to drop prices after the peak season (as it did in the March quarter), KFA could be looking at the wrong end of the barrel.

NO LOW-FARE AFFAIR
Given the crowding of players in the low-fare segment, KFAs’ move to operate a full-service airline is a good one. “If the company moves up the value chain, there are high chances of it turning around,” says Lillaney. Analysts say, given that there is little difference between the cost structures of low-fare and full-service airlines, any incremental gains from pricing the tickets higher for services would benefit Kingfisher Airlines. Currently, Jet Airways, with 50 per cent market share in the corporate segment, is benefiting from the problems at Air India as well as Kingfisher Airlines. This could change if KFA moves into full-service space and increases its share of the corporate segment.

MUTED QUARTER
Meanwhile, high fuel costs dented the company’s performance in the September quarter. In addition to this, passenger load factors also dropped 500 basis points year-on-year to 77 per cent in the September quarter. Pricing pressures and the lean season also meant the average gross revenue per passenger was down 4 per cent to Rs 3,885. If the carrier moves to full-service mode and increases the number of economy seats, the average revenue per passenger could move up to Rs 4,500. While the move into the full-service segment is a good one, the trend in ticket prices after the peak season is likely to decide the fate of Kingfisher.

In addition to the operational improvement involving reconfiguration of seats, lower discounts and reduction of lease rentals, which are expected to lead to savings of Rs 1,796 crore, the market will also be looking at the ability of the company to raise Rs 2,000 from a rights issue. This will mean a significant dilution in equity, given its current market capitalisation of Rs 1,244 crore.

If it is able to bring in the money, as do banks, it will mean lower debt and savings on interest costs. Additionally, the company has taken steps to reduce interest costs by Rs 394 crore a year. Last financial year, the company paid Rs 1,313 crore as interest costs and reported a loss of Rs 1,027 crore.