While its strategy to focus on the high-margin segment could pay off, the challenge is to sustain topline growth and cut debt levels sharply.
The Kingfisher Airlines (KFA) scrip fell to its 52-week low on Monday after state-owned oil companies raised aviation turbine fuel (ATF) prices by 1.5 per cent. This is the second rise in ATF prices over the last month taking the overall increase to four per cent during the period. News flow about the qualification of its auditors in the FY11 annual report was also responsible for the weakness in the stock. The management, however, defended by clarifying that the lenders have independently assessed the company and believe the airline to be viable as a going concern.
Over the past one year, the stock is down 72 per cent due to rising debt, higher fuel and interest costs and competitive pressures. To improve its profitability, the company recently outlined a strategy to exit the low-cost carrier segment, cut costs further and repay debt. While rising fuel costs and rupee depreciation are major worries, analysts believe price undercutting is denting profitability.
| FUEL BLOW | ||
| in Rs crore | Kingfisher | Jet Airways |
| Revenues | 1,911 | 3,582 |
| % change y-o-y | 15.0 | 18.5 |
| Fuel expenses | 845 | 1,563 |
| % change y-o-y | 44.0 | 57.0 |
| Ebidta | 5 | 162 |
| % change y-o-y | -95.0 | -65.0 |
| Loss | 264 | 123 |
| All figures for June 2011 quarter Source: Companies | ||
Going ahead, competitive pressures may ease in the short term, both on account of the busy season and Air India increasing fares. Jasdeep Walia of Kotak Securities says with the October-December quarter being the strongest three-month period, yields are expected to show significant improvement quarter on quarter, which could reverse the trend of sustained losses over the past few quarters. While this will come as a respite for KFA, its bigger challenge will be to maintain growth after the change in strategy and pruning debt.
GOING FULL SERVICE: WILL IT WORK?
KFA Chairman Vijay Mallya announced last week the company was not intending to compete in the low-cost segment and instead focus on the full-service business which has higher margins and yields. KFA is planning to reconfigure its seat structure to accommodate more economy-class seats, which are expected to increase the seat capacity by 10 per cent. With lower competition at the premium end, it is likely to help the carrier differentiate itself from others, say analysts. Sharan Lillaney of Angel Broking says the move could help Kingfisher position itself as a niche player, given that the only other private player, Jet Airways, is going the low-cost way. Jet Airways has been using its Konnect service as a “swing” product, which gives the company the flexibility to switch between full service to Konnect and vice versa, according to market requirements.
However, the sector dynamics show a favourable scenario for the low-cost segment. Low-cost carriers are expected to post 18 per cent growth annually as compared to 13 per cent growth for full-service players during FY10-13, says a Citigroup report. Thanks to their rapid growth, low-cost players have grabbed market share from their bigger rivals. Over the last five years, they have more than doubled market share to 45 per cent as of August 2011. In this light, it will be interesting to see how successful KFA will be in its new strategy.
TACKLING DEBT WILL NOT BE EASY
After the debt recast, the company now has a debt of Rs 6,000 crore, which is its biggest headache. To reduce debt and the interest burden (Rs 1,300 crore in FY11), the company is looking at sale and lease back of aircraft and convert rupee loans into low-cost forex loans.
Analysts say the company may look at shedding some of its real estate and its 67 aircraft fleet. KFA is looking to raise Rs 2,000 crore from the rights as well as $250 million from a GDR issue to pay down part of its debt. However, given that the market is valuing the company at Rs 1,000 crore, the capital raising plans will mean a massive dilution in equity unless KFA is able to rope in a private equity or strategic investor at a significant premium to the current share price of Rs 20.10.
DEMAND, A CRUCIAL RFACTOR
The key factor that is likely to help the airline and the sector as a whole is robust demand. Directorate General of Civil Aviation figures show passenger traffic during January to August this year were 18.6 per cent higher than the year-ago period; August sales were up nearly 20 per cent annually. However, higher capacity continues to plague the sector. With the exception of July, supply has exceeded demand for the first five months of FY12. This along with monsoon rains and the end of a busy season has translated into lower load factors for all airlines; KFA’s load factor in August was 75.9 per cent as compared to 79.8 per cent in July.
However, Citigroup’s Jamshed Dadabhoy and Arvind Sharma say the demand-supply gap in the sector is stabilising and rule out a dramatic expansion of capacity given the stretched balance sheets of the key players. According to Citigroup analysts, the best time for investment in aviation scrips is when crude oil prices fall to $80-$90 per barrel. Crude oil prices are currently at a $100 to the barrel.
