Kingfisher Airlines : Flying Into Bad Times?

Barely four months into 2009 and Kingfisher Airlines appears to have hit turbulence. Mid-April, reports in the media point to a sudden exodus of Airbus Commanders from the airline. In just one week, as many as 26 are reported to have deserted their flamboyant employer and are believed to be headed for the Middle East. Despite the global economic downturn and clear signs of the Middle East economy slowing down, Qatar Airways is in the expansion mode and is prepared to offer as compensation a hefty tax free package to pilots qualified and experienced on Airbus family of aircraft. But the lure of money is perhaps unlikely to be the only provocation for this unusual and sudden migration of experienced pilots, some of whom are believed to be exploring opportunities to fly with any of the low cost airlines in the India.

Conferred Five Star Airline Status by the UK-based consultancy Skytrax for delivering the highest standards of customer service, Kingfisher Airlines was launched in May 2005 with great fanfare. The airline ushered in a refreshing five-star culture in domestic air travel that was laced with innovative features to provide the customer—referred to as guest by the airline—excellent value for money and the unforgettable Kingfisher Experience. On account of a powerful image projection blitz with its catchy slogan Fly the Good Times, very soon Kingfisher became the airline of choice for the sophisticated and choosey segment of society. Not before long, Kingfisher Airlines emerged the acknowledged market leader in the industry.

The airline inducted a fleet of brand new aircraft of the Airbus 320 family, Airbus 330, ATR 72 and placed orders for more in accordance with their long term plans for expansion. Kingfisher was the first airline in India that had, and perhaps still has, plans to induct the giant Airbus 380 due for delivery in 2012. The airline was staffed and in some areas overstaffed with the best available in the market. Employees spoke with immense pride about the airline and appeared to be happily revelling in the glamorous world of Kingfisher. The airline even bought over Deccan in the middle of 2007 with the triple objective of killing competition, enlarging operational network and commencing services on international routes in August 2008 using Deccan’s operating licence. The aim was to beat the other Indian carriers of Kingfisher’s vintage.

Dreams Hit Wall of Dues
By the end of 2007, hopes of breaking even after three years of operation began to fade. Under the dual onslaught of skyrocketing prices of Aviation Turbine Fuel (ATF) and declining load factor owing to global economic downturn that had the inevitable impact on the Indian economy, the year 2008 proved to be a nightmare not only for Kingfisher but the airline industry as a whole. Both these factors played havoc with the balance sheet of the airline which was perpetually in a state of imbalance since inception on account of extended operation of the airline at a high threshold of input costs.

Between April and September of 2008, Kingfisher reported a loss of Rs 641 crore. In the last quarter of 2008, that is, October to December 2008, finances of the airline were down by another Rs 626 crore. Bills started to pile up of substantial sums owed to the various agencies, such as oil firms for ATF already drawn, five star hotels utilised by crew, simulator training conducted at establishments abroad, local transport companies for services provided and Airport Authority of India in respect of the various charges. All together the cumulative arrears were reported to be over Rs 1,000 crore. Financial woes of the airline were compounded by the fact it was unable to obtain fuel and other services on credit till such time the dues were cleared.

While lower prices of ATF provided some relief, to redeem the grievous state, the airline set in motion a number of emergency measures to reign in expenditure. These included trimming capacity through withdrawal or reduction in the number of flights on unprofitable routes; shelving of expansion plans; deferment of delivery schedules of new Airbus 320 class aircraft; lease or sale of aircraft already with the airline rendered surplus; modification of orders for the long-haul A340-500 aircraft and the smaller A333-200s; strategic operational alliance with Jet Airways to pool resources and optimise capacity utilisation; review and rescheduling of some international routes, notably to the US, and so on. The airline was in desperate need for funding and was lobbying with the government for investment by foreign airlines, which was not permitted under the existing regulations.

Unfortunately, even the latest regulations put in place by the government a month ago have dashed hopes of domestic airlines seeking foreign airline equity. The new regulations pertain to investments and operations of scheduled airlines which set a minimum paid up capital of Rs 50 crore with five large aircraft. For regional carriers, the entry barriers are lower at a minimum equity of Rs 20 crore and five aircraft. The regulations permit foreign equity up to 49 per cent and NRI investment up to 100 per cent but continue to prohibit investment by foreign carriers.

Pilots Bear the Brunt
For Kingfisher, the situation worsened through 2008 as the economy continued the downslide. Following year, it became precarious and presented a serious threat to the survival of the airline. The situation called for further urgent action. Attention then turned to trimming cost of human resource, especially pilots, which accounts for a substantial portion of operating cost and is invariably a sensitive issue. In fact, the exercise had begun in a discrete manner in September 2008 when some 300 low ranking employees were laid off. In the following month, salaries of a small group of 50 trainee pilots recruited as First Officers, was reduced drastically to a paltry stipend. At that time, Commanders and other senior pilots were spared. Vulnerable, the trainee pilots were really not in a position to resist this take it or leave it disposal by the airline management.