Nov 7, 2008

Business - India;KF - Jet,Precursor to a merger?

Anjuli Bhargava

Although the US election has distracted me beyond reason for the last two weeks, I have been pondering over what possibly would make Vijay Mallya, chairman of Kingfisher Airlines and Naresh Goyal, chairman of Jet Airways — who till a few months ago could not see eye to eye on many matters — come together in this unusual alliance announced last month. And it struck me that while Jet is undoubtedly going through a low phase, Kingfisher is in more trouble that it would appear.

Consider some of the facts. When Mallya bought Deccan last June, the airline was losing roughly Rs 1.5 crore a day. It enjoyed a market share of around 22 per cent and had high load factors of around 70-75 per cent. Kingfisher walked in, changed the colours, the look and the feel and the model (value-carrier instead of no-frills airline). It cut the number of flights, the destinations flown to and raised fares. But in the process, the airline’s market share snowdived to just around 10 per cent, its loads fell to the lowest in the industry (around 39 per cent) and its losses have doubled to Rs 3 crore a day. If there is some method in this madness, it’s not very apparent.

While Deccan’s fortunes have failed to improve, Kingfisher’s have declined. Its first-half loss is Rs 1,081 crore. Even if this is halved in the second half of the year, the full year’s loss could easily be Rs 1,500 crore. Add Deccan’s loss to this, and the figure gets more daunting.

It’s well known that Kingfisher was refused a second loan by ICICI recently. A former board member of Jet Airways based in Mumbai says that ICICI’s bosses are in no mood to dole out further loans to the airlines and are — with the current environment — quite keen to see some of it returned. Raising money for Kingfisher (it has been trying to raise around $400 million for a while now) has proved harder than anticipated. That investment from somewhere would be very welcome was very evident when Mallya even tried to ask the government to reconsider its policy on foreign airline investment so that Indian carriers could strengthen their balance sheets backed by foreign partners.

Jet’s announcement of its plans to sack employees and the events this triggered off have resulted in several skeletons falling out of the cupboards of both these airlines. Kingfisher owes over Rs 200 crore to the Airports Authority of India. We don’t know what the numbers are but money is also owed to the private airport developers. Dues to oil companies are close to Rs 1,000 crore.

Although earlier this year, Mallya managed to achieve his long-cherished dream of going international, the decision is proving to be less than wise. On the best of days, the Bangalore-London route is seeing very low load factors (30-40 per cent) and the front of the aircraft is practically empty.

Even before it officially began flying to the US, Kingfisher decided against this (the US offices are to be closed). According to one of the airline’s board members, the airline has staff and offices in Hong Kong, Singapore and London besides the US which may also have to go. Of the airline’s five A340-500s, three have already been leased out and two more are likely to be sent back or leased out. The Economic Times earlier this week claimed that the airline had defaulted on some of its lease payments.

In other words, Kingfisher’s flight has been less than smooth. Company insiders and indeed a couple of Kingfisher board members have told me that the extent of trouble is evident for the first time in their otherwise flamboyant and cool boss’s “body language”. He appears, they say, tense.

To be fair to Mallya, things may have been different had oil prices remained reasonable. If, for instance, his international plans had taken off, the profits may even have subsidised some of his losses on the domestic sector. But his gamble to expand at the time he did has proved more costly than even he could afford.

While Kingfisher appears to be in fair amount of trouble on its own, analysts are wary that a merger between the two biggies (Jet and Kingfisher), if it happens, may spell further trouble. As one airline expert in Mumbai pointed out, the two airlines will have accumulated losses of Rs 5,000 crore, will owe the oil companies close to Rs 2,000 crore, will jointly owe ICICI and other banks at least Rs 3,000 crore and have further dues to AAI and other private developers. “Well, happy merging to them”, was his acid conclusion.

Moreover, any company that may arise out of such a merger would be a challenge to run as it would essentially be incorporating four companies, four different business models and four brands under one roof — an unholy mix of Jet (a professionally run full-service airline), Kingfisher (a less-than professionally run full-service airline), an erstwhile Sahara and an erstwhile Deccan (now both value carriers, a breed practically unique to India). The complexity is inevitable in view of the fact that neither Jet nor Kingfisher has fully come to terms with the entities they merged with. While no one knows for certain that a merger will happen, the rumour mill has been working overtime since both airlines appear to be speaking with one voice. Both are returning planes, re-examining overseas plans and are looking to prune staff and wage bills.

Moreover, both airlines will, in the coming months, align their flight timings, schedules, frequencies and even frequent flier programmes and attempt to save the Rs 1,500 crore they announced they will save through the alliance. If that’s not a precursor to a merger, what is ?

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