Kingfisher CEO appears before DGCA
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Corporate Feb 21, 2012

Yes, Kingfisher is sinking. But it’s not the only one

By Firstbiz Editors

Everyday, Kingfisher Airlines inches one step closer to going belly up.

On Monday, it was back in the news again for a series of daily flight cancellations and pilot exits. Travel agents have also stopped taking bookings for the airline as they and passengers grow wary of how long the airline can continue its rapidly shrinking operations.

The cash-strapped airline is struggling to even pay its staff's salaries, which has prompted up to 50 pilots to leave the airline in the past week alone. More than 300 pilots have reportedly left the airline in the past six months.

The airline is now flying just 16 of its 64 aircraft and a Mint report said that the airline plans to return some aircraft voluntarily to lessors as its leases have been terminated because of payment defaults. The list goes on.....

The current challenging operating environment makes no distinction between good and bad airlines. Everybody suffers under this regime. AFP

While it's easy to dismiss Kingfisher's woes on bad management and a bad business model (read Firstpost story here), the fact is the airline is not alone in its woes. All three listed airlines - Jet Airways, Kingfisher and SpiceJet - have been posting losses for the past few quarters. Kingfisher's troubles, however, have been the most dramatic.

The current challenging operating environment makes no distinction between good and bad airlines. Everybody suffers under this regime.

Indeed, after the travails of Kingfisher and Jet, the auditors of SpiceJet, (which used to be considered one of the 'good guys) warned recently that given the airline's accumulated losses of Rs 1,078 crore, the company's net worth, or shareholder equity, had been considerably eroded, "indicating the existence of a material uncertainty that may cast doubt about the company's ability to continue as a going concern."

Well, it's certainly not the only one. Almost every airline is crumbling under the pressure of high operating costs, fierce undercutting of tickets by rivals, and heavy debt loads.

As we all know, the high cost of jet fuel is one of the biggest problems for the sector. Jet fuel in India is among the most expensive in the world, thanks to sales tax imposed by various states, which ranges between 4 and 32 percent. It makes jet fuel the biggest expense item for airlines, accounting for about 50 percent of their operating costs. Despite the bleeding state of airlines, state governments remain adamant about holding on to these taxes.

The other problem, of course, is the financial basket-case that is Air India. Over the past year, the bleeding airline has been selling tickets below cost to gain market share, a strategy that pretty much killed everyone in the aviation business because they all had to follow suit.

On Monday, Aviation Minister Ajit Singh said that no single airline would be given a bailout (read Kingfisher Airlines), adding that the government had done its part to help the sector and that airlines must now do the needful.

Actually, Mr Singh is wrong. If he (or the government) really want to help the sector, there are two things that can still be done. They need to find a way to lower the cost of jet fuel (as this Firstpost story notes, direct fuel imports are not the way to go). And second, it needs to shut down Air India, which has done nothing but suck away crores of taxpayer money, while indulging in tactics like undercutting prices that have felled the entire sector.

The government (including states) certainly has room to do more; the question is, do they want to? After all, it's so much easier to blame Kingfisher's bad management for its problems. But the truth is, the government has also played a role in messing up a potentially vibrant sector. Singh himself admitted that the sector is in crisis: if nothing is done to rectify that, very soon, we might not have a single commercially viable airline (barring Indigo). In fact, we're practically there already.

Kapil Kaul, South Asia head of the Centre for Asia Pacific Aviation, recently described India's aviation industry like this: "We have a chronically loss-making industry and a seriously under-performing one. It's also severely undercapitalised and fundamentally unviable."

And it might not be viable for a long, long time.

by Firstbiz Editors

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