Monday, 29 October 2012

Kingfisher’s Wings Grounded



On October 6, the Director General of Civil Aviation (DGCA) in India asked Kingfisher Airlines Ltd. to stop selling tickets. The airline hasn’t paid its employees since March, leading its pilots, technicians and engineers to go on strike as of October 1st. The strike compromised the safety of the airline’s flights since the engineers are responsible for certifying the aircrafts before flight, warranting the DGCA to suspend the airline’s license.

Kingfisher and its employees were able to reach a compromise on October 25 regarding wage payment. Kingfisher agreed to pay four month’s wages by the end of the year, and the remaining three month’s wages by March 2013. The airline also announced that it would be fully operational within a month’s time, and its employees could resume work then. Sanjay Aggarwal, the airline’s CEO has said, “We expect to be in the sky soon and put forth our case to the Directorate General of Civil Aviation. We have addressed all the concerns of the employees. We are all together in this.”

Aggarwal may be a bit too optimistic. Since its launch in 2003, Kingfisher Airlines has never made a profit and currently finds itself strapped with a $2.5 billion debt according to the consultancy Centre for Asia Pacific Aviation. The airline had 66 planes operational at this time last year, and now only has 10. The airline’s owner, the liquor tycoon Vijay Mallya blames the government for his company’s woes, "Very high fuel costs, obscenely high taxation, lack of foreign investment permission, until literally six weeks ago - so many different factors which make the Indian aviation space actually somewhat unattractive other than the potential growth going forward," he explained. "The government needs to look at taxation very seriously. You can't have a 25 percent average sales tax on fuel when crude oil prices that used to hover around $60 or $70 a barrel are now well in excess of $100 a barrel."

Kingfisher has planned to meet with the 17 banks that have exposure in the airline in the coming days. The consortium is looking at a 1.1 billion dollar writeoff on Kingfisher’s loans—the biggest in Indian corporate history. State Bank of India, the leader of the consortium, has over 278 million dollars of exposure in the airline.

Kingfisher will have to regain its license from the DGCA in order to start flying again. It should proceed cautiously.  A delay in paying its workers’ wages could lead to another strike, and another license suspension. The DGCA will be less willing to reinstate the airline’s license a second time. Kingfisher should also tread carefully with its investors. With a plummeting stock, and no eager lenders on the horizon, the airline will have to be willing to work with the 17-bank consortium to get its wings confidently in flight.

Written by: Lynn Bernabei

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