Kingfisher
Content
Problems with Kingfisher airlines:
The six months between April and September 2011 were disastrous for all airlines in India because of a steep rise in crude prices. Oil prices went from around $88 a barrel in January 2011 to almost $115 in April, a massive 25 % increase in just three months. Fuel costs add up to 40 % of the variable costs of airlines. Oil prices hovered around the $100 mark until September when they came down to $80 a barrel. In November, the price again went up to $100. The rise in the price of fuel was worsened by a fall in the rupee, which has declined by 11% against the dollar. Kingfisher Airlines has losses of Rs.732 crore between April and September. Jet Airways lost more-Rs.836 crore. Yet, it is Kingfisher which is gasping for air, not Jet. Why? The main reason behind this misfortune is that unlike other airlines, which have had ups and downs, Kingfisher has never recorded a profit since it began operations in 2005. In 2010-11, when crude prices were moderate and the rupee strong, Kingfisher recorded losses of Rs.1,027 crore. Kingfisher may be a victim of its business model which focuses on the upperend flier. The slowdown of 2008-2009 decimated the high-end market. There is evidence that price matters most to the Indian consumer. But Vijay Mallya is determined to stick to his model. In September, he announced closure of Kingfisher Red, the low-cost arm which emerged after his takeover of Air Deccan in 2007-08. The rest of the Indian aviation industry seems headed in the opposite direction. IndiGo and SpiceJet have done well as low-cost carriers. Jet now runs more than half its services under the low-cost brand it started in 2009, Jet Konnect. Kingfisher's debts add to its already high costs-its interest expense to net sales ratio in July-September was 21 %. Unfortunately, it may have the wrong business model. The initial problems led to further worries for kingfisher, unable to meet up the fuel costs & taxes, Kingfisher airlines started cancelling their flights. This had an impact on their cash-flow as they were not able to pump in cash for operating working capital needs. This is continuing their worries to pay taxes & fund the cost of fuels to start operations. Another problem that arose due to lack of cash was payment of salaries to its employees, which in-turn has agitated them to go on strike.
Government’s Role YES
There is this mistaken notion that since the airline industry is largely in private hands, the government has no responsibility any longer towards its development and upkeep. Airline travel has become a much more pleasant experience than in the days when Indian Airlines was the only airline available; with tickets available on demand (most of the time), ticket prices coming down (apart from temporary spikes) and airline service standards becoming much better. All this has helped people move around easily across the country – helping business growth in the process. The aviation industry is a key player in any country’s economic growth story. Why would the government hesitate to help it? To be sure, it is the government’s job to help every ailing sector. When times change, and entire sectors of the economy get into trouble, it is the government’s job to intervene and make policy changes that help in reviving the sector. That’s what happens in even the most capitalistic of all countries. In the past also, the government had given excise duty cuts and other similar concessions to reduce the impact on the Indian economy. Why then should the Indian thinking be any different now? Why should the government feel guilty of helping this crucial segment of the economy In the 21st century, governments of all countries have to be pro-industry. When industry segments get into trouble, it is but obvious that they must provide relief We are not talking of bailing out one airline alone. Much of the recent debate has been on Kingfisher, but the problems that Kingfisher faces are the same as those faced by all others. If the Government does not bail out an Indian company (Kingfisher Airlines) this may leave a negative impact of Indian economy in international market, foreign MNC/ potential companies that would like to invest in Indian markets may hesitate to do so. There may be fear that if the Govt. is not able to bail out a home company, they might not receive any help in crunch situation.
The six months between April and September 2011 were disastrous for all airlines in India because of a steep rise in crude prices. Oil prices went from around $88 a barrel in January 2011 to almost $115 in April, a massive 25 % increase in just three months. Fuel costs add up to 40 % of the variable costs of airlines. Oil prices hovered around the $100 mark until September when they came down to $80 a barrel. In November, the price again went up to $100. The rise in the price of fuel was worsened by a fall in the rupee, which has declined by 11% against the dollar. Kingfisher Airlines has losses of Rs.732 crore between April and September. Jet Airways lost more-Rs.836 crore. Yet, it is Kingfisher which is gasping for air, not Jet. Why? The main reason behind this misfortune is that unlike other airlines, which have had ups and downs, Kingfisher has never recorded a profit since it began operations in 2005. In 2010-11, when crude prices were moderate and the rupee strong, Kingfisher recorded losses of Rs.1,027 crore. Kingfisher may be a victim of its business model which focuses on the upperend flier. The slowdown of 2008-2009 decimated the high-end market. There is evidence that price matters most to the Indian consumer. But Vijay Mallya is determined to stick to his model. In September, he announced closure of Kingfisher Red, the low-cost arm which emerged after his takeover of Air Deccan in 2007-08. The rest of the Indian aviation industry seems headed in the opposite direction. IndiGo and SpiceJet have done well as low-cost carriers. Jet now runs more than half its services under the low-cost brand it started in 2009, Jet Konnect. Kingfisher's debts add to its already high costs-its interest expense to net sales ratio in July-September was 21 %. Unfortunately, it may have the wrong business model. The initial problems led to further worries for kingfisher, unable to meet up the fuel costs & taxes, Kingfisher airlines started cancelling their flights. This had an impact on their cash-flow as they were not able to pump in cash for operating working capital needs. This is continuing their worries to pay taxes & fund the cost of fuels to start operations. Another problem that arose due to lack of cash was payment of salaries to its employees, which in-turn has agitated them to go on strike.
Government’s Role YES
There is this mistaken notion that since the airline industry is largely in private hands, the government has no responsibility any longer towards its development and upkeep. Airline travel has become a much more pleasant experience than in the days when Indian Airlines was the only airline available; with tickets available on demand (most of the time), ticket prices coming down (apart from temporary spikes) and airline service standards becoming much better. All this has helped people move around easily across the country – helping business growth in the process. The aviation industry is a key player in any country’s economic growth story. Why would the government hesitate to help it? To be sure, it is the government’s job to help every ailing sector. When times change, and entire sectors of the economy get into trouble, it is the government’s job to intervene and make policy changes that help in reviving the sector. That’s what happens in even the most capitalistic of all countries. In the past also, the government had given excise duty cuts and other similar concessions to reduce the impact on the Indian economy. Why then should the Indian thinking be any different now? Why should the government feel guilty of helping this crucial segment of the economy In the 21st century, governments of all countries have to be pro-industry. When industry segments get into trouble, it is but obvious that they must provide relief We are not talking of bailing out one airline alone. Much of the recent debate has been on Kingfisher, but the problems that Kingfisher faces are the same as those faced by all others. If the Government does not bail out an Indian company (Kingfisher Airlines) this may leave a negative impact of Indian economy in international market, foreign MNC/ potential companies that would like to invest in Indian markets may hesitate to do so. There may be fear that if the Govt. is not able to bail out a home company, they might not receive any help in crunch situation.
