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Hard times for Vijay Mallya's Kingfisher Airlines

The move is in stark contrast to what its chief competitor Jet Airways intends on doing - it plans to increase domestic low-fare capacity to 80-85 per cent of its total fleet.

Geetanjali Shukla | September 30, 2011 | Updated 10:05 IST

Geetanjali Shukla
Even as low-cost carriers control nearly half - 45.5 per cent - of the aviation market in India, Kingfisher Airlines has decided to end its low-cost flights in the next four months. The announcement was made by the airline's chairman, Vijay Mallya, at the annual shareholders' meeting.

The move is in stark contrast to what its chief competitor Jet Airways intends on doing. India's largest carrier by market share, Jet, said it plans to increase domestic low-fare capacity to 80-85 per cent of its total fleet from the present 72 per cent.  

Building the case for its move to discontinue low-cost services, Kingfisher Airlines said average load factors for its first class service, Kingfisher First, stand at 50 per cent. It also claims that Kingfisher Class, its economy service, has generated higher yields and posted better load factors than its low-cost service.

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So, by converting Kingfisher Red's single-class aircraft into a dual-class service - consisting of both first- and economy-class seats - the airline hopes to better its revenues.

Analysts say Kingfisher's cost structure is too high for it to contest with the low-cost carriers and offer tickets at competitive rates, and hence the airline is looking to exit Kingfisher Red.

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The Vijay Mallya-owned carrier, which started off as a full-service carrier in 2005, entered the low-cost business in 2008 when it acquired India's first low-cost airline Air Deccan.

Puzzling as the airline's latest move may seem, there is no denying Kingfisher's earnestness to improve its revenues. It reported a net loss of Rs 1,027 crore for the financial year 2010-11, against a net loss of Rs 1,647 crore in 2009-10. The airline's debt stands at roughly Rs 6,000 crore.

In other moves to address its financial situation, the airline's board in late August approved a rights issue of shares to raise up to Rs 2,000 crore.

Earlier this year, Kingfisher also cut its debt through a restructuring by issuing shares to 14 banks, including State Bank of India and ICICI Bank. According to the plan, a consortium of 13 banks converted a Rs 750 crore loan into 23.37 per cent equity in the airline, valuing its shares at a nearly 62 per cent  premium over the prevailing market price.

The airline is also working with a consortium of banks to further reduce interest costs and raise working capital. It also plans to convert part of its rupee loans into low-cost foreign currency loans.

There are also plans to cut unprofitable routes. Sale and lease back of more aircraft - the most adopted route by Indian airlines these days - to infuse additional funds into the airline, is also being considered for more aircraft.

However, despite the baffling move to exit the low-cost business, these other measures and Vijay Mallya's statement that he has "personally stepped in to provide a third level of comfort to the lenders who have been extremely supportive of Kingfisher", recovery remains a daunting if not impossible task for the airline.

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