Kingfisher Shuts Down Low-Cost Operation

Kingfisher Airlines, India’s second-largest airline by passengers carried, will close its low-cost operation, Kingfisher Red, Chairman Vijay Mallya says.

“We are doing away with Kingfisher Red because we don’t intend to compete in the low-cost segment. We believe there are more than enough guests who prefer to travel full-service, and that shows in our own performance, where the load factors in [full-service] Kingfisher Class are more than in Kingfisher Red,” Mallya says.

Kingfisher’s decision signals a pronounced shift in an industry where most full-service carriers are betting on low-cost business. Jet Airways, the country’s largest carrier by market share, recently announced plans to increase its low-cost operations and low-fare flights to short-haul overseas destinations. It said last month that it aims to boost domestic low-fare capacity to 85% of the total fleet from the current 72%.

In addition to dropping its low-cost flying, Kingfisher is considering the sale and lease-back of some of its aircraft and other assets, and converting part of its rupee loan into low-cost foreign currency loans, based on its current foreign exchange cash flow, to improve finances, Mallya said in a letter to shareholders.

The cash-strapped airline will also raise about 20 billion rupees ($410 million) through a rights issue to improve its cash flow.

“Timing is everything. We’ll obviously take all factors into consideration before we launch the rights issue. You must also appreciate the fact that the pricing of the issue will also be a determining factor in how attractive it is. Sometimes, in a bad environment, a lower price becomes an attractive investment,” Mallya’s letter said.

Dismissing concerns about the carrier’s survival, Mallya said promoters of the ailing airline are committed to supporting the carrier and are working out measures to further reduce its debt burden.

“Kingfisher has been working and continues to work aggressively to raise fresh capital,” Mallya said. “As you would appreciate, in a volatile global economic environment and with oil prices as high as they have been, it is not an easy task.”

It has board approval to raise $250 million through global depository receipts, but the proposal was pushed back because of a debt restructuring by lenders earlier this year. Kingfisher issued shares to lenders and founders, helping cut debt by 22% to 60.07 billion rupees. The company issued shares to 14 banks, including State Bank of India and ICICI Bank, which now own 29% of the airline.

Mallya said Kingfisher is also working with the consortium of banks to further reduce its interest cost.

The airline has not reported a profit since going public in 2008 through an acquisition. Since then, it posted cumulative losses of 42.83 billion rupees.

In anticipation of leaving the low-cost market, the company has already started reconfiguring its aircraft. The changeover is planned to be completed in the next few months. The new cabin layout is expected to increase capacity by 10% and significantly improve revenues, Mallya said. The airline operates 370 flights a day.