Kingfisher Airlines: Facing Turbulence

The debt-ridden Kingfisher Airlines (KFA) has run into fresh controversy yet again, as it had to ground more than half of its fleet on Monday, 20th February, 2012. The company blamed the Income Tax Department’s move of freezing its bank accounts over non-payment of tax dues for the cancellation of its operations. Consequently, the Chief Executive Officer (CEO), Sanjay Aggarwal, was summoned by the Director General of Civil Aviation (DGCA), who directed the company to submit concrete flight schedules within 24 hours and put an end to the passengers’ misery.

In reply to the DGCA, the estranged airliner has submitted a revised flight schedule plan, announcing a sharp drop in operations from 64 flights to just 28 flights. Also, SBI, which is one of KFA’s lenders, has refused to comment on media reports that suggested that the airline was to receive fund infusion from SBI towards bank guarantees and working capital sanctions.

For long, the beleaguered airliner’s shares have massively underperformed on the bourses and they have lost more than 60 per cent of their value over the past two years, bleeding investors of their hard-earned money. In the aftermath of yet another quarter of widening net losses, investors would be wondering what to do with the scrip now. Some would ponder over the idea of bottom fishing into this stock and back their call with the possibility of capital infusion by the company’s bankers, FDI in the aviation sector and the government’s plan to allow the direct import of jet fuel.

Our advice, however, is a clear ‘STAY AWAY’. Despite all efforts taken by the government, bankers or the company itself, it’s time one starts counting the clock over when the curtains would fall and put an end to KFA’s fate.[PAGE BREAK]

The chief reason for such a strong ‘avoid’ call on the stock stems from its business. With more than half of its fleet grounded and a shortage of pilots and other staff to operate the remaining aircrafts, KFA would face serious trouble in generating revenues going forward. Even if the company were able to restart its operations, it would be a daunting task to retain pilots with training and expertise. Moreover, as KFA operates in the service industry, where brand equity plays a key role, it may take the company a long time to recover from the beating that its brand has taken in the recent past.

While many believe that the government’s recent attempts to help the cash strapped aviation sector by ordering a string of reforms like allowing FDI would prove beneficial for KFA, we, at DSIJ, would beg to differ. In a general sense, an investor would broadly analyse three parameters while investing in any airline company – viz. its assets, manpower and brand equity.

While we have already discussed KFA’s manpower woes, the sorry state of its financial assets also throws up some alarming signs. Mowed down by the huge debt of Rs 7000 crore on its balance sheet, the company has merely Rs 1300 crore in net block (aircrafts and helicopters) as on 31st March, 2011, which clearly indicates that it will not be able to pay off its debts even if it were to sell its physical revenue generating assets.

Brand equity, which plays a major role in the airline industry, would also fail to attract the fancy of foreign investors. This is because the brand name ‘Kingfisher’ belongs to its holding company, UB Group, which markets various other products under the same brand name that enjoy greater user recognition.

On the valuations front, we believe that at a market capitalisation of Rs 1341 crore, KFA is very expensive compared to SpiceJet, which is trading at a market capitalisation of Rs 1130 crore. We advise investors to stay away from KFA, as the company would continue to underperform on the bourses. For investors who wish to invest in the aviation sector, it would be more advisable to shift to Jet Airways or SpiceJet, as these two companies will greatly benefit from the cancellation of operations of KFA.