Kingfisher Airlines' decision to terminate its low-cost carrier operations is aimed at increasing its attention on the full-services model, which has relatively lesser competition. However, the move seems unviable since it will not only impact Kingfisher's market share and financial performance in the coming quarters but also increase prominence of low-cost rivals including Spice-Jet and Indigo in the domestic aviation industry.
After taking over Deccan Air's low cost-carrier operations in late 2007, Kingfisher has struggled hard to keep pace with other low-cost operators. This might have prompted Kingfisher to exit the segment. The decision, however, is likely to cause more harm than good given price-conscious Indian travellers.
The data from Directorate General of Civil Aviation (DGCA) shows that more passengers have chosen to fly by low-cost carriers over the past two years. In 2009, low-cost carriers accounted for 39% of total airline passenger traffic. The share bulged to 50% in the seven months to July 2011.
AKANKSHA ARORA
PGDM 3 SEM
Against this backdrop, an exit from the basic carrier model means that Kingfisher will find it difficult to outgrow its rivals in terms of passenger base, impacting its revenue and profits. In addition, the void created by Kingfisher's exit will prove beneficial to SpiceJet and Indigo, which have reported a strong traction over the past two years.
The decision also looks untimely given Kingfisher's rising debt. The recent debt restructuring has brought down its debt-equity ratio to 1.6 as of March 2011 from 17.6 a year ago. But, its interest expense as a percentage of net sales is still higher than its peer Jet Airways India.
In the June 2011 quarter, the company's interest relative to net sales was 16%, much higher than 6% for Jet Airways. Another worry is the deteriorating financial condition of its parent, United Breweries which has been unable to generate cash from operations in each of the last four years.
UBHL's loan has nearly doubled to Rs 11,186 crore in the three years ended FY11. This could be a major concern if UBHL has to revoke loan guarantees worth a whopping .`16,852 crore given to Kingfisher. Kingfisher is looking for avenues to raise funds.
After taking over Deccan Air's low cost-carrier operations in late 2007, Kingfisher has struggled hard to keep pace with other low-cost operators. This might have prompted Kingfisher to exit the segment. The decision, however, is likely to cause more harm than good given price-conscious Indian travellers.
The data from Directorate General of Civil Aviation (DGCA) shows that more passengers have chosen to fly by low-cost carriers over the past two years. In 2009, low-cost carriers accounted for 39% of total airline passenger traffic. The share bulged to 50% in the seven months to July 2011.
AKANKSHA ARORA
PGDM 3 SEM
Against this backdrop, an exit from the basic carrier model means that Kingfisher will find it difficult to outgrow its rivals in terms of passenger base, impacting its revenue and profits. In addition, the void created by Kingfisher's exit will prove beneficial to SpiceJet and Indigo, which have reported a strong traction over the past two years.
The decision also looks untimely given Kingfisher's rising debt. The recent debt restructuring has brought down its debt-equity ratio to 1.6 as of March 2011 from 17.6 a year ago. But, its interest expense as a percentage of net sales is still higher than its peer Jet Airways India.
In the June 2011 quarter, the company's interest relative to net sales was 16%, much higher than 6% for Jet Airways. Another worry is the deteriorating financial condition of its parent, United Breweries which has been unable to generate cash from operations in each of the last four years.
UBHL's loan has nearly doubled to Rs 11,186 crore in the three years ended FY11. This could be a major concern if UBHL has to revoke loan guarantees worth a whopping .`16,852 crore given to Kingfisher. Kingfisher is looking for avenues to raise funds.
PGDM 3 SEM
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