Reuters) - India's Kingfisher Airlines plans to exit its low cost business and focus on the premium model, Chairman Vijay Mallya said, in what will be a marked shift in an industry where most carriers are betting on the low-cost space.
Kingfisher, run by the flamboyant Mallya who also heads the UB group, operates the low cost arm under Kingfisher Red.
"We are doing away with Kingfisher Red because we do not wish to compete in the low cost segment," Mallya told reporters on the sidelines of Kingfisher's annual general meeting.
"We believe that there are more than enough guests who prefer to travel the full service Kingfisher class and that shows through in our own performance where load factors in the Kingfisher class are more than Kingfisher Red".
Indian airlines have aggressive growth plans, with orders worth $50 billion in the pipeline to Boeing and Airbus as growing economy spurs business travel and low-cost carriers make air travel affordable for a growing middle class.
But cut-throat competition and rising costs, including for fuel, means most big Indian carriers are loss-making, with state-owned Air India operating on government life support.
"The margins of Kingfisher class are higher than Kingfisher Red. That's because the yields are better," Mallya said.
Kingfisher's move marks a departure from the current trend in Indian aviation which has seen full service carriers such as Jet Airways increasing its low cost operations.
Jet, India's largest carrier by market share, had said last month that it aims to increase domestic low-fare capacity to 80-85 percent of the total fleet from present 72 percent..
Kingfisher is working with a consortium of banks to further reduce interest costs and raise working capital as the carrier looks to restructure its fleet by selling and leasing back some of its aircraft to lower debt, Mallya said.
"The high cost of ATF (aviation turbine fuel) coupled with a weakening rupee is the biggest challenge that the whole aviation industry in India is currently dealing with and we are no exception," Mallya said in his speech at shareholders' meeting.
Shares of Kingfisher Airlines have lost about 63 percent in value in a year, with the company suffering losses on high oil prices and intense domestic competition.
The airline's auditors had said in the company's annual report for the fiscal year that ended March 31, that it needs capital infusion to remain viable.
The auditors B.K. Ramadhyani & Co also noted, that the airline's financial statements had "been prepared on a going concern basis, notwithstanding the fact that its net worth is completely eroded."
The airline continues to work aggressively to raise fresh capital, Mallya said, admitting it would not be an easy task.
The airline also plans to convert part of its rupee loans into low-cost forex loans based on existing cash flows, he said.
The airline, which operates 370 flights every day, expects to increase its capacity by 10 percent by reconfiguring its aircraft which will significantly improve revenues, he said.
Kingfisher had planned to raise $250-$350 million through an issue of global depositary receipts in January, but no deal has been forthcoming.
The company also tried to bring in private equity investment in 2008 and 2009, but was not successful.
In late August, Kingfisher said its board approved a rights issue of shares to raise up to 20 billion rupees.
The airline has not reported profit since going public in 2008 through an acquisition. It has posted cumulative losses since then of 42.83 billion rupees.
Earlier this year, Kingfisher cut its debt through a restructuring by issuing shares to 14 banks. Now, the banks including State Bank of India and ICICI Bank together own 29 percent of Kingfisher.
This exercise converted almost 13 billion rupees of loans into equity and its debt now stands at about 60 billion rupees.
Funds worth 7.45 billion rupees, infused by founders, were also converted into share capital, Mallya said.
At 3:02 p.m. (0932 GMT), shares of Kingfisher Airlines, were trading at 24.7 rupees, down 1.79 percent in a weak Mumbai market.