Thursday, September 29, 2011

Markets write off Kingfisher Airlines​’ new strategy

Kingfisher Airlines Ltd’s decision to exit the low-fare segment is baffling, to say the least, especially at a time when the country’s largest airline, Jet Airways​ (India) Ltd, is expanding the proportion of low-fare flights. The markets, however, seem to have made up their minds on how this will affect the airline—Kingfisher Airlines’ share price fell by 7.5% on the National Stock Exchange, touching a new low in the process. At current prices, the company has a market value of only Rs. 1,137 crore, a fraction of the size of its revenue (Rs. 6,500 crore) and of its assets (Rs. 9,500 crore).

Currently, Kingfisher Airlines prices about 75% of its seats at “low-fare”, while the remaining are priced at relatively higher levels. This is similar to the model currently followed by Jet. But while Jet is reportedly looking at increasing the proportion of “low-fare” seats, Kingfisher has chosen the exact opposite path. It will now focus on its full-service carrier business, as “there are many guests who prefer to travel with full-service benefits”.

With the kind of mess Kingfisher Airlines is in with its debt, it perhaps makes sense for it to exit parts of its business. In the June quarter, it reported losses before tax and exceptional items of Rs. 388 crore, which worked out to a loss of Rs. 1,138 for every paying passenger it flew during the period. A year ago, it incurred losses at the rate of Rs. 920 for every paying passenger it flew. Of course, high interest burden had a lot to do with the losses. But it is evident from the above-mentioned numbers that flying fewer passengers could alleviate the company’s problems.

But this is not what Kingfisher plans to do by exiting the low-fare business. It will convert all its aircraft into full-service planes, and it actually expects its capacity to go up by 10% in a few months. Based on its current results, it appears that the losses will continue to mount. Kingfisher’s bet, however, seems to be that it will be able to extract better prices from customers. Of course, the pertinent question here is if the market can absorb this large influx of full-service seats at relatively higher prices. In other words, will passenger load factors sustain at current levels with higher fares? The stocks markets seem to have concluded that the experiment will be a failure. Meanwhile, low-cost airlines such as SpiceJet Ltd and IndiGo may benefit from the reduction in capacity of “low-fare” seats, thanks to the exit of Kingfisher Red.

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