Frankly, it was a hassle-free decision for Vijay Mallya to completely suspend services on his budget carrier Kingfisher Red , says one of his close confidantes.
Formerly known as Air Deccan, Mallya had bought 26% stake in this airline from his freind-cum-neighbour Captain Gopinath in 2007 at Rs 550 crore and later picked up additional 20% stake at around Rs 155 a share.
The intention of acquiring Deccan was only aimed at giving Kingfisher Airlines (KFA) an access to international routes quickly. Government rules gave overseas flight rights only to airlines with a minimum of five years experience, and KFA was behind in the queue after Deccan. “Mallya never believed in low fare business model even when he bought the airline,” says an official with the airline.
The dismal performance of Red all these years made Mallya realise that the high profile ‘classy image’ of his very own KFA is taking a hit due to him simultaneously running a low cost service.
Meanwhile, discontinuing Kingfisher Red may have come as a surprise to a few at a time when low fare carriers like JetLite, Indigo and SpiceJet are doing better then their full service peers in terms of load factors--- but the news has not sprung any surprise to analysts and Kingfisher Airlines (KFA) officials who had guessed something of this sort was on its way.
In that case, an official at KFA explains, “A year ago, Mallya had met many brand consultants in Europe who had advised him to hive off Kingfisher Red into a separate entity from its parent, KFA-- a move that could help the airline have an identity of its own just like JetLite--- a low cost arm of its archrival Jet Airways which is doing very well with almost 90% load factors on domestic routes.
But this idea did not see any daylight as the close coterie of Mallya had a better plan which was aimed at consolidating KFA’s image as a ‘luxury carrier’ and reducing operating losses. Quickly, his battery of experts went back to the drawing board, just recently, only to convince their boss that Kingfisher Red has to go off the radar and Mallya agreed.
This is what analysts told moneycontrol.com of their reading on Mallya's decision to stop low cost service.
Sonam Udasi, research head at IDBI Capital says, “Kingfisher as a brand has always been positioned as a lifestyle carrier. The presence of Kingfisher Red diluted the image of the airline. On the financial side, the airline had the same aircraft-to- employee ratio for its low cost service as it has for KFA, despite the fares being lower on the former.”
He further explained KFA will be able to get more business class passengers by configuring the seating arrangement of the aircraft by incurring minimal incremental cost.
Dhiraj Mathur, executive director & leader, aerospace and defence, PwC India, says,
“India is a diverse market with growth coming from premium class segment as well. Low fare and full service carriers can co-exist with increasing number of travellers preferring premium class as well.”
While referring to the price at which Mallya had bought the airline, he says that it was an expensive preposition for which the airline had to take a huge debt which is still servicing.
Sunil Jain, vice president-equity research at Nirmal Bang Securities Research adds, “Kingfisher Red was burning out to stiff competition from its rivals in the low cost segment. Second, the airline was not earning attractive revenues per passenger as is evident from the fact that the airline made operating losses of around Rs 300 crore for the June-September quarter and Rs 1,200 crore in FY11—much of it coming from Kingfisher Red.
However, he has reservations whether doing away with this business model will lead the airline to profitability. “The airline needs an immediate equity infusion which also looks difficult in this kind of a market situation,” he says.
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