Fly­ing Where No One Dares

In a price-sen­si­tive mar­ket, the low-cost model works. King­fisher is the only air­line bet­ting against the trend.

India Today - - THE BIG STORY - by Dhi­raj Nayyar

The six months be­tween April and Septem­ber 2011 have been dis­as­trous for all air­lines in In­dia be­cause of a steep rise in crude prices. Oil prices went from around $88 a bar­rel in Jan­uary 2011 to al­most $115 in April, a mas­sive 25 per cent in­crease in just three months. Fuel costs add up to 40 per cent of the vari­able costs of air­lines. Oil prices hov­ered around the $100 mark un­til Septem­ber when they came down to $80 a bar­rel. In Novem­ber, the price is again up to $100. The rise in the price of fuel was ex­ac­er­bated by a fall in the ru­pee, which has de­clined by 11 per cent against the dol­lar. An es­ti­mated 70 per cent of air­lines’ ex­penses are in­curred in dol­lars.

King­fisher Air­lines has losses of Rs 732 crore be­tween April and Septem­ber. Jet Air­ways lost more—rs 836 crore. Yet, it is King­fisher which is gasp­ing for air, not Jet. Why?

His­tory mat­ters. Un­like other air­lines, which have had ups and downs, King­fisher has never recorded a profit since it be­gan op­er­a­tions in 2005. In 2010-11, when crude prices were mod­er­ate and the ru­pee strong, King­fisher recorded losses of Rs 1,027 crore. In com­par­i­son, Jet’s loss was Rs 86 crore. Spice­jet, which lost Rs 312 crore be­tween April and Septem­ber this year, made a profit of Rs 100 crore in 2010-11. Indigo was said to have recorded a Rs 500-crore profit in 2010-11.

King­fisher’s poor fi­nan­cial per­for­mance stands in con­trast to its award-win­ning per­for­mance for ser­vice. It is the only In­dian air­line and one of seven glob­ally to have a five-star rat­ing from UKbased avi­a­tion con­sult­ing firm Sky­trax. King­fisher may be a vic­tim of its busi­ness model which fo­cuses on the up­per-end flier. The slow­down of 2008-2009 dec­i­mated the high-end mar­ket. There is ev­i­dence that price mat­ters most to the In­dian consumer. But Vi­jay Mallya is de­ter­mined to stick to his model. In Septem­ber, he an­nounced clo­sure of King­fisher Red, the low-cost arm which emerged af­ter his takeover of Air Dec­can in 2007-08.

The rest of the In­dian avi­a­tion in­dus­try seems headed in the op­po­site di­rec­tion. Indigo and Spice­jet have done well as low­cost car­ri­ers. Jet now runs more than half its ser­vices un­der the low-cost brand it started in 2009, Jet Kon­nect.

King­fisher’s debts add to its al­ready high costs—its in­ter­est ex­pense to net sales ra­tio in Ju­lySeptem­ber was 21 per cent. The ra­tio was 6.8 per cent for Jet and 1.1 per cent for Spice­jet. The air­line will need a big rev­enue boost to off­set costs. Un­for­tu­nately, it may have the wrong busi­ness model.

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