Flying Where No One Dares
In a price-sensitive market, the low-cost model works. Kingfisher is the only airline betting against the trend.
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.