Sunday, 6 January 2013

Why Kingfisher Airlines' problems are affecting both established airlines and start-ups


When the troubles of Kingfisher AirlinesBSE -0.69 %first surfaced, it was essentially promoter Vijay Mallya's headache. The seven-year-old airline had not made a profit since inception, but that was the least of the carrier's worries.

Losses began to pile. Soon, employees felt the heat because of unpaid salaries for months. In no time, the carrier's problems consumed passengers, thanks to frequent cancellations, forcing the government to ground the airline in October. By then, the Indian air traveller was already feeling the pinch of soaring fares. Rival airlines exploited the absence of Kingfisher to the hilt — India today has low-cost airlines; it would be preposterous to call them low-fare. Kingfisher had inevitably become Indian aviation's headache.

Deploying more planes by existing airlines or the launch of potential startups would ease the pain. But Indian carriers are woefully short of planes. In an earlier interview, Aditya Ghosh, president of low-cost carrier IndiGo, said: "Few realise that the US has 11,000 commercial planes. We have 440 commercial planes — that is international, domestic, turboprop, big planes and all airlines put together. It is nothing."

The Indian airport authorities have charged the aircraft owners for debts owed to them by Kingfisher and have been able to prevent the rightful owners from removing their aircraft out of India.

---- Tony Griffin, managing director, Phoenix Aircraft Leasing Pte Ltd 


A few carriers such as GoAir and IndiGo have placed huge orders — 72 and 180 A320 Airbus aircraft each — but planes do not arrive by bucket loads. The acute shortage is evident in the inability of airlines to fill the arrival and departure slots vacated by Kingfisher. Before its licence was suspended on October 20, 2012, Kingfisher held 400 slots. The airline applied and received 120 slots for the winter schedule from October 30, 2012, to March 30, 2013, post suspension. Even those slots are not being used by rival carriers, according to officials of airlines, airports and aviation ministry.

The Kingfisher crisis has also hit investors looking to launch airlines. Shyson Thomas, promoter of Air Pegasus, was looking to start a regional airline in the south last October. He is still hunting for aircraft. "Globally, airlines want to only operate aircraft; seldom do they buy." Thomas says he has been talking to aircraft lessors in Spain, France, Germany, Denmark, the UK and Singapore for months, but to no avail. "They do not want to lease it to Indian companies."



Recovery Barriers 

It is not hard to see why. Indian authorities are resisting the efforts of lessors and financiers to repossess the aircraft they had leased to Kingfisher, according to two companies that Thomas has been negotiating with. Tony Griffin, managing director of Singapore-based Phoenix Aircraft Leasing Pte Ltd, says his company was willing to lease two ATR 72-500 aircraft to Pegasus because the airline is headed by "experienced airline executives".
But due to the severe problems being experienced by lessors trying to get their aircraft back, Phoenix would not take the risk of leasing commercial aircraft to India, he says. Recently, ET reported that DVB Bank, the world's largest aircraft financier, has filed a case against the country's aviation regulator, Directorate General of Civil Aviation (DGCA) for delayed deregistration (freeing from a register) of two 
Kingfisher aircraft. The German company had complained about Indian officials and vowed to suspend all funding to Indian carriers.
In Pegasus' case, most lessors are asking the company to buy aircraft. Setting aside Rs 200 crore for purchase of aircraft in a capital-intensive sector like aviation is not viable, says Thomas. "Others are asking us to pay advance rentals of up to 24 months compared with the earlier 4-6 months. I might as well buy a second-hand aircraft with that kind of money."

Selim Cherif, manager, aviation transactions, MDT, a UK-based aviation financier, says when there are so many aircraft stuck in a country, one would be crazy to lease without significant guarantees. "From a lessor point of view, it is clear that the 'Kingfisher situation' has diminished the interest to lease into India."

According to Griffin, the Indian airport authorities have charged aircraft owners for debts owed to them by Kingfisher and have been able to prevent the rightful owners from removing aircraft out of India. "We believe that several owners have been forced to make a settlement with the airport authorities in order to get their aircraft back."

The country head of a foreign airline says lessors have paid Rs 1 crore per aircraft to the 
Airports Authority of India (AAI) to repossess planes. "Kingfisher should be paying AAI. India badly needs more aircraft but this crisis has put paid to those efforts." VP Agrawal, chairman of the state-run AAI to which Kingfisher owes more than Rs 200 crore, did not respond to mails and calls.

When you have so many aircraft stuck in a country with most of them from major lessors, one would be crazy to lease there without significant guarantees.

---- Selim Cherif, manager, aviation transactions, MDT, a UK-based aviation financier 


In barricading lessors, India could well be violating the Cape Town Treaty it signed in 2008. The international treaty is intended to standardise transactions involving movable property, including aircraft equipment. It creates international standards for registration of ownership and offers legal remedies for default in financing agreements, including repossession.

For aircraft financiers, the treaty brings, at least on paper, speed, certainty and cost savings to the process of repossessing aircraft and engines owing to insolvency or default on payments. Airlines benefit because any advantage to financiers leads to reduced costs. Defaults by airlines too is common worldwide, but authorities preventing repossession is rare, according to lessors.

'A Long Rope'

The question is why has AAI given such a long rope to Kingfisher, says Thomas. "First, its officials allowed Kingfisher dues to pile up and now when those dues cannot be recovered, they are not allowing the owners of planes to confiscate the planes."

Denying lessors is a huge financial setback, he says. "They are losing money as the planes lie idle. The aircraft will be in no condition to operate because they are lying in the open."

But DGCA boss Arun Mishra says his office is following the Cape Town Treaty to the book. "When we get a request from a lessor to deregister, we seek Kingfisher's response. In DVB's case, the airline said DVB has only financed the aircraft along with other Indian lenders and doesn't own the aircraft. The airline argued that it cannot agree to let go of the airline without permission from other financiers."

The same procedure was followed for US-based ILFC about two weeks ago, says Mishra. "We sought Kingfisher's response. It did not reply and we allowed four aircraft to be deregistered."
There are conflicting reports on how many aircraft are still in Kingfisher's possession. Authorities and Planespotters.com, a database of aircraft, put the number at 27. Media reports have speculated the number to be between nine and 16. An airline executive says he has seen six turboprops and two Airbus planes of Kingfisher parked at the Bangalore airport.

Slots are decided twice a year although airports periodically make adjustments based on the requests of airlines. The slots for the winter schedule run from October 28 to March 30. Before the crisis, Kingfisher had roughly 60 slots each at the two major airports, Mumbai and Delhi, according to a senior executive of GMR Group, which operates the Delhi airport. "KFA slots have been put on hold and not given to others due to a directive from DGCA," he says, requesting anonymity.

For the summer schedule, operators would gun for prime slots. But that shouldn't worry Kingfisher as the revival plan presented to DGCA envisions a relaunch with seven aircraft.

Indeed, nothing seems to worry Kingfisher officials. "Despite the expiry of the licence [on December 31, 2012], there is no cause for concern as the regulations permit licence renewal within two years of expiry," says Kingfisher spokesman Prakash Mirpuri. "Kingfisher is confident of securing approval from the DGCA on the restart plan and licence approval."
We were planning to start operations in October. But we have been unable to secure aircraft, thanks to the Kingfisher crisis.

---- Shyson Thomas, promoter, Air Pegasus
Authorities and lenders do not share Mirpuri's cheer. Kingfisher presented a restart plan to the DGCA in December, but still lost its permit after it failed to provide details on 
funding of operations. "We have laid down a condition that it has to fully pay salaries because it is an operational issue. We want a safe, reliable service because they reneged on promises earlier and that affected the market," says Mishra.


Kingfisher would also have to seek the permission of lenders such as banks and oil companies, he says. Mirpuri says these are "certain no objection letters which are in the process of being procured and a few additional questions which will be answered to the regulator's satisfaction".

Rough & Tough

If anything, flying again will be far from easy for Kingfisher. The carrier owes around Rs 13,500 crore to banks, according to aviation consultant Capa. These lenders, including the country's largest, 
State Bank of IndiaBSE 0.23 %, which met in Bangalore on Friday will begin recovery proceedings if Kingfisher's parent UB Groupdoesn't infuse funds to resume flights.

Earlier this week, rival 
Jet AirwaysBSE 0.02 % said it is in talks with Etihad Airways for a possible investment. Etihad was also in talks with Kingfisher, but an overwhelming majority of analysts say it could side with Jet, shutting out Kingfisher's best shot at survival. As for Thomas, he is trying to secure more capital and acquire two aircraft. After that he hopes to lease the rest: "Kingfisher has hurt the whole sector."





Air India to save Rs 500 cr by clearing bills, sourcing 80% ATF from IOC


NEW DELHI: State-owned Air India will gain Rs 500 crore a year from higher discounts on jet fuel as the debt-laden carrier has agreed to the oil ministry's demand of clearing past bills of Rs 4,235 crore by April next year and buy 80% of its fuel from Indian Oil CorporationBSE 1.79 % ( IOCBSE 1.79 %). 

At present, Air India gets a discount of a little over Rs 2,000/kilolitre of jet fuel, or ATF (aviation turbine fuel), whereas Jet AirwaysBSE 0.00 %, for instance gets double that amount at Rs 5,000/kilolitre. Foreign carrierLufthansa has a bigger discount at Rs 8,000/kilolitre, according to sources in the aviation ministry. 

"We're talking to the oil ministry and they are ready to give us maximum industry discounts starting February, provided Air India agrees to buying 80% of it's fuel from the Indian Oil Corporation (IOC) without a tender process," a senior official from the aviation ministry said requesting anonymity. 

In addition, officials at the oil and petroleum ministry say that it has been decided that state oil firms will give discounts to Air India at par with private airlines provided the state carrier gives a written undertaking to pay dues of oil companies (Rs 4,235 crore) in a time bound manner. 

"Pending dues will be cleared by April 2014, in our assessment as we receive money from the government," the official from the aviation ministry added. Air India's fuel bills this April are expected to cross last fiscal's Rs 8,000 crore, according to senior AI executives. 

Oil Minister Veerappa Moily took the decision last month after Civil Aviation Minister Ajit Singh raised the issue of discrimination. Air India has not been a profitable entity ever since its domestic (erstwhile Indian Airlines) and international (Air India) operations were merged in 2007. It has a colossal debt of Rs 47,000 crore with accumulated losses of Rs 20,300 crore.
http://economictimes.indiatimes.com/news/news-by-industry/transportation/airlines-/-aviation/air-india-to-save-rs-500-cr-by-clearing-bills-sourcing-80-atf-from-ioc/articleshow/17919013.cms

Airlines may not have to fly 10% capacity on unprofitable routes

Govt moots new regional connectivity policy plans to offer subsidy on non-viable destinations

The civil aviation ministry has decided to scrap the existing rule that makes it mandatory for domestic airlines to deploy 10 per cent of capacity on non-viable routes like the Northeast, Jammu & Kashmir and Andaman & Nicobar Islands.
Instead, the airlines willing to fly to routes considered non-viable would be given subsidy under the Essential Air Services Fund floated recently. This would be funded partly by the central government’s Budgetary support and partly by imposing a cess on passengers flying between the country’s metros. Also, state governments would be asked to underwrite some seats on these routes to support domestic carriers.
The list for non-viable routes (Category 2), apart from the current locations, would be extended and re-categorised to include other regional connections that do not make good money at present.
CLEARING THE RUNWAY
Key proposals in the govt’s new regional connectivity policy
  • The 10% rule for airlines to fly to non-viable routes like the Northeast and Jammu & Kashmir to be done away with
  • Airlines to get subsidy through the Essential Air Safety Fund
  • The fund to get its corpus by imposing cess on passengers travelling between metros, besides support from the Centre
  • State governments to underwrite seats on flights
  • States to be asked to cut sales tax on aviation turbine fuel
  • AAI to give airport concessions on Air Traffic Control charges
The changes planned would be incorporated in a new regional connectivity policy, expected to be announced within a month.
A senior civil aviation ministry official said there had been a lot of anomalies in airlines trying to comply with the present route dispersal guidelines that mandated flying 10 per cent of capacity (available seat km) to non-viable sectors like the Northeast. “Airlines tend to fly bigger planes to commercially viable destinations within the Northeast, such as Guwahati and Dibrugarh, to adhere to the 10 per cent requirement. And, connectivity to other remote areas continues to suffer. So, we have decided to scrap the rule and come out with a new alternative where they would get subsidy.”
At present, Air India is the only domestic carrier that flies 17-18 per cent of its capacity to commercially non-viable routes.
The ministry official said the change might not lead to rise in fares to metro cities; it would only make the process more transparent. “Currently also, the airlines cross-subsidise non-viable routes via travellers on the metro route but the amount a traveller has to pay is unknown. With the new system, he will know what he is paying. So, we do not expect fares to rise with the levy of this cess,” the ministry official added.
The revamped policy of regional air connectivity will also include concessions for carriers flying to Tier-III and -IV cities on air traffic control charges. Currently the Airports Authority of India does not charge any landing or parking charges from planes with 80 or less seats. It has been incurring losses of more than Rs 100 crore on Northeast airports.
Besides, state governments would be asked to reduce sales tax on aviation turbine fuel (ATF) to attract private carriers to fly to their airports. The sales tax on ATF, at around 24 per cent, is among the steepest in the world — next only to Bangladesh’s 27 per cent.
Some experts, however, say passing the buck to states to increase connectivity to non-profitable airports may not be practical.
http://www.business-standard.com/india/news/airlines-may-not-have-to-fly-10-capacityunprofitable-routes/497974/

Drunk, Unruly Passenger Duct-Taped To Seat During Flight


A JFK-bound passenger flying high on duty-free liquor had to be duct-taped to his seat to stop a midair rampage — which included shouts that the plane was going down, sources said yesterday.
Gudmundur Karl Arthorsson, 46, tried to choke and grope several people and was spitting all over the cabin when passengers pounced on him about halfway into the Thursday flight from Reykjavik, Iceland.
“He drank an entire bottle of hard liquor two to three hours into the flight,” said Manhattan resident Andy Ellwood, who posted on his blog a photo of Arthorsson taped to his seat.
http://nation.foxnews.com/man-duct-tapes-plane-seat/2013/01/05/drunk-unruly-passenger-duct-taped-seat-during-flight

Kingfisher Airlines may lose international rights, slots


NEW DELHI: KingfisherBSE -0.21 % may theoretically have two years to restart operations but top aviation ministry sources say that unless the airline does so in the next month or two, it could well be the end of the road for it. For the airline's international flying rights—which remain in demand even when domestic traffic is dipping sharply—are going to be given to other Indian carriers, along with its airport slots, in the coming summer schedule if KFABSE -0.21 % shows no sign of life soon.
And then Kingfisher, which in its eagerness to start flying abroad before completing five years had boughtAir Deccan to do so on its permit, will have to wait endlessly for foreign rights. "After that an airline will be able to get more foreign routes only when India and other countries enhance their bilateral flying. If Kingfisher has to start flying , it must do so in the coming weeks. Both state-run Airports Authority of India and private metro airports are also not going to reserve its slots, both domestic and international , forever," said a senior official. 

Aviation authorities handling the Kingfisher crisis say they do not see any urgency among promoters to raise funds to restart flying. While the airline's licence was expiring in the New Year, the management simply submitted an 'unsatisfactory' revival plan. Director general of civil aviation Arun Mishra had called the airline's VP Hitesh Patel on December 29 (a Saturday) to point out the various loopholes in the plan. The idea: the airline must have a working day (December 31, a Monday) to resubmit if it had anything concrete to offer. 

"The airline management just gave an unsatisfactory plan and did not even bother to find out what our response to that was. We really wonder if they can raise funds and have any concrete plans to do so because of the dire condition the airline is in with a collective debt-cum-loss of over Rs 15,000 crore," said an official. 

Sources indicate that the promoters wanted to somehow make the airline fly again so that they can sell it off. "Who is going to put in money in a grounded airline? Without putting funds, the management wanted us to give the nod to fly again and then get an investor. We have very clearly told them that get funds first either through an investor or through internal group funding, pay off employees and others and then fly," said an official. 

END OF THE ROAD? 

Aviation authorities, which are handling the Kingfisher crisis, say they do not see any urgency in the promoters to raise funds. While the airline's licence was expiring in New Year, the management submitted an 'unsatisfactory' revival plan. Kingfisher, which in its eagerness to start flying abroad before completing five years had bought Air Deccan to do so on its permit, will have to wait endlessly for foreign rights. "Both state-run Airports Authority of India and private metro airports are also not going to reserve its slots, both domestic and international, forever," said a senior official
http://economictimes.indiatimes.com/news/news-by-industry/transportation/airlines-/-aviation/kingfisher-airlines-may-lose-international-rights-slots/articleshow/17919382.cms

Air India Express to have a permanent CEO


Kochi, Jan 6 (IANS) Air India Express, the budget airline of Air India, will soon have a permanent CEO, said Minister of State for Civil Aviation K.C. Venugopal Sunday.
"The notification for it would be coming out in the next few days," Venugopal told reporters here, after an interaction with the airline staff here.
He also said that Air India Express headquarters would be shifted from Mumbai to Kochi in a phased manner.
"Special incentives will now be given to the employees so as to improve the customer service," said Venugopal.
http://www.newstrackindia.com/newsdetails/2013/01/06/182--Air-India-Express-to-have-a-permanent-CEO-.html

Kingfisher Airlines’ lenders to meet on Jan. 18


New Delhi, Jan. 6:  
The 17-bank consortium that had funded the grounded Kingfisher Airlines Ltd will meet at Mumbai on January 18. Bankers are expected to take a final call on initiating recovery proceedings against the beleaguered private airline, which has a liability of close to Rs 7,500 crore. The airlne’s licence to fly had expired on December 31. This may, however, be renewed until December 2014.
The promoter, UB Group, had pledged various assets including the Kingfisher Airlines brand, a villa in Goa and Kingfisher house in Mumbai as collateral for securing the loans. It is not clear whether the banks would be able to recover the entire exposure given that the airline is
grounded and the brand may not hold the same value.
Meanwhile, a core group of six banks met at Bangalore on Friday to discuss the viability of a restart plan presented by the airline. They were however not enthused by the proposed plan as it did not have any firm commitment from the promoters on fund infusion in the airline, it is learnt.
http://www.thehindubusinessline.com/todays-paper/tp-money-banking/kingfisher-airlines-lenders-to-meet-on-jan-18/article4280590.ece

Aviation sector could face less turbulence this year


Turbulence and uncertainty can best describe the year 2012 for the Indian aviation sector. In 2012 major airline companies’ profits plunged into red, staff unrest crippled two airlines and the year also saw one the major players grinding to a halt.
This was also a year when air fares shot up, forcing travellers to think twice before booking air tickets, finally resulting in declining air traffic.
Hit by rising fuel costs, hostile cost environment, continued regulatory uncertainty and rupee depreciation, the aviation sector has major challenges to overcome. For 2013, however, there are signs of a turnaround, aviation analysts feel.
Demand downfall
Lower competition arising from Kingfisher Airlines’ exit due to financial turmoil and subsequent consolidation in industry has helped in shoring up realisations in 2012-13. Predictably, demand growth has been a casualty of this hike in ticket prices, accentuated by the slowdown in the economy.
“Domestic air passenger traffic is estimated to have recorded a negative growth of around four per cent year-on-year (YoY) during April-October 2012. We expect domestic passenger traffic to shrink by eight to 10 per cent YoY in 2012-13 — a sharp contrast to the double-digit growth recorded in domestic traffic, ever since the advent of low-cost carriers five years ago,” said Ajay Dsouza, Director, CRISIL Research.
In order to ensure greater transparency in the pricing of domestic air tickets, the Ministry of Civil Aviation is also expected to set up a new unit to monitor domestic fares. The move may provide a cooling effect on the shooting air fares.
However, aviation experts and industry players do not expect the air fares to come down in the first few months of the year at least.
“Air fares have gone up by 30 per cent this year as compared to last year. With Kingfisher Airlines unlikely to revive anytime soon, we do not expect an immediate relief in the fares in the near future,” said Sanjay Bhasin, Managing Director, Goibibo (an online travel portal).
International operations
India’s international operations are, however, expected to see marginal growth as Indian carriers are still in a position to add capacities unlike international carriers who have more or less exhausted the seat quotas available to them under bilateral treaties. “We expect international passenger traffic in India to grow at a muted one to three per cent year-on-year in 2012-13,” Dsouza added.
This trend in passenger traffic is expected to sustain during the next fiscal and constrain air travel. Therefore, the domestic passenger traffic is expected to grow at a muted three to five per cent YoY in 2013-14. However, India’s international operations are expected grow at a relatively better rate of four to six per cent year-on-year in 2012-13.
However, improved alignment between capacity and demand is expected to strengthen passenger yields during 2013-14, driving the profitability of Indian carriers, Dsouza added. The operating margins of the airlines are expected to remain steady at five to seven per cent.
Following one of the most significant developments of 2012, the decision to allow 49 per cent foreign airline investment, the sector may see more than one such transaction during 2013-14. This will have a positive impact, in terms of capital and sentiment, analysts feel.
Big burden
While the profitability outlook for the coming years seems to be relatively better, there are structural issues that continue to plague the airline industry. In India the problem of high crude oil prices (translating into high ATF prices) is compounded by the fact that nearly 20-25 per cent of the ATF price is on account of both Central and State taxes. Consequently, ATF prices in India are nearly 40-50 per cent higher than global prices. “It is, thus, necessary for the Government to rationalise duties on fuel prices to ensure that airlines remains financially viable even in an era of high crude oil prices,” Dsouza said.
Further, Indian carriers are saddled with a collective debt burden of around Rs 90,000 crore as on March 2012 and a high debt-equity ratio. Given the poor financial health of the industry, bringing down the debt levels is essential. On the operational front, the airline industry will have to ensure a healthy trade-off between high air ticket prices and the need to maintain robust growth in passenger traffic and high passenger load factors.
New aircraft orders will be placed in 2013-14 as the market starts to look ahead to the next phase of growth. But cost pressures and a weak policy environment will continue to be a challenge, according to the Centre for Asia Pacific Aviation (CAPA).
CAPA also expects that with the commissioning into service of the new terminals at Chennai and Kolkata, and the partial opening of T2 at Mumbai during the year ahead, all six Indian metros will have world class airport infrastructure, a dramatic leap forward in the eight years since the modernisation program was announced. But 2013-14 must be the year in which certainty about economic regulation is achieved if there is to be strong investor interest in the upcoming tenders for the Navi Mumbai and Goa greenfield airport projects.