Kingfisher justifies low-cost carrier shutdown

Kingfisher Airlines today justified its plans to close down its low-cost carrier in four months saying the operating costs involved were the same as in a full-service carrier and the revenues lesser.

Maintaining that there was more competition in the no-frill segment than the full-service segment in India, Kingfisher CEO Sanjay Aggarwal said the decision would help the airline company generate additional revenue after its exit from the low-cost service, where competition was more intense and a price war could hit the margins.

Seeking to quell concerns emanating from the decision to shut down low-cost airline Kingfisher Red, he said the move would rather generate incremental revenue for the company.

Kingisher's shares were battered sharply soon after its chairman and key promoter Vijay Mallya last week announced the plan to exit from the low-cost segment.

It's shares fell by over 20% in three days, but the company was seen trading higher by 1.5% at Rs 20.40 today in afternoon trade at the BSE. It had fallen to a 52-week low of Rs 18.85 on September 30.

Aggarwal said the operating costs of the "so-called low cost carriers" were similar on fuel, airport charges and other costs and any additional expenses incurred by the full-service carriers were "more than recovered through higher yields".

He maintained that the decision was taken after a detailed study over the last six months during the high oil price regime which found that Kingfisher's full service product had generated higher yields and load factors.

The study found that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier and the remaining was the "net contribution to the bottom line."

"Full service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields," the Kingfisher CEO said.

Over the next four months, the airline would reconfigure all its Airbus aircraft, including its single-cabin aircraft, into dual-cabin ones, with a reduced premium business class cabin and an increased number of economy seats. It would lead to a capacity increase of about 10%.

He said the low-cost segment was expected to witness over-capacity and a price war with declining yields, as Indian low-cost carriers have placed large orders in recent months.

"Addition to large aircraft orders placed at the time of start up in 2004-05, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market.

Kingfisher had entered the low-cost segment through its acquisition of Air Deccan, the country's first no-frills airline, which it later rebranded as Kingfisher Red.