Kingfisher Airlines: On a wing and a prayer

Analysts say piecemeal bailouts won?t work serious cash infusion needed

Kingfisher Airlines is neck-deep in debt. Its accounts are frozen and services nearly dysfunctional. Yet, the stock has been up 12 per cent over the last two months, mainly on rumours of a possible rescue plan. However, analysts see little hope for the company till there is some serious cash infusion, as piecemeal rescue packages can keep the company afloat only in the short-term. What the company needs is cash infusion, either through promoters or a strategic investor. Capacity cuts is another option, but analysts say that comes with different implications. What matters in the aviation business is on-time performance and safety. Analysts say Kingfisher will take a long time to win back the confidence of consumers even if its financial woes are sorted out.

For these reasons, analysts are not enthused by either a potential rescue deal or the stock price movement. Additionally, the company is sitting on a long-term debt of Rs 7,500 crore and has short-term liabilities of another Rs 1,200 crore. But, the debt stretch is not a new phenomenon. Since inception, the company has undertaken a massive fleet expansion plan, which, coupled with high crude prices, have impacted the financials. At the net profit level, it has been in loss and its operating cash flows are negative, claim analysts.

Back in August 2010, an analyst report on the company read: “High leverage, low profitability and a potential loss in market share make Kingfisher Airlines a laggard in our coverage universe in the domestic aviation sector. We believe it will find it tough to maintain its share in the highly price-sensitive domestic market due to strong competition from low-fare carriers.” In the December quarter, Kingfisher’s market share declined from 18.7 per cent to 14 per cent sequentially, on account of cancellations in the number of domestic flights. In December, its market share further plummeted to 12 per cent.

Even if lenders were to work out a rescue package, it will do little for the company’s financials, claim analysts. Nor will the part-conversion of the eight per cent optionally convertible debentures into equity (at Rs 25 a share) help. According to analysts, all that the conversion will do is reduce the debt by Rs 500 crore.