What Went Wrong @ Kingfisher Airlines - An Accountants Perspective

It was during good times (or deemed good times?) of Kingfisher airlines about 3 years ago, I took a Kingfisher flight from Delhi to Lucknow.  It was a 40 minute flight.  The aircraft was a big one (not sure of the make), with 6 seats in a row and it had live television on every seat.  Once the aircraft took off the hostess hurried with snacks and believe me it was so huge that by the time I could finish half of it the plane was about to land and the hostess came back asking for the plates, so being typical Indian I packed the left out snack in a tissue paper and continued eating and the hostess happily took away my empty plate.  Though Immersed onto the live television and the snack provided, I also looked around the aircraft and found it was half empty (or half full to be optimistic).  In Lucknow I had one of my colleagues waiting for me to take me to Kanpur and I said to him "for the money I paid, it is too big a service I got from KFA, I am not sure whether they can continue like this for long?"  From that time, being an accountant I kept asking myself how does KFA keeps rolling out these big services at the same time keeping the price tag lower to match its competitive colleagues. 

Now that the tide has changed on KFA and my fear over the years have become real.  The company has been subsidizing its services over the years and the bill for this subsidy was picked by the banks to an extent of Rs.7,200 crores.  Am I right in saying subsidy?  Let me check the cashflow of KFA.

The analysis of cashflow shows that majority of the Cash realised from financing activities over the years have been consumed to finance the loss in cash from operations, rather than taking the money to investment activities.  Argument may be placed that the cash spent on operations is towards working capital but if we look at Net Profit it is negative through out which means expenses outsmarted income by a huge margin.   And according to me it is subsidy.

But did KFA had a choice as this is the state of the industry with high cost of wages due to lack of skilled pilots, increasing aviation fuel cost, congestion at airports leading to delays and consequent costs, compulsion to operate in some routes & intense competition from other airlines.

Let us analyse some more facts.  First, Indian aviation traffic increased 19% CAGR during the period 2006-11, Second, Indian air travel penetration is approximately 0.1 or less trips per year per person this is compared to China which is 0.2 trips per person per year and 2 trips per person per year in United States.  Does this fact suggest something juicy?  Yes it does there is lot of meat to chew, a huge potential to tap.  That I believe is what made KFA over leverage on their finances (ie) spend more than their means. 

Can this huge market availability turn into opportunity for the airlines?  I have my doubts.  First for an airline to make profits there should be world class infrastructure.  I for one believe that our airport infrastructure is far from satisfactory except for some airports in the metros.  This lack of infrastructure will make operational costs higher.  Second, passenger traffic grew 16% CAGR between 2006-11 will that be maintained is quite doubtful atleast in the short term of 3 years as Indian economy is not growing at the speed which it grew in the last decade and there will be a dent in growth rates.  Third most of Airline companies in India have major portion of their revenue from domestic operations which is highly price sensitive, they should tap more into International routes to have better realisation's.   Fourth pricing should be aggressive no doubt to keep competition at bay but it should be done smartly to have expenses covered.

If I were to be CFO of an airlines company what I will do?  It is easy to buy / lease aircrafts as they are sourced out of developed countries and the financial products in India are aped from developed countries and so financing them is also easy.  But the Big Question is "Is the Indian market ready", the answer is NO.  The current Indian market though looks big in potential is a small market and highly price sensitive.  I will look for the long term and a steady growth.  I would not put too much money in too many planes but start modestly, price aggressively (to keep my expenses covered) generate margins, generate net worth and use this positive networth to grow over a period of time (remember our childhood story of Hare & the Tortoise).

KFA is now having a huge negative Networth (BIFR?) they need more money to provide more subsidy to the passengers or alteast pay back the bankers who till now are subsidising.  I would suggest KFA to cut planes / routes, bring in more capital, pay off huge debts, stop major chunk of financial lease, recreate the brand of KFA, generate profits and use that profit to leverage in the long run.

My advise as an Accountant : Indian aviation industry will be a success story, but the players in this industry need to progress with caution as there are too many "Smoke and mirrors" there and it is easy to get foxed into them.  Price your product aggressively but never lose your focus on margins, because once you let it go it is difficult to get it back.   I always say it is good to lose some "Battles" but  win the "War".