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In Indian Airline’s Troubles, a Cautionary Tale

Kingfisher Airlines of India promised passengers the royal treatment — flight attendants so comely they were called “flying models,” full meals even on short flights and curbside valets to carry their bags.

When passenger numbers were rising, Kingfisher ordered more planes, although it had never turned a profit. It lost $219 million in the last nine months of 2008.

But how the mighty have fallen.

Short of cash and unable to pay its bills, the company has had to take on debt from India’s government-owned banks, pledge assets in exchange for loan guarantees, postpone delivery of new planes and search for a foreign investor.

Most symbolic, perhaps, instead of starting nonstop flights from India to California — as envisioned by the company’s flamboyant founder, Vijay Mallya — the airline last added a route from Calcutta to Dhaka, the capital city of Bangladesh.

Airlines around the world are suffering as businesses and individuals cut back on travel, but in India, by some measures, they are suffering more. And analysts say that in the months to come, Kingfisher, one of India’s top domestic carriers and one of the country’s most recognized brands, may be in for more pain than any other airline here.

Kingfisher’s troubles present a cautionary tale for investors and suppliers eager to do business in one of the few major economies still experiencing significant growth. Even as incomes and consumption continue to rise in India, success is not guaranteed — nor is a smooth ride.

Of the $9 billion that the International Air Transport Association estimates the global airline industry will lose in 2009, nearly a quarter will be lost by Indian airlines, which fly just 2 percent of the world’s passengers.

For India’s private airlines, “the next six to nine months are about survival,” said Kapil Arora, a partner with Ernst & Young’s aviation practice. To make it, they will have to cut costs relentlessly in marketing, technology and payroll, he said.

Even that may not be enough. After resisting for years, the Indian government is considering letting foreign airlines take a 25 percent stake in Indian carriers. But the rest of the world’s airlines are short of cash as well. “It’s going to take active government involvement” to keep India’s airlines in business, Mr. Arora said.

For Mr. Mallya, whose empire also includes United Spirits and United Breweries, India’s largest liquor and beer producers (the name Kingfisher came from his beer brand), as well as a fertilizer company and an engineering firm, cutting costs could be difficult.

Known as the “King of Good Times,” Mr. Mallya pursues a lavish lifestyle that includes a collection of hundreds of sports cars and a villa on the French Riviera. He built Kingfisher as a “premium” airline and, when passenger numbers were growing, placed big orders for planes, including five of the A380 superjumbo jets from Airbus, even though Kingfisher had never turned a profit.

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In an e-mail interview, Mr. Mallya brushed off suggestions that the company was struggling for survival. It will turn a profit in the next fiscal year, he said, and a $500 million loan, recently arranged by the State Bank of India and sold to an alliance of banks, is sufficient to keep the company going this year.

He was also confident about finding a foreign investor willing to take a stake in the airline. “We are in discussion with private equity investors,” he said. “Certain airlines have shown keen interest as well, subject to the government policy allowing them to invest.”

Bankers and analysts say that Mr. Mallya’s target price for any deal is as high as eight times Kingfisher’s stock price, which has fallen more than 80 percent from its peak in late 2007. He would not confirm that figure, but said, “There is handsome value for the largest carrier with the widest network in a country with great potential such as India.”

Still, such a premium could be difficult to come by even in good times.

Kingfisher lost 10.5 billion rupees, or $219 million, in the nine months that ended in December, the most recent figures available. India’s other large private airline, Jet Airways, reported a slight profit for the first quarter of this year, in part because of one-time tax credits. Kingfisher still owes $100 million to oil companies for jet fuel it bought in 2008, Mr. Mallya said. Those payments will be made by November.

A long-term game

Miranda Mills, vice president at Airbus, said the manufacturer had been in regular conversation with its Indian customers and was not worried about any of Kingfisher’s orders, including those for the A380. She added that Airbus was discussing the look of the cabins with Kingfisher and interior designers. “Vijay is very clear” that he wants to bring the A380 to India, she said.

“We work a long-term game,” Ms. Mills said. In the airline business, companies do not place an “order for the next year or two and then change your business model totally,” she said.

Unfortunately, that is just what the Indian government is encouraging airlines to do. “Individual customers have been thoroughly pampered all these years,” Praful Patel, the Indian civil aviation minister, said. Airlines need to redefine their business model, he said, and emulate no-frills carriers that are close to breaking even, like IndiGo and SpiceJet.

Indian airlines grew too much, too quickly during the recent boom, analysts say. At its zenith, the industry was adding six planes a month, when there was demand for only half that number, according to the New Delhi office of the Center for Asia Pacific Aviation, a consulting and research firm. To gain market share and attract customers who may never have flown before, airlines were pricing tickets way below cost.

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Adding to their problems, Jet and Kingfisher made expensive acquisitions in 2007 — Jet Airways bought Air Sahara and Kingfisher Airlines bought Air Deccan. Analysts say that the airlines paid too much for the acquisitions and have taken too long to absorb the operations they acquired.

Next, surging fuel prices forced up ticket prices just as the global slowdown cut business and leisure travel. To make things worse, Indian airlines face much higher fixed costs than carriers in many other countries, like fuel taxes that can be five times the global average.

In India, “the big boys today have huge debts, massive fleets, are confronted with a marked slowdown in domestic and on the international side,” said Kapil Kaul, chief executive for the Center for Asia Pacific Aviation in India. And, he said, “there are virtually no funds available.”

Saroj K. Datta, executive director of Jet Airways, said the industry is suffering in large part because it has not reduced capacity enough. His company has cut capacity 20 percent since last year, he said, but the industry’s overall capacity is down only 2 percent to 3 percent, while demand for air travel is down about 11 percent.

“That has resulted in most airlines offering lower and lower prices in the hopes of filling up seats,” he said. But with prices this low, no airline has been able to break even.

Loans from banks that are majority owned by the Indian government have given the big airlines some breathing room, but that money is unlikely to be enough to get them through the downturn.

While Mr. Patel, the civil aviation minister, would not comment on individual airlines, he did say that the government would not block further consolidation or prevent a carrier from closing. Many airlines should have been better prepared, he added. “Some of these guys in the best days didn’t go big time to the markets and raise money,” he said.

Characteristically, Mr. Mallya is undeterred. Kingfisher Airlines “enjoys business from both” low-fare and premium passengers, he said, “which is one of the reasons why Kingfisher Airlines flew more than a million passengers in May 2009.”