Strategic analysis of Kingfisher Airline’s Q2 FY12 results

Despite the extremely muted optimism of my co-author, Devesh Agarwal, Kingfisher’s results for the past quarter were on a number of levels, worse than those of Jet Airways. Given that Devesh has already provided a very succinct analysis of Kingfisher’s results, I will simply add in a few of my own thoughts focusing on past lesson and future strategy for the airline. 

On the international side, Kingfisher has actually done a decent job of keeping its operating costs down; in fact, non fuel costs were approximately Rs. 1 Crore lower in Q2 11-12 vs. Q2 10-11, on 3% capacity growth. And in fact, despite the losses, there are positive signs on the revenue picture, as well as in terms of capacity restraint. Seat-kilometer revenue growth of 8% is no laughing matter; the best-performing US and European full service carriers actually target unit revenue growth of 6-10%. Obviously the 38% rise in fuel prices effectively wipes out those revenue gains, but still there are positive trends in Kingfisher’s international operations.

Additionally, I actually think that the airline’s management is showing a little bit of prudence as it reviews its operations. In fact, of the 50 odd cancellations enacted by Kingfisher for the month of November, the only ones I really thought were smart were the ones in Bangkok.  

IF, and that is a big IF, Kingfisher is serious about forming a viable full service operation (and that’s a big “If”), then cutting flights to Bangkok make sense. Remember, Bangkok is on the whole, a relatively low yielding destination (with a decent mix of high yield passengers as well). With competition from Air India and Jet heating up on the Mumbai and Delhi to Bangkok sectors, it makes sense for Kingfisher to review these flights before re-starting them; presumably with smaller aircraft to improve unit revenues. 

My position on Kingfisher and the A380s is brief; cancel the order. Regardless of matters of prestige and international competitiveness, Kingfisher simply cannot afford the additional capital expense that taking on A380s would entail. They have only begun to reduce their aircraft lease costs; reductions that would be wiped out by taking on the pricey A380s. 

Moreover, when Kingfisher cannot even fill A320s and A330s (73% seat factor in Q2 internationally), how are they going to find enough paying passengers for an additional 200-300 seats? 

Unlike the international sector, domestic revenue trends were rather troubling; Kingfisher recorded a 16% drop in domestic unit revenues on a year-on-year (Y-O-Y) basis. When coupled with a 48% rise in fuel costs per available seat kilometer, it is no surprise that Kingfisher slid to an operating loss for the quarter. 

Sadly, as with Jet; there appears to be no significant improvement in the cards moving forward; due to competitive pressures from Air India and Jet (who recently announced an up-gauge of their domestic full service frequencies), Kingfisher’s revenue generation might be as stunted as ever in the third quarter; even as the carrier moves to convert its operation into an entirely full service one. 

These revenue generation problems actually somewhat masked the extremely positive cost discipline enacted by the airline during the quarter; C/ASK excluding fuel actually fell close to 10% vs. Q2 10-11. 

In Kingfisher’s financial results, there was no mention of the negative effects of a weaker rupee versus the dollar on a year over year basis. Perhaps this stems from the fact that Kingfisher does not measure its financial results in terms of dollars, or from the fact that their international operation is close to one-third the size of Jet Airways’ in terms of passengers carried? 

Still, it’s interesting to note, that if you strip away the currency fluctuations, Jet Airways would have lost less money than did Kingfisher this quarter.