Kingfisher-Deccan Means Big Losses Too

MUMBAI: The merger between Kingfisher Airlines and Deccan Aviation may have created one of the biggest airlines in India, but the new grouping is also among the biggest loss makers in terms of accumulated losses.

The combined accumulated loss of the merged entity totals about Rs 2,000 crore, putting it in the same league as firms like Fertilizer Corporation of India, Eastern Coalfields, Konkan Railway, Tata Teleservices (Maharashtra), Idea Cellular, ITI, going by the previous fiscal numbers.

The figures for FY07 alone indicate that the combined entity would have a loss of Rs 993 crore, second only to Fertiliser Corporation’s Rs 1,432.59 crore. The numbers highlight the difficult road ahead for the Vijay Mallya-Captain Gopinath-led management as they seek to build a profitable business amidst high costs and intense competition.

The combined entity may have market share and fleet size but is financially on a weak wicket. The debt burden of the combined entity is over Rs 500 crore and is likely to rise further as it borrows more to buy new planes and maintain operations. Deccan’s net debt alone for the year ended June 2007 was Rs 350 crore.

The combined operations will need about $250-300 million over the next two quarters and we may look at private placement of shares, UB group chief financial officer Ravi Nedungadi said. The Kingfisher-Deccan combined revenue is likely to top Rs 3,500 crore for the year ending March 08 but that is little comfort for the company battling shrinking margins and stiff competition.

Even the most profitable airline, Jet Airways was forced to report a loss for FY06. The company has turned around this year but other airlines have not been so lucky. Kingfisher Airlines posted a massive loss of Rs 577 crore for the year ended March 2007, while Deccan Aviation recorded a loss of Rs 419 crore.

Industry experts don’t see a major turnaround in fortunes at least for the next one year as it will take some time for the benefits of consolidation to sink in and margins to improve. Deccan Aviation lost 6% to Rs 277 on Thursday, while UB Holdings, which owns Kingfisher Airlines, rose 5.5% to Rs 1,144.

But the losses don’t perturb the Mumbai-based Kingfisher Airlines. The company believes that the loss is in tune with its plans for Deccan and that it can break-even in 2008.

“A major part of the loss came from high costs and other investment that are needed for our proposed international foray,” said a senior group executive who didn’t want to be named. “Then, other cost factors such as investment in training, route expansion and other investments will bring in returns in the near future,” he added.

The airline management expects 2008 to be a milestone with profitability rising due to increased scale of operations and lower costs. An analyst tracking the sector said the merger would prove beneficial “as it will give Kingfisher access to international routes. Now with the merger they would be able to get lucrative international routes and in Jet we are already seeing the effect of the profits coming in from international routes.”

India's top spirits maker UB group, which runs Kingfisher Airlines, bought a 26% stake in Deccan in May through United Breweries (Holdings) and subsequently raised it to 46%. Deccan will be called Kingfisher Airlines after the merger and the charter operations of Deccan will be spun off into a separate firm to be equally owned by Deccan's founder G.R Gopinath and the UB group, Deccan said.

“The merger will be structured in such a way to allow us to carry forward the accumulated losses,” Nedungadi said. The two airlines have a combined loss of about Rs 20 billion and this can be set off against future profits. Nedungadi said the maintenance and engineering divisions will remain with the combined airline for now. UB group will also look at rationalising capital expenditure.