Kingfisher Airlines set to launch int'l ops in Sept

Akanksha Banerjee and Shivani Muthanna, CNBC-TV18

Kingfisher Airlines is all set to launch its international operations in September. This, at a time when crude continues to soar and passenger growth has hit a three-year low. Will this international operation be the answer to Mallya's domestic woes?

The new A330-200 will start flying between India and the UK in September this year. In addition to in-seat massages, five course meals, it will have a full fledged bar for the long haul flights.

But does it make financial sense for Mallya to take the overseas plunge in today's difficult economic environment?

It's being estimated that Mallya's airline has posted a loss of nearly Rs 1,700 core in the past two years. Add to that Deccan Aviation's Rs 643 crore at the end of March 2008 as it's now merged with Kingfisher Airlines.

However, the king of good times, is confident about the airline's international operations weathering the storm. "In six weeks we will launch India to London - Heathrow services, we have been given designated carrier services  - Kingfisher narrow bodies can fly to Mid-East and South East Asia where yields are higher and cheaper - significantly improve operating economies," said thee Chairman of Kingfisher Airlines, Vijay Mallya.

But analysts say the airline may take two to two and a half years to break even on its international operations instead of 12- 18 months. Mallya could draw on the experience of its competitor Jet Airways, which has announced a pre-tax loss of Rs 260 crore on its international operations in the fourth quarter of 2008.

Jet introduced its overseas operations in 2005. In the past three years Jet has only managed to break even on select flights, but not completely on any of its routes.

High crude prices and falling passenger seat factors have made matters worse. But Kingfisher Airlines remains adamant to launch international flights by August-end.

Kapil Kaul, CEO, CAPA, said, "Kingfisher is banking on its product - selling of business class - or front end is very important in international flights and if they manage 80% occupancy then they will do fine otherwise it could be disastrous on their balance sheet." 

And it could get worse with the high infrastructure costs that the airline will have to absorb for its international operations. 

Industry estimates suggest that the setting up of a single lounge facility itself will cost upto USD 1 million and ground handling operations done on a shared basis with an international carrier will cost between USD 3000 - 4000 per flight.

The biggest operational cost for Kingfisher will be the aircraft itself. Last year, the airline ordered 50 new airbus aircrafts for a whopping USD 7.3 billion.
While the company says it will take delivery of 10 wide body aircrafts used for long haul flights, this year it may defer accepting all the narrow bodies.

For operational expenses like these, the airline will use ICICI Bank's Rs 1000 crore loan. Sources say what Mallya seems to be banking on is the huge resources of Kingfisher Airlines parent company - UB Holdings. In 2007, UB's total debt was close to Rs 3220 crore - the question is how much of UB's debt will be used for Kingfisher Airlines - and whether international operations will actually prove to be a millstone around Mallya's neck?