1. Curtailed operations
2013 was a very difficult year for your Company. In March 2012, your Company got suspended from IATAs settlement program, which meant that your Company could not sell tickets through several thousand IATA travel agents in India. While your Company devised a way to sell tickets through a handful of agents which who were willing to enter into a direct settlement agreement with your Company, this however limited our distribution reach to the customers, especially the high paying last-minute corporate clients.
In light of the distribution limitation, your Company significantly curtailed its schedule to prevent flying empty aircraft. Your Company still had to discount the tickets to attract customers due to their dwindling confidence levels. Ongoing media barrage and statements from various stakeholders further compounded the negative customer sentiment.
2. Other challenges and group support
During the year, the rupee continued to depreciate and put further strain on cash flows. Approximately 75% of your Companys operating cost is tied to the US dollar. Fuel prices and interest rates remained high in 2012-2013, leading to significant losses. In the face of reluctance of the Banks to provide much needed working capital, the promoter group continued to fund your Company during this difficult period to pay for fuel, airport charges, salaries, etc. In the 2012-13 fiscal year, the group provided a support of Rs. 1,340 crores to your Company.
Your Company has received recall notice dated April 2, 2013 from the State Bank of India ("Lenders Agent"), calling upon your Company to forthwith pay the entire alleged principal and all accrued interest on and all other monies in respect of the various facilities aggregating to Rs. 6493.29 crores, failing which they would initiate steps for recovery.
Your Company also received Notice dated May 3, 2013, issued jointly by SBICAP Trustee Company Ltd. and State Bank of India as Lenders Agent to your Company purportedly under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI ACT"), calling upon your Company to discharge the alleged outstanding liability of Rs. 6,027.42 crores (Rupees Six Thousand Twenty Seven Crores and Forty Two Lacs only) together with interest from April 1, 2013 and all other incidental expenses, to the Lender Banks within 60 (sixty) days from the date of the Notice, failing which SBICAP Trustee Company Limited would exercise its rights under Section 13(4) of the SARFAESI Act with respect to the secured assets listed in Annexure 1 to the said Notice. United Breweries (Holdings) Limited and Dr. Vijay Mallya have also been served with similar notices as alleged Guarantors on behalf of your Company. Your Company has challenged the legality and validity of these notices and is in consultation with its legal advisers to take other steps as may be advised by the legal advisors to protect your Companys interests.
Thereafter the Lenders have filed proceedings before the Debt Recovery Tribunal ("DRT") at Bangalore. Your Company is in the process of consulting its legal advisors to protect its interests in these proceedings.
Your Companys immovable property viz. Kingfisher House is subject matter of a Notice of Attachment from Service Tax authorities and Possession Notice by SBICAP Trustee Company Limited on behalf of the consortium banks. Your Company is in the process of seeking legal advise in this regard.
3. Continued disruptions and suspension of operations
Even though your Company curtailed operations, the cash flow constraints caused disruptions or delays in flight operations. These disruptions were caused by oil companies refusing to refuel aircraft, airport authorities not allowing the aircraft to depart, or employees refusing to come to work.
In September, due to salary delays, one group of employees stopped coming to work and hence your Company was forced to suspend its operations and declare a lock-out on October 01, 2012. The lock out was lifted after a week. However, due to disruption in flight schedule, DGCA on grounds of potential inconvenience to the travelling public, suspended your Companys Scheduled Air Operators Permit ("the SOP"). Thereafter the SOP expired on December 31, 2012. Under civil aviation regulations, your Company has a period of 2 years to renew the SOP.
4. Dialogue with Civil Aviation authorities
Your Company remained in dialogue with the authorities to restart operations. Your Company presented a viable restart plan to DGCA and the Civil Aviation Authorities which is acceptable to the said authorities, subject to recapitalization of your Company. Since recapitalization with a foreign investor would have been a long term process, your Company presented a two-phase revival plan to the authorities.
o Phase 1 (Limited Restart Plan) involved restarting the airline operations of your Company with a limited fleet of 7 aircraft (5 Airbus + 2 ATRs), gradually increasing to 21 aircraft (10 Airbus + 11 ATRs) in a period of 3-4 months. UB Group offered to organize funding of approximately Rs. 650 crore to implement this phase.
o Phase 2 (Full Recapitalization Plan) of your Company envisaged bringing a new investor with fresh capital. This plan would address the issues of debt restructuring, servicing, and repayment.
The UB Group agreed to organize financing for Limited Restart as your Company believed that the dialogue with investors will progress faster and conclude once the airline business is operational.
While the authorities remain supportive of your Companys restart, these authorities are awaiting recapitalisation of your Company for granting the necessary permissions for renewal of the SOP and restart of operations.
5. Changes in FDI Policy
In September 2012, the Government of India finally announced the long awaited change to FDI policy allowing foreign airlines to buy up to 49% stake in Indian carriers though with many operational riders regarding need for Open Offer, etc . The policy change is a relief of sorts for the struggling Indian aviation industry.
6. Investor Dialogue
Despite suspended operations and suspension/ subsequent expiry of the SOP, your Company engaged in dialogue with several Asian carriers for a potential investment in your Company. Some of these discussions matured to the level of detailed and extensive due diligence on your Company and a written offer of investment. However, due to political uncertainty in India, constant negative media statements made by the Lenders about your Company as well as hostile recovery action initiated by the Lenders, those discussions did not fructify into an investment.
Your Company remains in dialogue with several investors and believes that there is a rationale for investment for various strategic and non-strategic investors. As on the date of this report, your Company is engaged in discussions with one such potential investor. Below is the value proposition for any investor looking at investing in your Company:
a) A foothold in the Indian aviation space India remains one of the fastest growing aviation markets in the world. Third largest economy with a 300 million strong middle class but less than 1% of the population flies. Young population with growing personal income, high aspirations and rising propensity to fly. Airbus estimates CAGR for the next 20 years at 9.9%.
b) Growing importance of aviation in policy making Government is coming out with a series of far reaching reforms in aviation and allied sectors. Some of the already announced policy changes include - changes to the FDI policy, allowed foreign borrowings to reduce high-interest rate Rupee loans, allowed import of jet fuel.
c) Improving Infrastructure Airports Authority of India is expected to invest $9 billion to improve aviation infrastructure and add 30 new airports in the next 5 years. Incentives are being offered to promote low frills airports in Tier 2-3 cities. This will lead to manifold increase in traffic.
d) Promoter Support Promoters are willing to continue support for the revival of your Company. Valuation of your Company is very attractive at the moment.
e) Kingfisher Airlines Brand At its peak your Company was the largest airline in India with a five-star rating from Skytrax. A recent brand valuation conducted by Grant Thornton put the brand value at $550M once the airline business becomes operational.
f) Scheduled Air Operators Permit (SOP) Your Company has one of the limited number of Air Operators Permit issued to scheduled carriers. While the SOP has currently expired, it can be renewed within a matter of days until December 31, 2014 by capitalizing your Company in line with the revival plan submitted to DGCA.
g) Fleet Availability Your Company had 12 aircraft on its SOP at the time of expiry of the SOP. Your Company is confident of acquiring additional aircraft during the ramp up.
h) Management and Technical Staff Your Company still has appropriate staff on its payroll. These include the senior and mid level managers and sufficient number of pilots, engineers, dispatchers to operate up to 20 aircraft. Additional staff can be hired as the airline business ramps up.
i) Ground Handling Equipment and Aircraft Spares Your Company has equipment and parts that will be required to support the fleet.
j) Slots and airport space Your Company still has access to most of its premium slots and has curbside and ramp space at various airports.
7. Industry Operating Environment
a. The Indian airline industry continues to grapple with profitability pressures. The primary drivers of losses are high crude price, weak rupee, and high interest rates. This is over and above an already high fuel price due to punitive sales tax and high airport charges.
b. This is demonstrated by the fact that despite the challenges faced by your Company, which led to a curtailed schedule for the first six months of the year and no operations for the last six months of FY13, both Spicejet and Jet Airways reported losses for the year.
c. The other airlines had to raise fares to partially compensate for the increase in operating cost and that let to drop in passenger traffic. DGCA reported a drop in traffic of 5% FY13 over FY12.
8. Internal control systems and their adequacy
a. Your Company has a proper and adequate system of internal controls commensurate with its size and nature of operations to provide reasonable assurance that all assets are safeguarded, transactions are authorized, recorded and reported properly and applicable statutes, codes of conduct and corporate policies are duly complied with.
b. The Internal Audit department reviews the adequacy and efficacy of the key internal controls, guided by the Audit Committee of the Board.
c. One of the objectives of your Companys Audit Committee is to review the reports submitted by the Internal Audit department and to monitor follow-up and corrective actions by Management.
d. Your Company has a compliance procedure to ensure that all laws, rules and regulations applicable to it are complied with.
e. The Company Secretary is the designated Compliance Officer to ensure compliance with Securities and Exchange Board of India regulations and with the Listing Agreement with The National Stock Exchange of India Limited and Bombay Stock Exchange Limited.
f. Your Company has a process of both external and internal safety audits for each area of operation. Your Company is in full compliance with all laws, rules and regulations relating to airworthiness, air safety and other statutory operational requirements to the extent applicable.
g. Your Company, as part of its Risk Management strategy, reviews, on a continuous basis, its strategies, processes, procedures and guidelines to effectively identify and mitigate risks. Further, the Management has developed a procedure to ensure adequate disclosures of key risks and mitigation initiatives to the Audit Committee of the Board.
9. Analysis of operational performance for the period ended March 31, 2013
The current financial period is for the twelve month period from April 1, 2012 to March 31, 2013 (FY13). During this period your Company operated only for a 6 month period (April September) and had to suspend operations effective October 01, 2012 due to reasons discussed above.
Financial Results of Operations:
FY13 (Rs. million) | FY12 (Rs. million) | (% difference) | |
Income | |||
Passenger | 4,430 | 49,102 | (91%) |
Cargo | 372 | 4,356 | (91%) |
Excess Baggage | 38 | 327 | (88%) |
Rebooking charges/ cancellation | 174 | 1,150 | (85%) |
Other Income | 1,821 | 3,305 | (45%) |
Total Income | 6,835 | 58,240 | |
Expenditure | |||
Employees costs | 3,492 | 6,735 | 48% |
Aircraft/ engine lease rentals | 7,101 | 10,585 | 33% |
Aircraft fuel expenses | 4,021 | 29,459 | 86% |
Operating and other expenses | 7,615 | 22,305 | 66% |
Depreciation/ Amortisation | 2,388 | 3,419 | 30% |
Interest & Finance charges | 14,362 | 12,763 | (13%) |
Exceptional Item | 10,867 | 7,434 | (46%) |
Total expenditure (inc. exceptional item) | 49,846 | 92,700 |
The results for the period April 1, 2012 to March 31, 2013 are not comparable with the results for the period April 1, 2011 to March 31, 2012 since your Company operated only for a period of 6 months (April 1, 2012 to September 30, 2012) for reasons already mentioned above.
Income
Your Companys total income stood at Rs. 6,835 million during the twelve month period from April 1, 2012 to March 31, 2013.
a. Income from services formed 73% of total income at Rs. 5,014 million. The entire revenue was primarily domestic since your Company had discontinued its international operations effective April 10, 2012. Revenue generation has been significantly impacted since your Company has operated only for a period of 6 months (April 1, 2012 to September 30, 2012) as mentioned above.
b. As mentioned above, your Company discontinued its international operations effective April 10, 2012 and hence the revenue from international operations was insignificant as compared to the twelve month period ended March 31, 2012, when it stood at Rs. 13,809 million.
c. Other income stood at Rs. 1,821 million during the twelve month period from April 1, 2012 to March 31, 2013, a reduction of 45% when compared to the previous year ended March 31, 2012. Other Income comprised mainly of liabilities no longer applicable and written back of Rs. 1,664 million.
Expenditure
Total expenditure including exceptional items stood at Rs. 49,846 million during the twelve month period from April 1, 2012 to March 31, 2013, a reduction of 46% when compared to the previous year ended March 31, 2012.
a. Aircraft fuel expenses: Expenditure on fuel stood at Rs. 4,021 million during the twelve month period from April 1, 2012 to March 31, 2013.
The expenditure is not comparable with the previous year since your Company has operated only for a period of 6 months (April 1, 2012 to September 30, 2012) as mentioned above.
b. Aircraft Engine/Lease Rentals: Aircraft/engine lease rentals stood at Rs. 7,101 million during the twelve month period from April 1, 2012 to March 31, 2013. Your company has returned 29 aircraft during the year and the fleet as on March 31, 2013 was 26 aircraft. On the contrary, during the previous year, your Company had operated 67 aircraft (scheduled and non scheduled) up to November 2011, 13 of which were owned through finance leases and 54 were held under operating leases. Since November 2011, till the end of the financial year your Company returned 16 aircraft and the fleet as on March 31, 2012 was 55 aircraft.
c. Employee Remuneration and Benefits (Personnel Costs): Employee remuneration and benefits stood at Rs. 3,492 million during the twelve month period from April 1, 2012 to March 31, 2013. Your Company saw a reduction of 48% costs on employee remuneration. The number of employees of your Company for the period ended March 31, 2013 was 2,851 employees from 5,696 employees in the previous year ended March 31, 2012.
d. Other Operating Expenses: Other operating expenses stood at Rs. 7,615 million during the twelve month period from April 1, 2012 to March 31, 2013. The reduction in cost was mainly due to highly curtailed operations in the first half of the fiscal year, followed by no operations in the second half of the fiscal year.
e. Interest and Finance Charges: Interest and Finance Charges amounted to Rs. 14,362 million during the twelve month period from April 1, 2012 to March 31, 2013. Loan funds increased to Rs. 94,071 million as against Rs. 87,190 million. Your Company incurred interests of Rs. 13,680 million on fixed and other loans as against Rs. 12,052 million incurred in FY12. Bank charges and guarantee commission stood at Rs. 681 million for the year under review as compared to Rs. 711 million in the previous year ended March 31, 2012.
f. Depreciation and Amortization: Depreciation charges were Rs. 1,788 million during the year ended March 31, 2013 as compared to Rs. 3,010 million in the previous year ended March 31, 2013. Amortization charges stood at Rs. 600 million during the year ended March 31, 2013 versus Rs. 409 million for the year ended March 31, 2012.
10. Your Companys Outlook
The management is optimistic about recapitalization and restart of the airline operations of your Company. All efforts are directed towards a successful restart. While the growth in the industry has slowed, long term future of aviation in India remains bright. Many full-service foreign carriers have expressed an interest in entering the Indian aviation market and are in a wait-and-watch mode to see if the government is supportive of such initiatives. Even financial investors are keenly awaiting governments approval for foreign carriers to enter the market so that they can have an exit strategy if they so desire.
Cautionary Statement
Statements in the management discussion and analysis describing your Companys objectives, projections, estimate, expectations may be forward-looking statement within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to your Companys operations include economic conditions in the domestic markets and overseas markets in which your Company operates, changes in the Government Regulations, tax laws and other statutes and incidental factors.
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