IS KINGFISHER AIRLINES HEADING TOWARDS BANKRUPTCY?

Kingfisher Airlines, the darling project of Vijay Mallya owed $2.49 billion (around Rs.13, 400 crores as on October 23, 2012) to creditors and had accumulated $1.9 billion in losses by 30 June, 2012. It posted losses of Rs.2, 328 crores in the fiscal year ended 31 March, 2012 and Rs.1, 027 crores and Rs.1, 647 crores in the preceding two years. With such financials supporting the uproar from the employees of the company as well as the media, the question automatically arises: Is kingfisher airlines heading towards bankruptcy? The answer is not a straight-forward one. There are some experts who say that the airline should have gone bankrupt long ago. Had Kingfisher been a U.S. carrier, the natural choice for it would have been to seek Chapter 11 bankruptcy protection, CNI Researchs Ostwal said. A research by the Dalal Street Investment journal seems to suggest the same. The research is based on Altman Z-Score given by Edward I Altman. a Z-score of 2.99 and above indicates that the company is financially strong. As the ratio declines and settles somewhere between 1.81 and 2.99 its means that the entity has entered into the grey zone and one must develop caution over its finances. Below the 1.81 ratio is an indication of sheer financial embarrassment. When the Altman Z-scores formula was applied to KFAs financials we derived a score of -0.64, which is far below the 1.8 levels. This is a clear indication of financial distress leading to the conclusion that the days of Kingfisher Airlines are numbered. However, there are some experts who feel that the company still has a chance to come out of the doldrums. Banks have traditionally chosen to give promoters of such companies a long rope. Bankers speaking off the record, say their experience with loss-making Indian companies in the past decade is that they come out of it- eventually. Liquidating assets does not help anyone, they say citing the example of Ispat, Essar Oil and Dabhol Power company. All three eventually began paying back their loans. But does this theory work for an airline company? Unlike the steel companies, Kingfisher Airlines has few assets. The aircraft, engines, spares, offices are all leased. The slot, brand and people are intangible assets that are difficult to monetize. The Kingfisher brand is one of the assets hypothecated for the loans- but bankers are not very sure what they will do with it. Thus, it is clear that banks are only delaying the inevitable. There are also some experts who feel that the airline might survive without Vijay Mallya. The biggest reason for Kingfisher Airlines decline is clearly Mallyas hubris and wrong management calls at every step of the airlines seven year existence. The beer-baron has never brought in professionals to run the carrier- even the CEOs he hired like Nigel Harwood (who came from Airbus) or more recently Sanjay Aggarwal (from Spice Jet), are never allowed to take their own decisions. KFA has been micro-managed by Mallya. So, it is clear that KFA s days are numbered.