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31st, Oct 2008

Kingfisher Airlines Limited – commentary on the results for the half year ended 30th september, 2008.

The Aviation Industry is going through a challenging phase globally, driven primarily by spiraling fuel costs, which hit an un-precedent USD 147 per barrel in July 2008. The Indian industry was hit more adversely due to the cumulative impact of Customs Duty and Sales Tax on account of this sharp increase in international fuel prices. The average price of ATF in the six month period from April to September 2008 increased by about 60%. The impact on Kingfisher Airlines alone was to the tune of Rs.640 Crores.

 
The industry was constrained to pass on at least a part of this cost push in the form of Fuel Surcharge resulting in an average 55% increase in the end price paid by the travelling public.
 
This increase in fares coupled with the lean season between June and September resulted in a drop in traffic and corresponding low capacity utilization for the industry as a whole. The period saw Kingfisher’s seat factor dropping in line with the industry by about 6%.
 
Apart from the increase in the average ticket value, the Company has initiated a number of steps to mitigate and manage costs. Key Measures Include:
 
  1. Network alignment consequent to the merger of Kingfisher and Deccan: The capacity deployed has been brought down by about 4% and further reductions are planned.

  2. Two aircrafts have already been returned to Lessors with no additional cost, and the Company is in discussion for the return of a further eight aircraft. The impact of this capacity contraction will be visible during the second half of the Financial Year.

  3. The Company has deferred its international roll-out plans apart from one flight operating between Bangalore and London. Consequent, to this decision taken in the light of the global economic environment and the near recession conditions prevalent in much of the Western world, there will be reduced deployment of wide-body aircraft in the near term.

  4. The merger of the two operating airlines into one corporate entity has also enabled savings on operating costs such as Engineering and Ground Handling, Insurance and Catering. Employee costs have also been addressed through an integrated organization which enabled the Company to terminate the contracts of most expatriate staff and impose a hiring freeze on new appointments.

Despite the challenging environment, the Company has managed to significantly improve its topline performance.
  • The unit revenues have increased by over 33% between H1 FY09 and H1 FY08.
  • The Average Ticket Value has improved by 55% over the same period.
  • The absolute revenues have increased by 33% despite a capacity reduction of 4%.
The recent discussion between Kingfisher Airlines and Jet Airways is expected to help both carriers to significantly rationalize and reduce costs by offering a unique high product quality with improved standards of service to its consumers.
 
The two airlines will be able to derive maximum synergies by working together and thereby offer best possible fares for the benefit of the end users i.e., the travelling customer. The scope of this discussion is expected to include the following on the operational and cost aspect.
  • Joint fuel management to reduce fuel expenses
  • Common ground handling of the highest quality
  • Common Global Distribution system platform
  • Cross utilization of crew on similar aircraft types and commonality of training as also of the technical resources, subject to DGCA approval.
Areas covered on the revenues and revenue related operational aspects are:
  • Code-shares on both domestic and international flights subject to DGCA approval
  • Interline/Special Prorate agreements to leverage the joint network deploying 189 aircraft offering 927 domestic and 82 International flights daily.
  • Joint Network rationalization and synergies
  • Cross selling of flight inventories
  • Reciprocity in Jet Privilege and King Club frequent flier programs
The softening of the fuel prices has resulted in an improvement in the Company’s performance in September 2008 (fuel prices reduced by 15.5%). The further expected drop in fuel prices will help the Company in the second half of the year.

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