That the Indian Airline industry faces significant operating challenges is no surprise. Majority of airlines except for the likes of Indigo, Spicejet etc. are burning cash and running losses.
This is not even including the woe that is Air India. The fuel costs alone are huge for the Indian airlines and coupled with the fuel burnt while waiting to receive the landing clearance itself could be a huge contributor to losses.
Kingfisher Airlines is no exception to the tough operating environment that Indian airlines are facing. Kingfisher posted a loss of Rs 1,027 crore for the last financial year and is burning cash at a rate more than it is making cash.
Add to that the high debt & the accompanying interest rates, the balance sheet sure does not look good for the carrier.
Kingfisher Airlines has adopted an interesting strategy to not only increase its chances of filling capacity but also infusing capital back into the company,
Kingfisher Airlines has turned the big ticketing agents into financiers. What this means is that instead of the traditional Net 15, Net21 payment terms the ticketing agents will pay Kingfisher upfront money for the seats. So, Kingfisher gets to collect the money upfront from ticketing agents and in turn promises to pay the ticket agents interest at 3% per month
But does collecting the money upfront instead of the traditional way of getting it after 15, 21 days help the airline enough? May be not, but there are interesting dynamics are at play here.
To start with big ticketing agents account for 70-80% of the total airline ticket sales albeit at discounted rates. Now, when ticketing agents pay Kingfisher Airlines the money upfront for the tickets all the Kingfisher Airline tickets become the most important inventory item for them.
To ensure that the agents recover the payment made, there is the possibility that they ought to give preference to Kingfisher airline tickets when selling it to travellers. So, in a way it looks like a win-win for Kingfisher Airlines. Like hotels, the success (revenues) for airlines depends a lot on occupancy.
So, if Kingfisher Airlines manages to fly its plane with almost full capacity, it would be much better than it is now.
However, there is this 3% monthly interest rate to consider as well. Kingfisher is already paying crores of rupees in interest and this 3% interest rate amounts to a whopping 36% annually.
One wonders if this is too much a burden to receive upfront payments and end up paying additional interest. The scepticism arises from the fact that this is not a new method.
Apparently, Air India tried a similar formula but decide to do away with it after a year. Well, it is Air India so there could have been umpteen factors not causing it to work but lets see if Kingfisher Airlines finds it sustainable.
Obviously, the Competition Is Crying Hoarse!!!
It is obvious, isn’t it. With Kingfisher Airline handholding the biggest selling channel into peddling its own tickets other airlines are feeling left out. They are crying foul as Kingfisher Airlines tries to buy out the ticketing agents with a 3% monthly rate or so to speak.
At the onset it does look bad for other airlines, but hey, no one is stopping you to do so – If you can take the risk of that 3% monthly rate.
I have no idea whether this strategy by Kingfisher will fly but at a much broader level it made me ponder whether these so called anti-competitive strategies are ethically/morally in wrong.
Yes, Kingfisher Airlines might indirectly force the ticketing agents to sell more Kingfisher airline tickets but the model sure does not seem wrong and it is easily replicable, so why should the competitors call it wrong/bad
What are your thoughts on this new strategy by Kingfisher Airlines? Do you think it will help airline with its debt woes to a certain extent?