Winning strategy? Kingfisher's Mallya turns ticketing agents into financiers

MUMBAI: Aviation companies usually refer to their big ticketing agents as business partners. Kingfisher Airlines, promoted by liquor baron Vijay Mallya, can now go one step ahead and call them financiers as well.

In a move that has caused disquiet among rivals, Kingfisher has turned to its big consolidators (so called because they buy tickets from all airlines in bulk at a discount and sell them to travellers) to raise money. With bank lending drying up and equity markets not conducive, India's second-largest airline by market share is relying on money released ahead of the payments cycle by these consolidators to meet its expenses.

This is how it works: A big consolidator usually gets tickets from all airlines and sells it at a discount to passengers. The payment is made every 15 or 21 days. About eight months ago, Kingfisher requested the consolidators to pay for tickets at the beginning of the month itself, instead of in cycles. In return, the airline agreed to pay 3% interest every month to the consolidators.

It was supposed to be a perfect and cosy, though unusual, arrangement. The strapped airline gets the money, while the consolidators get interest on the lines of a credit card issuing bank - 3% a month or 36% per annum.

The trouble is, it is not working out as planned. The airline has upset rivals who blame the practice for the losses they suffer through discounted tickets.

"If an airline goes to the travel agent and gives 36% interest in a year against ticket money, it becomes unviable to compete with it," a top official of another airline, who did not want to be identified, said.

AIR INDIA TRIED IT LAST YEAR

Since they have already paid Kingfisher, the consolidators are forced to dispose of the tickets at any cost. This forces other airlines to drop fares.

"If I am unable to sell Kingfisher inventory that is with me for the amount paid, I might stop selling other airlines like IndiGo and push for Kingfisher tickets," said a Kingfisher travel agent. He said a similar proposal was made to Air India last year.
"Air India tried it for one cycle last year and abandoned the idea thereafter," he added. Kingfisher executives are defending the practice.

"Each airline has the right to run its business the way it wants to. The payment made by LCCs to agents is called deposit incentive, and if we do the same it becomes an issue. Jet Airways too sells First Class coupons to travel agents at discounts that are sometimes as high as 10%," Sanjay Aggarwal, CEO, Kingfisher Airlines, told ET.

But he admitted the company's cash position is not comfortable. "The recent developments are negative for fund-raising. But we are working on other means and resources to raise funds," he added.

Kingfisher posted a loss of Rs 1,027 crore for the last financial year and recently completed a debt restructuring under which lenders agreed to convert a portion of their loans to equity to ease the debt burden.

Kingfisher still pays Rs 800 crore annually towards interest costs (at 12.5%) and has over Rs 6,000 crore of debt on its books. Payments to suppliers have been erratic, forcing one of them, HPCL, to shut fuel supply last month at the Delhi airport, a move which threw operations out of gear for an hour. The firm also owes money to the Airports Authority of India and to some private airport operators.