The Directorate General of Civil Aviation (DGCA), after much delay, suspended the airoperator’s permit (AOP) of debt-ridden Kingfisher Airlines on 20 October and gave Kingfisher until 31 December, i.e. the date its AOP expires, to submit “a concrete and reliable revival plan ensuring safe, reliable, efficient and sustainable scheduled air transport services”.
An airline can conduct scheduled flight operations only during the validity of its AOP, which is renewed periodically by the DGCA.
On 28 December 2011, after conducting a safety audit, the DGCA concluded that Kingfisher’s financial crisis was likely to impede its ability to maintain the required safety standards and there existed a reasonable case for withdrawal of its AOP.
The civil aviation requirements (CAR) provide that the validity of an AOP largely depends on the financial health of the operator. Potential risk factors considered in the financial assessment include significant layoffs or turn-over of personnel, delays in meeting payroll, reduction in safe operation standards, evidence of cutting corners, demands for cash on delivery by suppliers which previously granted credit to the operator, shortage of supplies, inadequate maintenance services, and curtailment or reduced frequency of revenue flights.
In 2012, the airline’s losses have risen to ₹80 billion (US$1.5 billion) while its debt exposure has mounted to ₹75 billion. Loan defaults have led many banks to list loans to Kingfisher as non-performing assets.
The airline struggled to maintain its services until September, when its bank accounts were frozen by tax authorities owing to default in taxes. This led to a strike by frustrated pilots, engineers, other employees and service providers, resulting in a partial lockout which culminated in the suspension of Kingfisher’s AOP. Owing to defaults in lease rental payments, many foreign aircraft lessors have proceeded to repossess aircraft that they leased to Kingfisher.
Impact of suspension
The suspension has resulted in the airline being grounded until it can submit a satisfactory revival plan. Unless the suspension is revoked and the AOP revived before it expires on 31 December, Kingfisher cannot renew its AOP on its expiry.
Suspension of its AOP has increased the risk of the airline losing out on parking spaces and landing rights at airports across the country. Despite payment of what it owed to one of the busiest airports in the country, though in instalments, the airline has been forced to give up its premium airspace at the airport.
To sustain its AOP, Kingfisher must not only submit a revival plan acceptable to the DGCA but also ensure continued compliance with the CAR, one of them being maintaining a minimum of five aircraft in its fleet. As of early December, the grounded airline’s fleet strength was reduced to a mere eight to10 from a once impressive 66. It is to be seen if Kingfisher is able to assure and convince the lessors that have not yet terminated their leases to continue them.
Despite Kingfisher’s steady downfall in the past year, its lenders have so far not proceeded with liquidating the airline’s pledged securities for recovery of the ₹75 billion owed by Kingfisher.
Lenders have been holding back due to the constant assurances given by chairman Vijay Mallya of pumping in funds through the group company United Breweries Holdings or bringing in a new investor pursuant to the Indian government recently allowing 49% foreign direct investment in the aviation sector by foreign airlines.
With the suspension of Kingfisher’s AOP, the chances of the airline getting any direct foreign investment seem bleak. Lenders now seem to be hoping for something to come of the recent alliance between Mallya and the British liquor giant Diageo, though it is unclear whether any portion of the deal money will be used for rescuing Kingfisher.
Consequences of lapse
If Kingfisher’s AOP expires on 31 December, the airline has three options: (1) remaining grounded until it can restart its operations and then applying for a fresh permit; (2) shutting down its operations altogether; or (3) revalidation of the lapsed AOP by a new investor under a new name.
If Kingfisher fails to revive its AOP and resume operations and ends up with a lapsed permit, it remains to be seen which of the above three options is the fate of the struggling airline or whether another choice will emerge. Is it the end of the road or is there still a way out for this struggling airline, which had a promising start as an ultra luxury carrier?
Will Kingfisher again “Fly where nobody else takes you” and “Fly the good times”?
Nimish Vakil is a partner and Sneha Rao is an associate at Tyabji Dayabhai. Tyabji Dayabhai was established in 1872 and has over 25 years’ experience in handling all types of aviation transactions and litigation.
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