Kingfisher Default Said to Raise Airline Costs: Corporate India

Payment defaults by grounded Indian carrier Kingfisher Airlines Ltd. are prompting aircraft lessors to demand a premium to cover risks in the South Asian country.

Companies leasing out planes are insisting on a one-year security deposit instead of the usual three-month cover in addition to a commitment to hire the aircraft for as long as nine years, said two officials of Air India Ltd. The state-owned firm is negotiating to lease 19 Airbus SAS A320s for six years, they said, asking not to be identified because the talks are private.

Higher costs may weigh on local carriers that are already struggling with a combined debt of $13.6 billion, the region’s most expensive fuel tariffs and a falling rupee, said Mark D. Martin, chief executive officer of Dubai-based Martin Consulting LLC. Lessors including a unit of American International Group Inc. are wary after the government failed to release some aircraft grounded by Kingfisher, leading to messy litigation.

“I don’t really blame the lessors,” said Martin, who advises airlines on their fleet strategy. “You have to blame Kingfisher for this. Right now, lessors are pretty much in control and command of the negotiations.”

State Guarantee

While keeping rentals unchanged, the lessors also sought government guarantee for the planes, which Air India declined to provide, the officials said. The carrier has asked the government to expedite a rule change to address their concerns, the officials said.

India plans to ease rules to ensure leasing companies are able to take possession of aircraft without any hurdles, Aviation Secretary K.N. Shrivastava said Sept. 13, without giving a timeline.

The rule change is aimed at underscoring the supremacy of the Cape Town Convention over Indian laws. In 2008, India signed the agreement that provides for the irrevocable power of attorney, which allows lessors to seek deregistration and export of aircraft in the event of a default. That will end the repeat of any “Kingfisher-like fiasco,” Shrivastava said.

Kingfisher, the only Indian carrier to order Airbus A380s, has grounded planes since October after five straight years of losses. The airline lost its operating license on Jan. 1 after failing to convince authorities it has enough funds to revive operations.

Planes Seized

The Bangalore, India-based company defaulted on payments to lessors, creditors and airports as losses widened amid rising fuel costs and competition.

AIG’s unit International Lease Finance Corp. earlier this year struggled to retrieve six Airbus aircraft it had leased to Kingfisher after local airport and tax authorities seized them against dues owed by the carrier. DVB Bank SE also faced delays in repossessing two planes.

“The difficulties incurred by aircraft lessors in re-possessing aircraft placed with Kingfisher has raised the perception of the India-market risk,” said Binit Somaia, a Sydney-based director with consultancy CAPA Centre for Aviation. “This may result in tighter adherence to contracts. There is likely to be less leeway with delayed payments.”

India’s current market conditions haven’t deterred foreign carriers from investing. Singapore Airlines Ltd. yesterday announced a venture with Tata Group to set up a full-service operator from New Delhi. Malaysia’s AirAsia Bhd. has also teamed up with Tata for a discount airline while Etihad Airways PJSC this year agreed to buy a stake in Jet Airways (India) Ltd.

Rising Costs

Aircraft leasing costs for Jet Airways jumped 31 percent to 3.63 billion rupees ($58 million) in the quarter to June 30 from a year ago, according to an exchange filing. For SpiceJet Ltd., they rose 16 percent in the same period. Leasing costs account for the highest expense for airlines after fuel, according to data compiled by Bloomberg.

Jet hasn’t posted an annual group profit in the six years through March, while SpiceJet reported loss for the second year in a row through March 31.

Shares of Jet rose 1.3 percent to 358.95 rupees in Mumbai today. The stock has lost 36 percent this year, compared with a 4.3 percent gain for the benchmark S&P BSE Sensex. SpiceJet, the nation’s only listed budget carrier, tumbled 50 percent.

The rupee’s slide may further boost expenses for airlines, Giorgio De Roni, chief executive officer of budget carrier Go Airlines (India) Pvt., said in an Aug. 30 interview.

Rupee, Fuel

The local currency has slumped about 11.6 percent this year against the dollar. The one-month implied volatility of the rupee surged 333 basis points in the past month to 17.46 percent, signaling a greater potential for losses.

The rupee’s fall “is a serious challenge,” De Roni said. “There’s a consequential impact on fuel and all the costs that are in foreign exchange.”

He didn’t immediately respond to a separate e-mail seeking comments on lessors increasing costs. S.L. Narayanan, chief financial officer of SpiceJet’s parent Sun Group, didn’t respond to two calls and a text message to his mobile phone. Jet Airways and IndiGo didn’t respond to e-mailed questions.

Indian airlines have 381 aircraft with a list price of $60 billion on order with Airbus and Boeing Co. IndiGo, which has an order of 280 aircraft pending with Airbus, has predominantly expanded fleet through sale and leaseback transactions.

“I don’t see this as a great hindrance,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. in Mumbai. “From a financial perspective, security deposits may be interest bearing.”