Kingfisher Airlines update and Airbus accounting puzzle

Kingfisher Airlines shares rose by 2.49% today to Rs24.65 at the close on the back of news that the government has asked the Life Insurance Corp (LIC) to “consider” buying 10% stake in the airline.

This will infuse much-needed capital into the airline whose lenders had also asked the carrier to put in more money for continued support.

It is true to say that Kingfisher is more or less Indian state owned, it is therefore too large to fail. The Indian state banks who bought into the airline with large loans are now out on a limb, they could end up with huge write-offs of loans and therefore the Indian government has no choice but to continue spreading the debt of the airline across its financial assets so as not to be seen to be giving a direct loan. Hence the entrance of the state insurance sector, they too will be worried and they should be. Kingfisher slipped to third place on the Indian national airline rankings last month with IndiGo taking its number 2 slot.

Currently, Kingfisher owes huge amounts of money to oil companies, airport authorities both state- and privately-owned and is unable to meet staff payments. Any injection of cash through investment at this time should in reality come with the power to take charge and attempt to sort out the mess.

In loosely-related news: It was the cancellation of the Kingfisher A340 order which effectively guaranteed an early end to production of the aircraft type. But with the aircraft winding down and the staff working on the A330 production line, Airbus was in a good position to have a seamless cancellation of production once and for all without fanfare. In the event Airbus ensured that this was the case, making the announcement during the Dubai Air Show, but of course after that Qatar deal was finalised...

Normally the story would end there with the obituary already written (in Airline Economics issue 3) there is not much more to say – But what of this €192m gain that Airbus booked from the cancellation of the program? EADS CFO, Hans Peter Ring, confirmed that the gain was from the write-back of a provision taken by Airbus on the A340 program. So what was the write-down made for in the first instance? Was Airbus going to build aircraft that they could not sell with no order in place for the same on a build-it-and-they-will-come-basis? A gain at the end of a program is highly unusual because there are excess and obsolete parts, unamortized tooling and other costs associated with the decision to terminate. We are currently investigating the one off gain as it is seemingly strange – we will let you know...