Kingfisher considers hiving off engg dept into separate unit, DGFT Exemption may let Kingfisher Import ATF Directly

Kingfisher Airlines is exploring hiving off its engineering department into a separate maintenance, repair and overhaul (MRO) unit. This is one of several measures being considered by the airline management to tide over its current financial crisis. Government-owned Air India, also in severe financial losses, is also implementing such an exercise, hoping to launch its MRO in January. Kingfisher posted a second quarter loss of Rs 469 crore. Apart from interest reduction and cost savings, the airline is looking at “opportunity to unlock further value through spin offs”'. One such plan is for an MRO to service its planes. Creation of a separate engineering unit would benefit the airline in reducing its employee costs. Kingfisher has about 1,500 aircraft engineers and technicians who currently do maintenance on the airline's 66 planes. Kingfisher is expecting to get benefits worth Rs 2,190 crore through debt reduction, aircraft reconfiguration, operational efficiencies and discounts from vendors. Although there was an increase in revenue, a combination of high fuel price and interests costs led to a widening of losses in the quarter. The management has listed various plans to achieve cost savings. It hopes to halve its debt of Rs 6,521 crore to Rs 3,722 crore through a slew of measures, such as conversion of Rs 675 crore of UB Holding debt to equity and through release of maintenance deposits held by lessors. It is expecting Rs 400 crore through reduced interest costs. The airline is estimating an earning of Rs 1,395 crore following a reconfiguration of planes and is expecting discounts worth Rs 286 crore from suppliers and reduction in lease costs amounting to Rs 115 crore.

The government will allow cash strapped Kingfisher Airlines to directly import fuel instead of sourcing it through state canalising agencies only if it is satisfied that the restriction was causing genuine hardship. Vijay Mallya, had sought the Directorate General Of Foreign Trade’s permission for the airline to directly import fuel to save on sales tax, which varies from 4% to 30% across the country.  Aviation turbine fuel is a restricted item which can be imported only by state-trading enterprises, in this case IndianOil Corp.  If a request has been made for putting ATF on open general licence, the matter has to be referred to the commerce minister for a policy change. While the Foreign Trade Policy 2009-13 includes ATF in the list of restricted products that are to be imported through canalising agencies, the DGFT has discretionary powers to grant exemption. According to oil industry the idea is not viable as it can cost Rs 100 crore to build facilities at a large airport. According to the DGFT, while there was no precedent for granting exemption for ATF import, some relaxation has been given for import of other restricted items in the past.  When allowed to import directly, importers also save commission that is to be paid to canalising agencies which could be as much as 1% of the total value of imports.