UPDATE 3-India's Kingfisher flies into debt turbulence
* Kingfisher shares hit all-time low on cancellations
* Aviation minister to speak with finance minister on bank support
* Kingfisher says cutting 40 daily flights
* Airline says does not see risk to its future viability (Updates with company comments)
By Aniruddha Basu and Sanjeev Choudhary
MUMBAI/NEW DELHI, Nov 11 (Reuters) - India's civil aviation minister sought to cool a crisis over debt-hobbled Kingfisher Airlines on Friday as investors bailed out, alarmed by scores of flight cancellations and reports that its leasing firms wanted their planes back.
Named after the country's most-famous beer, Kingfisher has climbed to become India's No. 2 private carrier since it began operations in 2005 as the economy boomed and forecasts for passenger growth reached for the skies.
But it has become one of the main casualties of high fuel costs and a fierce price war between a handful of airlines which, between them, have ordered hundreds of aircraft for delivery over the next decade in an ambitious bet on the future.
The Centre for Asia Pacific Aviation (CAPA) has forecast a record $2.5-$3 billion loss for Indian airlines for the year ending March 2012, with state-run Air India alone likely to account for more than half of it.
As shares in Kingfisher slumped by as much as 18 percent to their lowest level since being launched by flamboyant liquor baron Vijay Mallya, Civil Aviation Minister Vayalar Ravi said he would approach the finance minister to seek emergency bank assistance for the cash-strapped company.
Late on Friday, Kingfisher Chief Executive Sanjay Aggarwal said the carrier had not made any bailout request to the government, and that it was complying with credit terms and payment arrangements with its vendors.
"Kingfisher does not see any risk to its future or long term viability. The whole Indian aviation industry is struggling due to high costs and lower yields. We are no exception," he said.
The country's main opposition party made clear on Friday it would oppose a state bailout for Kingfisher, which means the pressure will remain on Mallya's United Breweries (Holdings) to keep the airline in business.
BANK SHARES SUFFER
Shares in India's top two lenders, State Bank of India and ICICI Bank, which each hold more than 5 percent of Kingfisher, fell on concern their loans could sour.
"I think it will be difficult for the UB Group to bail them out again and again," said an aviation analyst at a domestic brokerage, who asked not to be named.
"The airline needs fresh funds and there will be a question mark on its survival if it is unable to raise the funds."
The Economic Times reported that some companies that had lent aircraft to Kingfisher planned to take them back, and in Europe two industry sources said on Thursday that the carrier was set to cancel orders for two A340 Airbus aircraft.
India's aviation regulator, meanwhile, said it was starting financial surveillance of all airlines to ensure there was no corner-cutting on safety and said it had asked Kingfisher to explain why they had cut back drastically on scheduled flights.
Kingfisher said it was dropping unprofitable routes and speeding up a fleet reconfiguration, which would see its daily schedule of flights drop to 300 from 340. It apologised to the regulator for not informing it about the cancellations.
Kingfisher, which said it has been a few days late paying salaries in the last two or three months, is one of India's most successful brands, ranked 116 by Campaign magazine in its list of the top 1,000 Asia brands for 2011.
"Like Air India, Kingfisher is also a difficult duck to drown," said Rajan Mehra, executive director at the Asia Pacific Academy for Aviation and Hospitality.
"They are in very bad shape, but whether they will sink I am not too sure. Mallya will have to take some very serious and stern steps," he said.
Rising crude prices, a depreciating rupee and cut-throat competition have eroded airlines' ability to raise fares despite passenger growth of about 19 percent this year.
LOW-COST SERVICE TO GO
Six weeks ago Kingfisher announced plans to recast its business model by doing away with its low-cost service.
Kingfisher shares have lost 70 percent of their value so far this year. The airline, which listed when it bought out budget airline, Air Deccan in 2008, has never made a profit.
Its auditors noted in the annual report this year that the firm needs extra cash to survive. Kingfisher had aimed to raise $250-$350 million through an issue of global depositary receipts in January but did not follow through on the plan. It also tried to attract private equity investment in 2008 and 2009 but no deal was forthcoming.
Earlier this year, Kingfisher cut its debt through a restructuring by issuing shares to 14 banks, including State Bank of India and ICICI. Its current debt is about $1.2 billion.
Last week it said it had written to banks for further help.
"The only way out is they sell a stake to a foreign airline company - if the government passes the rule anytime soon, which I think they can, given the circumstances of the whole industry," said Sharan Lillaney, an analyst with Angel Broking.
Foreign airlines may not invest in Indian carriers, a rule the government has said is likely to be scrapped.
State-run Air India lost 70 billion rupees ($1.39 billion) before tax in the year that ended in March. Jet Airways , India's top carrier, and SpiceJet posted losses of 7.13 billion and 2.4 billion rupees, respectively, for the September quarter. [ID:nL3E7MB1QK (Additional reporting by Swati Pandey; Writing by John Chalmers; Editing by Rosemary Arackaparambil and Tony Munroe)
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