MUMBAI/HYDERABAD (Reuters) - Kingfisher Airlines (KING.NS) will scale back overseas flights to cut costs and attract funding from sceptical investors, but the Directorate General of Civil Aviation (DGCA) accused it on Wednesday of reneging on a recovery plan and British Airways said it had suspended a code-sharing pact with airline.
Cash-strapped and debt-laden, Kingfisher has slashed its operating schedule and is scrambling for financing from creditors as its losses grow in India's fiercely-competitive airline industry.
While Kingfisher drew praise from analysts for cutting overseas flights, the country's aviation regulator said the airline has reneged on a turnaround plan it had agreed to with DGCA in January. The regulator said the current situation with the airline cannot be allowed to continue for long.
Aviation minister Ajit Singh also said that the regulator will submit a report on the airline in one to two days.
Adding to Kingfisher's woes, International Airlines Group's (ICAG.L) British Airways said on Wednesday it had suspended its code-sharing agreement with Kingfisher as of last week. It did not disclose the reason.
Also on Wednesday, Vijay Amritraj resigned from the airline's board, Kingfisher said, becoming the fifth director to leave the company since April 2011. Amritraj's resignation, which Kingfisher said was due to an increase in his travel schedule and commitments, leaves the company with just four directors.
Kingfisher, in a statement, said it is "working with our bankers to realise the urgent interim working capital," adding that foreign investors have shown an interest in the carrier.
"We would like to confirm that we are curtailing our wide-body overseas operations that are bleeding heavily," the airline said on Wednesday, adding that it had already returned one Airbus A330-200 to its UK lessor as a result.
Wide-body aircraft are used by Kingfisher to fly to London, Singapore and Hong Kong. The airline provided no details on its international flights to regional destinations like Sri Lanka.
Cutting its costly and loss-making long-haul international flights is seen by industry analysts as a necessary step if Kingfisher is to salvage its flagging business. It might not, however, be enough to bring bankers back to the table.
The move to cut overseas flights "is absolutely a good move by Kingfisher and an overdue one," said an aviation equity analyst in Mumbai. "There was no scale in the overseas business and it was bleeding cash. But until there is an upturn in the domestic business too, bankers will still stay away."
Shares in the airline rose as much as 3 percent after the news it was cutting its loss-making overseas operations. The shares later retreated to fall 1.2 percent. The stock has lost around 57 percent of its value since last April.
Kingfisher posted a loss of $90 million in the quarter to end-December. International operations accounted for more than 70 percent of the airline's losses before interest, tax, depreciation and amortization during the quarter.
Kingfisher, which has slashed its flights per day to 101 from 370 flown in September, has been hit by pilot resignations and a freezing of its bank accounts by tax authorities.
The carrier, which has never turned a profit, has become the poster child of struggling airline industry that is saddled with high fuel costs, stiff competition and low fares.
"Positive and immediate action is being taken on all fronts to cut costs," the airline said in its statement.
The airline, which has debt of about $1.3 billion, needs at least $400 million soon to keep flying, according to the Centre for Asia Pacific Aviation, an industry consultancy.
Kingfisher owes $52.5 million to the Airports Authority of India in unpaid fees, the authority's chairman said on Wednesday.
Kingfisher, controlled by flamboyant liquor baron Vijay Mallya, has been a supporter of proposals to allow foreign carriers to buy stakes in Indian airlines. India's government is expected to announce a decision on the plan soon.
"The government's final verdict on removing the restriction on investment by a foreign airline within the existing FDI limit of 49 percent is awaited. We can confirm that there is interest from prospectives on this basis," Kingfisher said.
Two Gulf carriers told Reuters last month they have no interest in a stake in Kingfisher. Kingfisher has also opened talks with SC Lowy Financial, a Hong Kong distressed debt firm, as the airline runs out of traditional funding options.
India's airlines are likely to lose up to $3 billion in the fiscal year ending March as the industry's total debt swells to $20 billion. Five of India's top six airlines are in the red, including state-owned Air India which is operating on taxpayer-funded life support.
Kingfisher last month abandoned plans to join the oneworld alliance, which would have seen it share passengers with carriers such as British Airways and Cathay Pacific (0293.HK).
Kingfisher Airlines, named after Mallya's famous brand of beer, was suspended from the International Air Transport Association's account settlement system last week due to non-payment of fees.
Kingfisher said on Wednesday that the suspension was due to its bank accounts being frozen by tax authorities.
"We continue to work with the tax authorities to arrive at a solution to de-freeze our accounts as early as possible," Kingfisher said.
Editing by Ranjit Gangadharan, Matt Driskill and Tony Munroe