CASESTUDY ON KINGFISHER AIRLINES

Kingfisher Airlines Ltd. (KAIR) is a private airline based in Bangalore, India.

Currently, the Indian carrier is struggling with a cash shortage and losses, it will end international
flights and cut many local routes as it seeks funds to revive operations. KAIR is India's largest
domestic airline. Owned by Vijay Mallya of United Beverages Group, Kingfisher Airlines started its
operations on May 9, 2005, with a fleet of 4 brand new Airbus - A320. He took over the UB Group
even before he turned 30 after his father, Vittal Mallya, passed away suddenly in 1983. Since then, he
has consolidated the group holdings, shed those companies, including a car battery making venture,
won a corporate battle and Manu Chabbria’s Shaw Wallace. Today, his beer business controls half
the domestic market while the liquor business controls three-fourths of the market. Kingfisher Airlines
was set up in 2003 but hasn't seen a single year of profit since it got listed in 2006.

Retrospection on Kingfisher Airlines history proves that it was a stiff competition for other domestic
airlines of India. Its brand new aircraft, stylish red interiors, stylishly dressed cabin crew and ground
staff added to glamorous flying. The airline introduced in-flight entertainment (IFE) systems, for the
first time to Indian consumers. The IFE systems were provided on every seat, even on the domestic
flights. Kingfisher Airlines offers several unique services to its customers. These include personal
valet at the airport to assist in baggage handling and boarding, exclusive lounges with private space,
accompanied with refreshments and music at the airport, audio and video on-demand, with extra-wide
personalized screens in the aircraft, sleeperette seats with extendable footrests, and three-course
gourmet cuisine. The airline offers attractive services to its on board passengers. Years following its
inception proved to be beneficial for the airline, in terms of its booming business, with a good track
record of customer satisfaction. Kingfisher Airlines was the first airline in India to operate with all new
aircrafts. It was also the first airline in the country to order the Airbus A380. Kingfisher Airlines
currently operates ATR 42, ATR 72 and Airbus A320 aircraft for domestic and Airbus A330s for
international services. In the present time, the airline operates with a fleet of 74 aircrafts, which
include 25 Airbus A320-200 aircraft, 6 ATR 42-500, 27 ATR 72-500, 3 Airbus A319-100, 8 Airbus
A321-200 and 5 Airbus A330-200. Delivery of A380s is due in 2010 and A350s in 2012.

The question is, did Mr. Mallya’s problems lie in acquisitive excess? He acquired Whyte & Mackay, a
Scottish bulk liquor maker amidst drama and glamour, holding a press conference in London to
announce the deal. He bought newspapers like Asian Age, fashion and movie magazines, bought and
sold a TV company and added football teams to his ever expanding empire. He added a cricket team
Royal Challengers to his list of acquisitions. He funded a party and became a Rajya Sabha MP. He
owns a racing team (Force India) which regularly competes in Formula One racing events, launched a
calendar Kingfisher, in which the best of the models, feature. The biggest venture of them all was
Kingfisher Airlines and he promised flyers a first class service not usually seen among the domestic
airlines. Jet Airways was good and on time, but was for busy executives; Air Deccan was for the Aam
Aadmi, a sort of shuttle service. Mallya brought glamour into the business of running airlines. Each
seat in his aircraft had a TV screen just like the international air carriers offered welcoming guests by
appearing on the screen and asking them to write to him personally if they were unhappy with any
service. He handpicked air hostesses, gave away goody bags to each passenger. Kingfisher Airlines
made you feel special. The corporate sector wanted all top executives to fly Kingfisher and they came
back admiring the service.

In 2008, due to the prevalent economic downturn, the civil aviation industry faced the worst period in
its history. It was the time, when air passenger traffic started dripping, and the aircraft fuel prices went
sky rocketing. Deccan Aviation's Capt G.R. Gopinath, who was desperately looking for a buyer for his
airline, Air Deccan, had all but tied up with the Anil Ambani for a sell-out. Some last-minute delays
eventually led to the collapse of the deal. That's when Mallya, suddenly put in his bid, apparently
offering more money than the previous one to clinch the deal. Mallya got Air Deccan's huge market
share and several aircraft as well, plus an immediate listing. The licence to fly on international routes
as Air Deccan had been in the business for five years — a requirement by the regulator for any airline
to fly overseas. But he also acquired the losses incurred by the airline. Through a reverse merger,
Kingfisher Airlines became Air Deccan and once the entire acquisition was completed with necessary
approvals from the regulator SEBI in place, Mallya quickly changed the airline's name back to
Kingfisher Airlines in 2008. He spun off Air Deccan's fleet into a subsidiary called Kingfisher Red. So,
Kingfisher Airlines had an economy as well as business class and flew on trunk routes including the
metros, while Red did the rounds of tier-II cities. Kingfisher Chairman Vijay Mallya and his Jet Airways
counterpart Naresh Goyal announced an alliance, both the airline companies decided to implement
code-sharing on both domestic and international flights. It was a step to reduce the expenses.
Subsequently, frequent flier programs were announced by both the airlines, namely King Club and Jet
Privilege. The Kingfisher Airline had everything going for itself: great brand visibility, loyal customers
and a wide network. But, the business model was coming apart and losses kept mounting. There was
cannibalisation from the mother brand, that is If two brands look alike, then obviously, passengers will
opt for the cheaper priced. Industry analysts say that the airline should have first consolidated its
domestic operations and then introduced international routes because on the foreign routes, the
competition only gets bigger and with those who have deeper pockets.

The airline is today saddled with total debts of over Rs. 8,000 crore. Mallya was forced to take loans
from banks which now have a total exposure of about Rs. 7,000 crore to Kingfisher Airlines, of which
over Rs 1,300 crore had been converted into equity during the last fiscal as part of a debt
restructuring exercise. Of the banks' total exposure, over Rs. 4,000 crore are in the form of term
loans. The consortium, led by State Bank of India, also includes a number of other public and private
banks. But early this year, after the airline missed one of the milestones to raise Rs. 1,000 crore
through global depository receipts because of the crisis in the Arab world, the lenders converted part
of their loans to equity at a premium to market price. As a consequence, these banks now hold 23 per
cent stake in the airline. These loans for Kingfisher have also come at an enormous cost for the UB
group. More than nine out of 10 shares of its crown jewel, United Spirits have been pledged as
collateral to the banks. Kingfisher is also struggling to meet its working capital needs, and has sought
relief from lenders. It owes close to Rs 7,060 crore to 14 banks, and they are at present assessing the
viability of the airline. Kingfisher reported a net loss of Rs 469 crore for the September quarter, though
there was a 10.2% rise in revenues at Rs1,528 crore. The loss was on account of massive spike in
aviation fuel prices, and inability to hike fares due to the competition. Vijay Mallya is said to have been
moved to tears for the employees of the Airlines, who have been suffering as they have been left
unpaid since last few months. Vijay Mallya expressed his concern for the employees while sending a
personal letter addressing all people working with Kingfisher. Expressing his helplessness, Mallya,
who was once known as the King of Good Times, claimed that the company was handicapped
because its bank accounts have been frozen by the income tax authorities. The frozen accounts had
disrupted payments to suppliers, including the International Air Transport Association, contributing to
the carrier cutting flights and delaying salaries to employees. Kingfisher got access to some bank
accounts that were earlier blocked by tax authorities because of late payments. The Kingfisher chief
reportedly informed that he has organized funds to be able to pay overdue salaries, adding that the
delay in payments is a "source of great personal sorrow." Awash in liabilities, Kingfisher Airlines is
today asking the banks for another debt recast and perhaps some easier terms to pay interest costs.
In its bid to reduce costs, the airline has started cancelling flights and has recently closed down its
low-cost carrier Kingfisher Red. Indian passengers are extremely price conscious and this measure
may just lead the airline into a deeper mess. This might prove to be another costly mistake. Now, it
seems likely that the carrier may lose its license as billionaire Chairman Vijay Mallya struggles to
implement turnaround plans, according to Aviation Minister Ajit Singh. The new proposal is at least
the second reduction in services in less than a month for the Bangalore-based carrier, which had 340
flights a day in October 2011.

Kingfisher rose 1.1 percent to 19.20 rupees as of 9:51 a.m. in Mumbai, after gaining as much as 4.2
percent. Jet Airways (India) Ltd. (JETIN), the nation’s biggest airline, fell as much as 1.9 percent,
while SpiceJet Ltd. (SJET) dropped as much as 2.4 percent. The carrier had a market share of 9.7
percent last month from 11.3 percent in January. Kingfisher will pare local flights by as much as 37
percent to between 110 and 125 a day with a 20-plane fleet, Chief Executive Officer Sanjay Aggarwal
th
after submitting a new plan to India’s aviation regulator, on 20 March. The airline will stop services to
eight overseas destinations by April 10 after bookings were hit by a suspension from an international
billing facility. The airline is also in talks with local investors for funds. But in a recent interview to
Business Line, UB Group chief financial officer Ravi Nedungadi pointed out that when the first debt
recast happened, the price of crude was about $80 per barrel, which has now gone up to $100 per
barrel while the rupee has eased past Rs. 50 per dollar from about Rs. 40 earlier. ―It is obvious that
the working capital requirements too has gone up,‖

Paul Stephen Dempsey, an expert in aviation and the law at Canada's McGill University, has
analysed that barely a decade after the Airline Deregulation Act of 1978 was implemented; the US
airline industry lost all the money it made since the Wright Brothers' inaugural fight in 1903. The core
problem of the aviation sector could be traced to a single cause, which is when Indian government
deregulated the airlines industry, taking cue from the US government. There was the time when
airlines industry flew as the government dictated who could fly where and how much they could be
charged, which let the airlines to generate a good profit but tickets were expensive. But hard times
started after the implementing deregulation act, which wide opened the gates for competition. This led
for the sharp fall in ticket prices and profit followed the same suit. The old airlines which failed to cope
with business model set for the new era by the new competitors, crash landed their airlines once and
for all. Deregulation has not only led to fall of ticket prices but also increased the monopoly and
concentration to tenfold. For instance, just four airlines are controlling the two-third of the US market,
country that gave birth to the deregulation. Expensive labor contracts, skyrocketing fuel prices and
passengers used to cheap cross-country fares to be blamed for the current crisis. Other times, costly
planes, fears of terrorism and even outbreaks of disease adds to the woes of ailing aviation. When
people endure the unemployment difficulties due to recession, airlines lose passengers. There are
many lessons which Indian aviation have failed to learn or still being defiant to those reasons led to
the sorry state of few airlines. Some anti-competitive, greedy airlines in order to control huge aviation
market cause unhealthy competition, that eventually raise economical pressure. But India has
removed the Monopolies and Restrictive Trade Practices Commission from aviation markets, under
the guidance of PM Manmohan Singh. However, the government have shown no will to appoint the
promised Competition Commission.

Mallya has blamed the paid media as being responsible for the downfall of Kingfisher Airlines. These
comments were made in Mallya's letter to his employees. He said, "I'm trying my best to revive the
airlines, employees must have patience." The letter is believed to have come shortly ahead of the
Directorate General of Civil Aviation's (DGCA) call on the airline's new flight schedule. Kingfisher had
submitted a copy of the revised schedule to the DGCA after last week's massive cancellation of flights
causing great distress to flyers. It is now operating only 28 out of 64 flights. But market analysts
believe flaws in Mallya's business plans and style of functioning lie at the root of Kingfisher airlines'
woes. In a controversial report on the airline, Veritas Investment Research analysts point out that
Mallya should have never got into the airline business. ―We believe that the ill-conceived foray into the
airline business has already cost UB shareholders dearly, and that their ownership of India's premier
liquor and beer assets has been sacrificed at the altar of egoistic ambitions,‖ two analysts with the
research company said in a report in September this year. The report was hotly contested by the UB
Group management which felt there was nothing wrong with the airline.

Mallya was not just into one business but several and each as different as the other. Normally, for
such diverse businesses, one would appoint a CEO each to run it with a hands-on approach who
would, in turn, report to the group chairman. While the liquor and the beer businesses had an
experienced set of officials running the show, the others needed the undivided attention of Mallya
himself. The carrier has been seeking new funds or loans since at least November when it shuttered
low-cost services and deferred plane deliveries as part of a turnaround plan. The company has
posted more than 10 straight quarterly losses as it contended with high jetfuel expenses and a price
war. Some of the potential investments in Kingfisher depend on a change in foreign ownership rules.
Finance Minister Pranab Mukherjee during his budget speech, proposed allowing airlines to borrow as
much as $1 billion industrywide from overseas for working-capital requirements. Mukherjee also
earmarked 40 billion rupees in the federal budget to bail out Air India Ltd., the state-owned carrier.
The government doesn’t want to ground Kingfisher because of concerns about employees,
passengers and fares. Kingfisher also had its five-star service rating suspended by SkyTrax Research
following cuts in its international network. The carrier is paring overseas operations that are ―bleeding
heavily.‖ Suspension from the IATA system used by travel agents because of overdue fees affected
bookings. Airline executives have gone to Geneva to work to regain access as soon as possible.
Kingfisher lost domestic market share every month from October through February, according to data
available with the regulator, as it cut flights and as service disruptions deterred passengers from
booking tickets.

Kingfisher Airlines, which hogged the limelight during the previous two editions of India Aviation, an
international exhibition and conference on civil aviation held once in two years in Hyderabad, has
decided to stay away from the five-day event this year. Today, Kingfisher Airlines accumulated losses
stand at about Rs 8,200 crore and the money to pay for fuel, salaries and airport fees is running out,
prompting Mallya to approach the government for a bailout.

QUESTIONS:

a) What changes would you suggest to KAIR to salvage the situation?

b) What led to the failure of Kingfisher Airlines?

c) Give supportive reasons for this statement ―Mallya’s personality got in the way of CEO Mallya‖

d) Give reasons for the Indian Government to intervene and bailout Kingfisher Airlines.

e) What are the problems plaguing the aviation industry and Kingfisher Airlines business?

NOTES:

1. How an airline obsession put a liquor baron on the rocks – excerpts from www.thehindu.com
2. Kingfisher airlines www.businessweek.com
3. Excerpts from www.wikipedia.com
4. Excerpts from www.news.oneindia.in
5. Excerpts from www.business-standard.com
6. Statement From Kingfisher Airlines - Mumbai, March 14, 2012

Prakash Mirpuri - Vice President - Corporate Communications, Kingfisher Airlines Ltd

1. Despite the shortage of crew, Kingfisher Airlines operated 101 flights on March 13th
and will operate 101 flights on March 14th.

2. Our prime mission is to maintain schedule integrity by predicting in advance what we

can with the sole objective of minimising, if not eliminating guest inconvenience.

3. We try hard 24X7 to inform guests in advance of cancelled or combined flights and to
give them the option of travelling on other airlines or to take a full refund.
 4. There will, inevitably, be a small number of guests who are inconvenienced partially
because we could not access them personally but only via their agents.

5. Kingfisher apologises to all those who were affected.

6. Whilst many of our pilots and engineers have expressed their disappointment, we not
only sincerely apologise to them but wish to advise that our Chairman will meet the pilot
fraternity on Thursday March 15 in Delhi.

7. There is a lot of sensational speculation and assumption about us.

8. We request one and all to appreciate the serious handicaps we face not only because
of our frozen accounts but because of the operating environment. We are working hard to
resolve the issues that confront us given the current environment.

9. We would like to confirm that we are curtailing our wide body overseas operations
that are bleeding heavily. To this end we have already returned one Airbus A 330-200 to the
lessor in the UK. Positive and immediate action is being taken on all fronts to cut costs.

10. We are trying to protect the interests of our valuable employees. We share their pain
caused by unpaid salaries and we are also trying to protect their jobs apart from paying
salaries.

11. Whatever the schedule we operate, we would like to assure our valued customers
that your flights will depart as shown and on time.

12. The suspension of our ICH and BSP accounts with IATA resulted from the freeze of
our IATA accounts by the tax authorities.

13. We have, obviously suffered as guests are not able to book seamlessly through IATA
travel agents as before. This serious handicap has been partially mitigated by encouraging
our travel partners to establish booking arrangements on their individual platforms.
Nevertheless, this greatly influences our ability to operate certain flights and it is, therefore,
incorrect to assume that pilots are solely responsible.

14. We continue to work with the tax authorities to arrive at a solution to de-freeze our
accounts as early as possible.

15. We are also working with our Bankers to realise the urgent interim working capital as
approved in the Bankers Consortium meeting held on February 17th. This is not dependant
on State Bank of India as widely reported.

16. We fully understand that State Bank of India can only consider additional facilities
once our account with them is standard and this has been debated and minuted at the last
Consortium meeting.

17. The Government's final verdict on removing the restriction on investment by a foreign
airline within the existing FDI limit of 49% is awaited. We can confirm that there is interest
from prospectives on this basis.

18. Finally, we wish to assure all guests, employees and all stakeholders that we are
doing our very best.

(FLYKINGFISHER.COM)