Contents

Introduction
Read any newspaper, visit any website or talk to any MBA graduate, one issue seems to crop up everywhere: What is future of Kingfisher Airlines? One may find many responses to the above question. Some say that Mr. Vijay Mallya should close down the business or should take the bailout option from Bank or Government. In current paper, we will look at all the options of Kingfisher Airlines can avail for the future course of action.

Background
Kingfisher Airlines
Kingfisher Airlines was launched as an all-economy, single-class service provider with basic food and entertainment amenities. However one year into its operation, Kingfisher Airlines changed its business model from economy to luxury. This had a major impact on the airlines as management did not allow airlines to stabilize. Soon after becoming luxury services provider, airlines merged with Air Deccan. The all-economy configuration of Air Deccan was rebranded and called Kingfisher Red, which continued to operate as its low-cost wing till recently. Kingfisher ended up spending Rs 550 crores on an airline that had losses of over Rs 550 crores. Kingfisher merged itself with Air Deccan so that the new entity would be classified as an airline with five years of domestic flying experience (Air Deccan was already five years old at the time of the merger) , thus fulfilling requirements to fly international routes. Meanwhile, Jet purchased Air Sahara, fuelling the competitive race between the two Airlines. Global developments also did not help the Kingfisher Airlines either. Both at the time of the Deccan acquisition and then financial restructuring by taking loans from the 14 banks, the market conditions changed. Essentially, jet fuel prices began to sky-rocket. Then came the 2008 recession that made fundamentals in the airline industry worse, which is when the airline launched its international operations. Moreover at that time, Kingfisher was very

aggressive with its international expansion, launching long-haul as well as short-haul flights. Basically Kingfisher wanted everything in one go without proper planning. Kingfisher Airlines currently is awash in a sea of red. It recorded a loss of Rs 1,027.40 crores in 2010-11 and has losses of Rs 1,175 crores for the first three quarters of the current fiscal already, with accumulated losses of around Rs 6,000 crores. Its debt burden is now over Rs 7,000 crores and it recently reported a reduction in major sectors.

Indian Aviation Industry

Currently, Indian Aviation industry is facing huge economic problems which are adding to the problems of all the major players in the industry. Following are some of such problems:
1. Rising fuel Costs causing major expenses 2. Tax rationalization and a price cut on the Airline Turbine Fuel 3. Periodic Expenses for spare parts, to customs, to airport authorities. 4. Skilled personnel in the airline sector 5. Lack of Airport infrastructure

Till Government addresses the above mentioned issues, it would be difficult for the aviation players to reduce the losses and earn the profits.

Current Scenario
As mentioned above, Kingfisher Airlines is suffering from are losses amounting to 7000 crores and is looking for options to restore its original glory. Following are some of the available options that Kingfisher is unable to leverage:
1. Kingfisher Airlines in desperate need of 400-500 crores of working

capital but banks are not helping it as airlines has already taken loans from 14 banks for financial restructuring and is unable to repay it.

2. Mr. Vijay Mallya is unable to infuse equity into the airlines has he has

already pledged 90% of his shares and now has limited abilities to raise the money
3. Mr. Mallya cannot raise money from the market as Indian equity market

is worst this year and down by 23%. Moreover, Kingfisher share are down by 64%.
4. Mr. Mallya can try to raise funds abroad, but global banks, already

frightened by the exposure to European sovereign debt, are likely to be wary of helping a cash-strapped airline.
5. Till now, FDI in Aviation industry is being considered. Even if, FDI is

allowed till 24%, no foreign company would invest as it would be allowed to participate in decision making.
6. If Government rescues the airlines, there will be no telling what kind

future bailout would be. Moreover, bailout at this time does not mean that there wont be any future problems with Kingfisher Airlines.

Decision Making
Kingfisher Government Game
In this game, two parties are involved namely, Kingfisher airlines and Government. Both of them have their own motives and would make their decisions as per those motives. Let us look at the motives of all the parties involved.
Government Motives

From the Government perspective, following may be the few criteria on which decision could be made:
1.

Government does not want to bail out Kingfisher airlines as it may incur huge expenses in doing so. However, Government would want Kingfisher to operate to maintain the competition in the market. Thus the Government would want Kingfisher to find some other bailout option and continue operating. Government would pay the bailout money to Kingfisher airline if airline is not able to find any other source of income. The worst condition for Government would be to pay the bailout money but Kingfisher airlines does not manage to survive.

2.

3.

Kingfisher Motives

From the Kingfisher Airlines perspective, following may be the few criteria on which decision could be made:
1.

Kingfisher would also prefer to be helped by Government as compared to the bank or other investors. This is because it would like to control its management once it recovers from the losses. If Government does not help Kingfisher airlines, Kingfisher airlines have to find some other way of finding the help.

2.

Payoffs

Based on the above information, following would be the pay offs of both the parties (in the decreasing order):
S No. 1 2 3 4

Criteria Government does not give bailout, but Kingfisher Airlines manages to operate by approaching other sources Government gives the bailout, and Kingfisher Airlines manages to operate. Government does not give bailout and Kingfisher Airlines have to close down the operations Government gives the bailout but Kingfisher has to close down the business due to continuing losses

Payoff
4 3 2 1

Decision Payoff: 3 Bailout

K (a) Bailout No Bailout Payoff: 1

G(A) No Bailout Bailout K (b)

Payoff: 4

No Bailout Payoff: 2

Created above is the tree displaying the possible choices of Government (G) and Kingfisher Airlines (K). Let us do the rollback analysis and begin at the action node a and b. At node a Kingfisher knows that Government would provide bailout, so Kingfisher would go for Bailout option and manages to recover the losses. So Bailout branch is highlighted by other line. Similarly at node b, Kingfisher already knows that Government would not bailout, however, as it has to stay in business, Kingfisher would approach other sources. Thus Again Bailout would be the appropriate choice here. At Node A, Government already knows that Kingfisher would select bailout option irrespective of the choice Government takes. Thus Government would go for non-bail out option. This choice is highlighted by another line. Thus, the decision by the Government would be not to bailout Kingfisher Airlines.

Kingfisher - Bank Government Game

In this game, three parties are involved namely, Kingfisher airlines, Banks and

Government. All the three have their own motives and would make their decisions as per those motives. In this case, banks would only give loan when they are sure that Kingfisher airlines would be able to recover the losses. Thus banks would evaluate the business plan of Kingfisher Airlines and if they are sure that all the operational issues associated with Kingfisher airlines no longer exist, they would grant the loan. Let us look at the motives of all the three parties involved.
Kingfisher Motives

From the Kingfisher Airlines perspective, following may be the few criteria on which decision could be made:
1. Kingfisher Airlines already know that Government would not bailout it.

So, it has to ensure that Bank support comes in.

2. Kingfisher Airlines also knows that the bailout would be short term

bailout and for long term profits, Government needs to modify its rules pertaining to aviation industry.
3. Kingfisher also wants to stay in business. So, if Bank rejects the bailout,

it would have to find some other source and get the required equity.
Bank motives

From Banks perspective, following may be the few criteria on which decision could be made:
1. Banks would be ready to pay the loan only when it is sure that Kingfisher

Airlines would be able to pay the debt and for Kingfisher Airlines to reap the benefits, Government would have to modify the rules.
2. If Government does not modify its rules, Bank may not be interested in

bailing out of Kingfisher airlines.

3. Bank would not want to bail out the Kingfisher airlines if Kingfisher

airlines succumb to the debt and Government does not modify its policies.
Government motives

From Banks perspective, following may be the few criteria on which decision could be made:

1. Government would want Kingfisher airlines to restore to its former glory

but would not want to pay the bailout money.

2. Government would not be interested in changing the rules of aviation

industry.
3. Government would be forced to change the rules of aviation industry if

that is what it takes for bank to bailout Kingfisher Airlines.

Payoffs

Based on the above information, following would be the pay offs of both the parties (in the decreasing order):

S No.

Criteria Government does not agree for rules modification, banks do not provide the bailout money and Kingfisher Airlines manages to recover from its losses by attracting some other new source. Government does not agree for rules modification, banks provide the bailout money and Kingfisher Airlines manages to recover from its losses. Government agrees for rules modification, banks provide the bailout money and Kingfisher Airlines manages to recover from its losses. Government agrees for rules modification, banks do not provide the bailout money and Kingfisher Airlines manages to recover from its losses by attracting some other new source.

Payoff

5 6

Government does not agree for rules modification, banks do not provide the bailout money and Kingfisher Airlines close the business Government does not agree for rules modification, banks provide the bailout money, however Kingfisher Airlines

4 3

have to close the business

7

Government agrees for rules modification, banks provide the bailout money, however Kingfisher Airlines have to close the business Government agrees for rules modification, banks do not provide the bailout money and Kingfisher Airlines have to close the business

Here, I have taken assumption that all the banks would be unanimous in their decision to either support the bailout or oppose the bailout and all decision of all these banks would be governed by their previous experience with Kingfisher Airlines. The new source may be any VC or angel investor looking to revive the business. In practical sense, new source may be the banks with which Kingfisher airlines have not done any business till now. This is done to simplify the calculations of payoffs.

Decision Payoff: 6 Bailout

K(a) Bailout No Bailout Payoff: 2

B(a) Modify Rules No Bailout K(b)

Bailout

Payoff: 5

No Bailout

Payoff: 1

Bailout K(c ) Bailout No Modification B(b) No Bailout Bailout K (d) No Bailout

Payoff: 7

Payoff: 3

Payoff: 8

No Bailout

Payoff: 4

Creating above is the tree displaying choices of all the three players: Government (G), Banks (B) and Kingfisher Airlines (K). Let us do the rollback analysis at node K (a). At this node, Kingfisher Airlines already knows the decision of Government and Bank. So, Kingfisher Airlines would select the bailout option. Thus bailout option is highlighted by another line. Similarly at node K (b), K(c) and K (d), Kingfisher Airlines would select bailout option.

Let us do the rollback analysis at node B (a). At this node, Bank knows both decision of Government and Kingfisher Airlines. Thus, to reap the maximum benefits of the interest on the loan given to Kingfisher Airlines, Bank would go ahead and bailout the Kingfisher Airlines. Thus, bailout option is highlighted by another line. At node B (b), bank knows that Government would not modify the rules, so bank would not take the risk of giving the loan again and losing the entire amount. So bank would choose the no bailout option. Same is highlighted by another line.

On doing the rollback analysis at Node G, Government knows the decision both Bank and Kingfisher Airlines would take. It would be in the interest of the Government that Kingfisher Airlines be bailed out without help of either Government or Bank. Thus, Government would choose No modification option and the same is highlighted by another line. However, if government wants to force Bank to pay the bailout money to the bank, it needs to modify the rules of the aviation industry. To highlight this, the same option is highlighted by dashed line.

Thus, if Government wants Kingfisher Airlines to look for another source of equity, it would not change its rules of aviation industry. If government wants to force the bank to pay the bailout money, it should change the rules of aviation industry.

Conclusion
As per the above analysis, it seems that Government would never by itself pay the bailout money to Kingfisher airlines. However, it can either force the bank to pay the bailout money to Kingfisher Airlines or make Kingfisher airlines to look for another source of equity.