Case Study: Kingfisher Airlines

This is a world class experience, all at an affordable price. We are not a lowcost carrier and we do not intend to be one. We have broken the shackles of conservative socialism. The growing middle classes want the kind of standard of living you enjoy in the West. So what I am selling is lifestyle. Vijay Mallya About the Company
KINGFISHER AIRLINES is a major airline based in Mumbai, India. It is Indias fifth largest passenger airline that primarily provides national and international, short and long haul, highfrequency, medium to high fare service. Kingfisher Airlines was established in 2003. It is owned by the Bengaluru based United Breweries Group. The airline started commercial operations in 9 May 2005 with a fleet of four new Airbus A320200s operating a flight from Mumbai to Delhi. It started its international operations on 3 September 2008 by connecting Bengaluru with London. Kingfisher Airlines started by flamboyant beer baron Vijay Mallya in May 2005 shared the name of Indias leading beer brand. Though originally conceived and announced as a value carrier, Kingfisher rapidly morphed into a fullservice airline more in keeping with Mallyas style and went headon at Jet Airways. By September 2007, Kingfisher had 34 aircraft in its fleet (4 A 319, 12 A320, 6 A321, and 12 ATR72) and served 34 destinations. The airline had 51 A 320 family aircraft on order for delivery by 2014, 35 ATR aircraft on order for delivery between 2006 and 2010, and 50 widebodied aircraft (including the A380) on order for delivery between 2008 and 2018 for a planned international expansion. Indian Aviation Industry is one of the fastest growing markets in the world. But nowadays it is in the news due to different reason. And that is the failure of one of the leading aviation player Kingfisher Airlines. The airline has been facing financial issues for many years. Till December 2011; Kingfisher Airlines had the second largest share in India's domestic air travel market. However due to the severe financial crisis faced by the airline, it has the fifth largest market share currently. Even the company have no funds to pay the salaries to the employees and is facing several other issues like fuel dues; aircraft lease rental dues, service tax dues and bank arrears.

Financial turmoil of the Kingfisher Airlines

Ever since the airline commenced operations in 2005, the company is reporting the losses. But the situation became more horrible after acquiring the Air Deccan in 2007. After acquiring the Air Deccan, the company suffered a loss of over Rs. 1,000 crore for three executive years. By early 2012, the airline accumulated the losses of over Rs. 7,000 crore with half of its fleet grounded and several members of its staff going on strike. By 2010, the dark clouds over Kingfisher Airlines were getting darker and dense with no ray of sunshine. Jet Airways surpassed Kingfisher Airlines to become countrys largest passenger airliner as it reported a market share of 25.5% whereas for Kingfisher it came down to 19.8% down by almost 3% from last year. There was one player in the industry which was finally getting noticed IndiGo as it reported a good 90% seats being filled and was gaining market share rapidly. Kingfishers domestic daily operations were same 366 flights daily but its international operations increased to 28 flights daily. Despite of the increase in flights, Kingfisher failed to capture market unlike its competitors and this should have been considered as a red flag by the company which unfortunately went unnoticed by the company. The airline reported an increased gross income of INR 64.9 Billion and reduced losses of INR 10.2 Billion for the year ending 31st March 2011. In 2011, Kingfisher Airlines for the very first time declared that it is having some serious cash flow problems. It simply blamed the same to rising fuel costs. Dozens of pilots left Kingfisher for rival airlines during 2011. Creditors warned the firm that if it would fail to raise almost USD 159 Million in equity then they will not be able to restructure its debt. But Kingfishers top brass believed that they would continue being the way they have till now but the problems were bound to get really out of hands. The income for year ending 31st December 2011 stood at approx. INR 13.4 Billion which was lowest since 2007 and the losses increased sharply to INR 4.4 Billion. During late February, 2012, Kingfisher Airlines started to sink into a fresh crisis. Several flights were cancelled and aircraft were grounded. The airline shut down most international short-haul operations and also temporarily closed bookings. Out of the 64 aircraft, only 22 were known to be operational by February 20. With this, Kingfisher's market share clearly dropped to 11.3%. The cancellation of the flights was accompanied by a 13.5% drop in the stocks of the company on 20 February 2012. The CEO of the airlines, Sanjay Agarwal was summoned by the Directorate General of Civil Aviation to explain the disruptions of the operations. The State Bank of India, which is the lead lender to Kingfisher airlines, declared Kingfisher Airlines as a nonperforming asset and said that they would not consider giving any more loans to Kingfisher unless and until it comes up with a new equity by itself. Political activists also

claimed that bailing or helping a private airline would lead to problems within the Government. By February 27, Kingfisher operated only above 150 out of its 400 flights and only 28 aircraft were functional. Reuters reported that if Kingfisher were to shutdown, it would be the biggest failure in the History of Indian Aviation. It was announced that the direct flights to the smaller airports of Jaipur, Thiruvananthapuram, Nagpur and also to Hyderabad's Rajiv Gandhi International Airport were all shut down and only one/two-stop flights from its main hubs of Delhi and Mumbai would operate. Things were now out of hands of the management of Kingfisher and it declared 2000 job cuts along with longer work hours. Seemed like someone in the management assumed Kingfisher to be a manufacturer and not a service provider where each employee is a jewel for the firm. For the very first time the man himself Mr. Mallya declared that the airline was in dire need of funds in order to maintain operations. And on 18th February the airline became headline of almost all newspapers when it grounded most of its aircrafts and declared that it is operating mere 28 aircrafts with curtailed schedule of 175 daily flights. The consortium of banks led by SBI also declined to further issue more debt to Kingfisher until and unless Kingfisher itself raises some funds through fresh equity. In response to a situation as bad as bankruptcy, Vijay Mallya announced that he had organized funds to pay all the employees' overdue salaries. With bank accounts frozen and huge debts due, it is unknown so as from where he arranged the money. But he apologized to his workers and said that he would pay them immediately. By this time, kingfisher had accumulated losses of 444 crore during the third quarter of the fiscal year 2011-12. On March 3, 2012, The Central Board of Excise & Customs of India froze many more Kingfisher accounts as it was unable to pay all the dues as per schedule. Kingfisher was meant to pay 1 crore per working day. Aviation minister Ajit Singh warned the airline about the temporary suspension of the license until the crisis was sorted out. He announced that the rest of the airline's fleet would be grounded and all flights cancelled until the crisis came to an end. This would be only one step from permanently closing the airline. Now Kingfisher Airlines all accounts stand frozen by banking agencies and export import houses due to nonpayment of dues. Also The International Air Transport Association (IATA) has suspended Kingfisher from its International Clearing House dealing a fresh blow to the ailing carrier as it seeks funds to stay aloft.

Failed low cost model: What went wrong?

It cannot be understood that why airlines (read Kingfisher and Jet) tried to replicate business models of international LCCs (Low Cost Carriers) RyanAir or Southwest Airlines ? If this would have been the case then Singapore Airlines would have been bankrupt by now. It looks like that Kingfisher failed to study the models carefully and blindly acquired Air Deccan. The primary way any low cost carrier makes money is by operating on nonprimary routes using secondary airports which reduces costs for the airlines and then the benefits are passed on to the customers unlike Kingfisher which charged low fare for Kingfisher Red but continued operating at prime routes including metros. Kingfisher should have avoided flying even a single aircraft to metros and should have taken advantage of hundreds of uncommon routes and we all know that India is under penetrated market and much advantage could have been taken by exploring newer routes. Kingfisher was a five star airliner then there was no reason to operate on two different business models at the same time. These were simply the over ambitious plans of the management of Kingfisher Airlines.

Governments Role
One of the reasons for this is the abrupt end to reforms in aviation sector. In India starting an airline is not at all everyones cup of tea. Ask M Thiagarajan, CEO, Paramount Airways who although entered the Guinness Book of Records for being youngest chairman of a scheduled airline but his airline Paramount Airways is yet to receive an aircraft and officially a defunct airline. In India every time an airliner wants to buy an aircraft, it has to seek permission of the government and everyone knows that there are numerous procedural delays by our governmental agencies. Also there is an unusual rule that in order to fly overseas, the carrier needs to complete minimum five years of operations domestically. Further adding to the suffocating operational environment, the government is still continuing its protectionist approach towards Air India. For example many of Indian airports are capable of catering super jumbo Airbus A380 aircrafts but since Air India dont have any of those so the government has not allowed any other private player from anywhere in the world to land A380 for commercial in Indian territory. There was no privatization of airports since 2006 but even after that only handful of airports has been privatized which does not make much sense. The government also has differential fuel pricing which seems very much biased towards Air India. One must understand that if Air India is Indias flag ship carrier, Kingfisher, Jet or IndiGo are not transferring their earnings to Bahamas or Dubai. Their revenues also contribute towards Gross Domestic Product of India only and they also employ Indians.

Competition

Competition is definitely extremely intense in the Indian aviation industry with 5 carriers fighting one on one. We cannot say that IndiGo, SpiceJet or GoAir are new entrants in the industry. They are almost as old as Kingfisher Airlines but what new about them is that they have restructured themselves with time but have always stayed on course with it comes down to business model. All of them are low cost carriers so they have not introduced business class in their aircrafts in so many years of operations. The plus point of Indias low cost carriers is that they have not compromised when it comes down to quality and security unlike other low cost carriers around the globe. The other form of competition in Indian aviation sector is from railways. Even though we cannot say that Indian Railways is safer mode of travel, still majority of Indians travel via railways especially for shorter routes. Now this makes the idea of having an airline exclusively for point topoint short haul routes a waste of time and money. Where airlines can gain here is by hitting on the weakest point of railways Quality. Kingfisher Airlines was a favourite among business travellers hence it should have continued being a business centric airlines and even if it would have increased the prices say by ten per cent business travellers would have still travelled by Kingfisher only because they were sure of getting five star treatment along with on time departures and arrivals. Kingfisher most probably believed that people in majority are more important that people in minority but it forgot that there are four other players in the country serving the majority of people and it was the only one serving the minority and hence failed to capitalize upon its own strength and unique selling point (USP).

Bargaining Power of Buyers

Since Kingfisher Airlines decided to introduce Kingfisher Red it automatically entered into a price war against all other carriers especially domestically. If Air Deccan was offering tickets for meagre one rupee then naturally Kingfisher had to continue such kind of marketing campaigns. But the problem was that Kingfisher almost trashed all the marketing strategies of Air Deccan thinking of reducing operational costs but here came the deviation. Airline business has extremely long gestation periods. For Kingfisher, Air Deccan was a totally new business so it should have considered that Kingfisher Red will take some years to completely reap benefits of being a low cost carrier but Kingfisher believed that Air Deccan has been in the market much before Kingfisher Airlines so it should bring Kingfisher Airlines financial statements into green very soon. The business fliers which were earlier loyal to Kingfisher Airlines used all their frequent flier miles, bought free tickets, gave the same to their family to enjoy and they never returned back to Kingfisher. For them Kingfisher Airlines became a compromised airliner and they started going back to Jet Airways which also is cash strapped but has a sustainable business model. As soon as Kingfisher realised that they had committed a mistake by changing model of Air Deccan, it in a haphazard

way increased prices of Kingfisher Red and brought the same on par with other airlines. At this point of time Kingfisher Red had become a lost opportunity and even the management was confused if it would call it a normal carrier or a low cost one. Finally in February 2012 the brand Kingfisher Red was officially declared nonfunctional, marked one of the biggest examples of failed consolidation and became a land mark failure in terms of merger and acquisitions.

Aircrafts
Aircrafts are the most important assets of any airliner. Choosing and inducting the same requires major decision making skills. Kingfisher Airlines started with an Airbus A320 aircraft and went on using aircrafts on the same line. Now the business model of Kingfisher Airlines is such that it does not have any aircraft of its own. All the aircrafts of Kingfisher Airlines are dry leased. Dry leased means that the lessor (who actually owns the aircraft) gives the aircraft to the lessee (Kingfisher in this case) for a period of minimum two years without insurance, crew, ground staff, supporting equipment, maintenance, etc. The problem here is that aircrafts instead of being fixed assets for the airlines becomes an operational asset and plays a crucial role in cash flow calculations. Kingfishers dues kept on piling up and it is goodwill of United Breweries group that the lessors allowed the same. The amount has piled up way so much that lessors have filed suits against Kingfisher Airlines across globe and has forced Kingfisher to ground majority of aircrafts. Another issue with Kingfisher Airways is that it has itself created confusion for itself. Since it does not buy aircrafts, it cannot command any bargaining power over Boeing or Airbus but it can abstain from duplicity of tasks. Kingfisher Airlines operates both Airbus and ATRs. This is absolutely an unwanted headache caused due to managements poor decision making skills. Kingfisher requires double personnel just because of the fact that it operates aircrafts of two different makes. If it would have relied only on Airbus then it could have easily reduced its operational costs. When Kingfisher Airlines knew that it is entering market for a long term then instead of wasting cash on acquiring Deccan Aviation, it should have bought planes from Airbus or Boeing. Kingfisher wasted millions on ordering A380 jumbo aircrafts. It knew that government would not provide permit to fly the same any time soon. Majority of carriers around the globe which ordered A380s such as Emirates, Qantas etc. are having profits on their books, have almost nonsignificant competition domestically and they operate at an extremely large scale around the globe unlike Kingfisher Airlines for which neither the competition is low nor it used to operate at such a huge scale. Just to prove your superiority over other domestic carriers or to show how powerful you can be, it is pretty much wasteful first mover loss instead of first mover advantage.

The Uncertainty Future

Kingfisher Airlines is unofficially bankrupt and officially out of funds. There is difference between two statements. Kingfisher Airlines is operating without any cash. The bank accounts are frozen and customers are not willing to fly with the carrier. After analysing the entire scenario, there are strong possibilities of more difficult situation in the last month of fiscal year 2011-12. The company is in dilemma of finding help, but from where? Government has refused for bailing and all the lenders and bankers have no more trust. The employees are also not able to tolerate the salary crisis and the slipping market share leads the more difficulties. Promoter Vijay Malya has to decide the way ahead. Whether is it possible to save the company? There are very few alternatives. As per the previous news, Etihad Airways was interested in investing in Kingfisher by providing equity in exchange for a stake in the airline. Also involved in the talks was the International Airlines Group, owner of British flag carrier British Airways and Spanish flag carrier Iberia. But the question is the permission by Government. So at present there is very tough situation for Vijay Malya and for the company. Will new fiscal year bring any solution for the company?

Questions
1. According to you, what are the possible ways for the company to overcome this situation? 2. Should the Indian Government to intervene and bailout Kingfisher Airlines? Give reasons
in support of your answer.

3. Mallyas personality got in the way of CEO Mallya, comment on the statement. 4. Is the Problem of Kingfisher Airlines Industry Specific or Company Specific?