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 itsoperations on May 9, 2005, with a fleet of 4 brand new Airbus - A320. He took over the UB Groupeven 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 Chabbrias Shaw Wallace. Today, his beer business controls halfthe 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 groundstaff 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 ondemand, 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 AirbusA321-200 and 5 Airbus A330-200. Delivery of A380s is due in 2010 and A350s in 2012.The question is, did Mr. Mallyas problems lie in acquisitive excess? He acquired Whyte & Mackay, aScottish bulk liquor maker amidst drama and glamour, holding a press conference in London toannounce the deal. He bought newspapers like Asian Age, fashion and movie magazines, bought andsold a TV company and added football teams to his ever expanding empire. He added a cricket teamRoyal Challengers to his list of acquisitions. He funded a party and became a Rajya Sabha MP. Heowns a racing team (Force India) which regularly competes in Formula One racing events, launched acalendar Kingfisher, in which the best of

the models, feature. The biggest venture of them all wasKingfisher 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 AamAadmi, a sort of shuttle service. Mallya brought glamour into the business of running airlines. Eachseat in his aircraft had a TV screen just like the international air carriers offered welcoming guests byappearing on the screen and asking them to write to him personally if they were unhappy with anyservice. He handpicked air hostesses, gave away goody bags to each passenger. Kingfisher Airlinesmade you feel special. The corporate sector wanted all top executives to fly Kingfisher and they cameback admiring the service.In 2008, due to the prevalent economic downturn, the civil aviation industry faced the worst period inits history. It was the time, when air passenger traffic started dripping, and the aircraft fuel prices wentsky rocketing. Deccan Aviation's Capt G.R. Gopinath, who was desperately looking for a buyer for hisairline, Air Deccan, had all but tied up with the Anil Ambani for a sell-out. Some last-minute delayseventually led to the collapse of the deal. That's when Mallya, suddenly put in his bid, apparentlyoffering more money than the previous one to clinch the deal. Mallya got Air Deccan's huge marketshare 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 airlineto 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 necessaryapprovals from the regulator SEBI in place, Mallya quickly changed the airline's name back toKingfisher 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 themetros, while Red did the rounds of tier-II cities. Kingfisher Chairman Vijay Mallya and his Jet Airwayscounterpart Naresh Goyal announced an alliance, both the airline companies decided to implementcode-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 JetPrivilege. The Kingfisher Airline had everything going for itself: great brand visibility, loyal customersand a wide network. But, the business model was coming apart and losses kept mounting. There wascannibalisation from the mother brand, that is If two brands look alike, then obviously, passengers willopt for the cheaper priced. Industry analysts say that the airline should have first consolidated itsdomestic operations and then introduced international routes because on the foreign routes, thecompetition 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 loansfrom banks which now have a total exposure of about Rs. 7,000 crore to Kingfisher Airlines, of whichover Rs 1,300 crore had been converted into equity during the last fiscal

as part of a debtrestructuring exercise. Of the banks' total exposure, over Rs. 4,000 crore are in the form of termloans. The consortium, led by State Bank of India, also includes a number of other public and privatebanks. But early this year, after the airline missed one of the milestones to raise Rs. 1,000 crorethrough global depository receipts because of the crisis in the Arab world, the lenders converted partof their loans to equity at a premium to market price. As a consequence, these banks now hold 23 percent stake in the airline. These loans for Kingfisher have also come at an enormous cost for the UBgroup. More than nine out of 10 shares of its crown jewel, United Spirits have been pledged ascollateral to the banks. Kingfisher is also struggling to meet its working capital needs, and has soughtrelief from lenders. It owes close to Rs 7,060 crore to 14 banks, and they are at present assessing theviability of the airline. Kingfisher reported a net loss of Rs 469 crore for the September quarter, thoughthere was a 10.2% rise in revenues at Rs1,528 crore. The loss was on account of massive spike inaviation fuel prices, and inability to hike fares due to the competition. Vijay Mallya is said to have beenmoved to tears for the employees of the Airlines, who have been suffering as they have been leftunpaid since last few months. Vijay Mallya expressed his concern for the employees while sending apersonal 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 handicappedbecause its bank accounts have been frozen by the income tax authorities. The frozen accounts haddisrupted payments to suppliers, including the International Air Transport Association, contributing tothe carrier cutting flights and delaying salaries to employees. Kingfisher got access to some bankaccounts that were earlier blocked by tax authorities because of late payments. The Kingfisher chiefreportedly informed that he has organized funds to be able to pay overdue salaries, adding that thedelay in payments is a "source of great personal sorrow." Awash in liabilities, Kingfisher Airlines istoday 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 itslow-cost carrier Kingfisher Red. Indian passengers are extremely price conscious and this measuremay just lead the airline into a deeper mess. This might prove to be another costly mistake. Now, itseems likely that the carrier may lose its license as billionaire Chairman Vijay Mallya struggles toimplement turnaround plans, according to Aviation Minister Ajit Singh. The new proposal is at leastthe second reduction in services in less than a month for the Bangalore-based carrier, which had 340flights 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 nations 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 9.7percent last month from 11.3 percent in January. Kingfisher will pare local flights by as much as

37percent to between 110 and 125 a day with a 20-plane fleet, Chief Executive Officer Sanjay Aggarwal after submitting a new plan to Indias aviation regulator, on 20th March. The airline will stop services to eight overseas destinations by April 10 after bookings were hit by a suspension from an internationalbilling facility. The airline is also in talks with local investors for funds. But in a recent interview toBusiness Line, UB Group chief financial officer Ravi Nedungadi pointed out that when the first debtrecast 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, hasanalysed that barely a decade after the Airline Deregulation Act of 1978 was implemented; the USairline industry lost all the money it made since the Wright Brothers' inaugural fight in 1903. The coreproblem of the aviation sector could be traced to a single cause, which is when Indian governmentderegulated the airlines industry, taking cue from the US government. There was the time whenairlines industry flew as the government dictated who could fly where and how much they could becharged, which let the airlines to generate a good profit but tickets were expensive. But hard timesstarted after the implementing deregulation act, which wide opened the gates for competition. This ledfor the sharp fall in ticket prices and profit followed the same suit. The old airlines which failed to copewith business model set for the new era by the new competitors, crash landed their airlines once andfor all. Deregulation has not only led to fall of ticket prices but also increased the monopoly andconcentration 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 andpassengers used to cheap cross-country fares to be blamed for the current crisis. Other times, costlyplanes, fears of terrorism and even outbreaks of disease adds to the woes of ailing aviation. Whenpeople endure the unemployment difficulties due to recession, airlines lose passengers. There aremany lessons which Indian aviation have failed to learn or still being defiant to those reasons led tothe sorry state of few airlines. Some anti-competitive, greedy airlines in order to control huge aviationmarket cause unhealthy competition, that eventually raise economical pressure. But India hasremoved the Monopolies and Restrictive Trade Practices Commission from aviation markets, underthe guidance of PM Manmohan Singh. However, the government have shown no will to appoint thepromised Competition Commission.Mallya has blamed the paid media as being responsible for the downfall of Kingfisher Airlines. Thesecomments were made in Mallya's letter to his employees. He said, "I'm trying my best to revive theairlines, employees must have patience." The letter is believed to have come shortly ahead of theDirectorate General of Civil Aviation's (DGCA) call on the airline's new flight schedule. Kingfisher

hadsubmitted a copy of the revised schedule to the DGCA after last week's massive cancellation of flightscausing great distress to flyers. It is now operating only 28 out of 64 flights. But market analystsbelieve 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 belie ve that the ill-conceived foray into theairline 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 UBGroup 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, forsuch diverse businesses, one would appoint a CEO each to run it with a hands-on approach whowould, in turn, report to the group chairman. While the liquor and the beer businesses had anexperienced set of officials running the show, the others needed the undivided attention of Mallyahimself. 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 hasposted more than 10 straight quarterly losses as it contended with high jetfuel expenses and a pricewar. 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 asmuch as $1 billion industrywide from overseas for working-capital requirements. Mukherjee alsoearmarked 40 billion rupees in the federal budget to bail out Air India Ltd., the state-owned carrier. The government doesnt want to ground Kingfisher because of concerns about employees,passengers and fares. Kingfisher also had its five-star service rating suspended by SkyTrax Researchfollowing 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 affectedbookings. 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 dataavailable with the regulator, as it cut flights and as service disruptions deterred passengers frombooking tickets.Kingfisher Airlines, which hogged the limelight during the previous two editions of India Aviation, aninternational exhibition and conference on civil aviation held once in two years in Hyderabad, hasdecided to stay away from the five-day event this year. Today, Kingfisher Airlines accumulated lossesstand 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.

On Oct 21 2012 Kingfisher Airlines Chairman Vijay Mallya downplayed the crisis
that hit the airlines saying it was blown out of proportion. "Kingfisher crisis is blown out of proportion, some companies do well, some don't," Mallya said. Mallya returned to the country after a month-long overseas visit. He was at the Buddh International Circuit Formula 1 track, where the qualifiers for the Indian Grand Prix were taking place. He said that the airlines has submitted a robust plan for its revival to the Directorate General of Civil Aviation (DGCA). "Sanjay Agarwal is looking into it, we have given a very robust and comprehensive plan," Mallya said. He also said that he was open to meeting the employees of the organisation. "If the employees want to meet me, they know where I live in Delhi," Mallya said He also added, "I have always been available. If you are trying to suggest that whatever settlement we have reached is without my participation, you are wrong." Mallya also brushed aside reports that the Kingfisher employees will protest at the circuit. "That is something the media mentioned it as their perception, there is no question of any disturbance or protest," he said.
Dec 5 2012 State Bank of India, the lead banker in the 17-lenders consortium that extended Rs 7,000 crore loans to the now grounded Kingfisher Airlines, said the banks are "trying to do everything to find an amicable solution" to the carrier's financial troubles. The SBI comment comes a week after the expiry of deadline that the lenders had set to the airline management to come up with a revival plan, that includes a $1 billion capital infusion. Kingfisher is a good company with a high brand value and lenders are trying to do everything to see that an amicable solution is found, SBI managing director and chief financial officer Diwakar Gupta told reporters on the sidelines of a PwC event.

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 Mallyas 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? f) How an airline obsession put a liquor baron on the rock