SERVICE MARKETING - CASE STUDIES

2012
FAILURE STORY BY “PRICING”

KINFISHER’S FAILURE STORY

SUBMITTED BY:
Preeti Yadav & Vinay Chande
ITM - SIA BUSINESS SCHOOL
12/30/2012
Introduction
Kingfisher Airlines was established in 2003 & Parent company being United Breweries
Group Headquarters: The Qube, Mumbai, Maharashtra the airline started commercial
operations in 9 May 2005 It started its international operations on 3 September 2008 by
connecting Bangalore with London.

On June 15, 2005, it became the first (and only) Indian airline to order the Airbus A380
Ever since its launch in May 2005, Kingfisher Airlines had blazed a trail of innovations and
introduced a range of market-firsts that have completely redefined the whole experience of
flying Kingfisher was recognized as a '5-star airline' for its excellent product and service
quality by Sky trax By elevating its customers to a level of being ‘guests’ and not just
passengers, Kingfisher Airlines has endeared itself to consumers

Status of Kingfisher Airlines- Pre Crisis Cont. Kingfisher Airlines was the first Indian airline
to introduce in-flight entertainment (IFE) system on domestic flights

Kingfisher Initial Success

Kingfisher Initial Success: External factors POLITICAL FACTORS OPEN SKY POLICY by
Indian government in 2005 FDI LIMITS increased to 49% from 40% in 2005 Good relation
with Indian Civil Aviation Minister Praful Patel TECHNOLOGICAL FACTORS GROWTH OF E-
COMMERCE AND ONLINE TICKETING Mobile and online check-in Modernization and
privatization of airports. Up gradation of ATC

Failure Story
One of India's most high profile airlines few years back, now in shambles. It is really
interesting to ponder that in same market scenario, one of the competitors of Kingfisher is
flying high and high. Yes, Indigo Airlines is the most profitable airlines in India. What makes
one company succeed, while another, in the same operating environment, falter?
The top most reason for the failure is attributed to ailing around a single “p”.
The people‘s p was highly neglected by Mr. Mallya as people form the key basis in service
industry starting from
Providing vision as a leader,
Formulate strategies,
Become key decision makers and
Manage the business as well as
Run the daily operations.

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Therefore let’s discuss each aspect of people and its correlation to KFA failure in detail -

Lack of visionary leadership

Relations between owner and chief executives were always strained Chief Operating
Officer Nigel Harwood quit due to disagreements with Mallya on running the airline Lack of
delegation is being talked about as the major move that Mallya did not undertake wh en
running the airline. Sanjay Agarwal, ex-CEO Spice jet, joined Kingfisher Airlines in Sept
2010, and Vijay Mallya assumed the role of MD and Chairman of Kingfisher Airlines. To
cope up with the cash crunch, the airline decided to get away with Kingfishe r Red, its low
cost segment, in September 2011; but it seems the survival mantra was too late for the
ailing airlines.

Should questions be asked to board and senior management how risk of the company was
being managed? After Vijay Amritraj resigning from the board, there are just four directors
left. Is that the directors responsibilities - first don't take appropriate measures to protect
the company and then resign when the company is in crises? How should the board be held
responsible for failure of the organization?

Kingfisher was gifted to Mr . Sidhartha Mallya by his father on his birthday i.e. a Near Zero
experience in running a company and the later CEOs appointed by Mr. Mallya couldn’t
bring any significant result too. His over indulgence in petty things like parties and
Kingfisher Calendar also lead to inadequacies in his finances. .IPL is also one of the reason
for Kingfisher downfall because it is known that many of the money was diverted to IPL
from Kingfisher airlines, resulting which they defaulted in Loans and recently became a
NPA (non performing asset) to its leading bankers like SBI

I still have hope from Mr. Mallya that he will refrain from over indulgence and concentrate
on his fragile business. It’s time he and his son become responsible and start this company
from scratch instead of late night parties and IPL and took inspiration from Indigo airlines
who proudly claimed themselves as Low cost airline and exceeding the customers delight
in every way they can.

Poor Decision making by Initial leaders

Strong initial opposition
When the idea of starting an airline was debated at the UB headquarters, there was strong
opposition from his close aides.

But Mallya prevailed.

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'We had a series of discussions and many of us said that if we have to start a new business,
mobile telephony is an option instead of an airline. Leveraging the Kingfisher brand in the
mobile telephony space would have worked wonders to expand our empire, but somehow
we could not convince Mallya out of the idea of an airline business,' a board level official of
UB Group told Business Standard.

Even as recent as late last year, just before the 2G scam broke out in the Indian telecom
sector, UB Group was toying with the idea of licensing the Kingfisher brand to a new mobile
telephony player.

Pet project
However, one of the key reasons to acquire Deccan was to get the license to fly to high -
traffic global destinations, a plan which Mallya passionately pursued until reality hit hard.
One pet project was a flight from Bangalore to Silicon Valley in the US, connecting the two
major technology hubs of the world.

There is immense traffic in this sector, dominated by global airlines and if that move had
worked out it would have benefited Kingfisher to a large extent. It would have also
catapulted Kingfisher Airlines onto the global stage and would have given a global stage for
its beer brand. This didn't happen.

Curtailing plans
Mallya also tried his hand at connecting Bangalore to London but had to pull out as
Kingfisher could not sustain this route. Now, Kingfisher flies to Hong Kong, Singapore, West
Asia, London and to a few neighboring countries of India.

'We are curtailing our plans for global expansions as we are now part of One World
alliance. From London, Singapore and Hong Kong our guests have good connectivity
onwards across the Atlantic and the Pacific. We do not intend to expand our overseas
plans,' Mallya said.' He started the airline with a lot of passion and all the troubles have not
diluted that. My gut feeling is that he is unlikely to sell out despite mounting debt and high-
level of public angst,' a senior member of a financial institution who has been funding the
UB Group told Business Standard.

According to 31 March 2011 ending annual report, KFA flew 366 domestic flights and 28
international flights. It owned 67 aircraft.

“Aircraft Engine/Lease Rentals: Aircraft/engine lease rentals stood at Rs. 984 crore (USD 197
million) during the twelve month period from April 2010 to March 2011. Your Company
operated 67 aircraft (scheduled and non scheduled) in the year under review, 13 of which are
owned through finance leases and 54 are held under operating leases.”

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Business Today article mentions that presently the airline owns 63 planes and a few have
been returned to the lessors. However, the plane financing problem isn’t new. In September
2008, after the merger with Air Deccan, in financial results commentary KFA stated the
following:

“Two aircraft have already been returned to Lessors with no additional cost, and the
Company is in discussion for the return of a further eight aircraft. The impact of this capacity
contraction will be visible during the second half of the Financial Year.”

After the merger, according to the Business Today article, the airline refused to take
delivery of 5 Airbus A340-500. It had over 90 aircraft in Airbus books and no delivery was
taken after 2008. This is a case of investment plans made under a cloud of unknowing.

Poor strategies-Due to lack of competent leadership

Frequent changes in strategy sensitive business

Unlike his other two major businesses - the spirits and beer segments - which have been
running exceptionally smoothly under the helm of managing directors, the airline has been
crash landing because of one trouble or another with frequent changes in strategy and
direction as well as the absence of no long term CEO or MD.
KFA was launched as a premium business class airline. That was the first mistake, a lack of
understanding of customer requirements and basing a decision that luxury sells in airlines.
Organizations focus on reducing costs and usually just CXOs are allowed business class
travel. Rest of the staff mostly travels by economy class. Moreover, buying most expensive
business class tickets doesn’t go down well when seniors aim to project the image of
walking the talk.
Even consultants, whose travel tickets are paid for by clients, hesitate to book KFA tickets.
It appears that they are abusing privileges. Hence, the market size for business class tickets
is small in India.

Secondly, internationally Southwest Airlines operating model has proven successful. It is a

low-cost airlines, provides minimum frills to customers at reasonable rates. Mr. Mallya,
highly successful in liquor business, didn’t comprehend the difference s in customer
preferences within the two industries. Customers may buy expensive alcohol, but not
airline tickets, since the total cash outflow is higher. It is a price sensitive market.
Therefore, KFA adopted an incorrect strategy from the start as it failed to understand the
market dynamics.

A look at the 31 March 2011 year-end annual report reveals that KFA had 7-8 directors,
with just one executive director. The audit committee had 3-4 directors and didn’t seem
active, since there were just 4 meetings during the year. Since inception of the company,
three CEOs have come and gone. Mr. Vijay Mallya, the Chairman, controls the company.
The board of directors has not actively participated in charting the route of the company.

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Hence, pilot of the company is responsible for the downward spiral of KFA. As the banks
and government refuse to give a life jacket to KFA, the probability of safe landing is low.

KFA acquired Air Deccan, a low-cost airline in 2007. Five years of operations is a key
criterion for an airline to fly internationally. Hence, KFA acquired Air
Deccan’s international flying rights and simultaneously entered the cheaper market
segment. It made the following announcement in September 2008 financial results
commentary:

“The merger of the two operating airlines into one corporate entity has also enabled savings
on operating costs such as Engineering and Ground Handling, Insurance and Catering.
Employee costs have also been addressed through an integrated organization which enabled
the Company to terminate the contracts of most expatriate staff and impose a hiring freeze on
new appointments.“

After the merger, first signs of trouble cropped up. As per a Business Today article, it
became the largest Indian airline with 27.5% market share, and domestic travel increased
by 30%, however it didn’t make profits. Despite the fact the its main rival – Jet Airways –
continuously showed profitable quarters.

KFA showed growth in numbers while having lost the strategy. With the merger, it lost its
brand image of a premium business class airline. It expanded with the speed of a jet
without building a base and resolving the post merger challenges. This set the course for a
bumpy ride Kingfisher was launched as an all-economy, single-class configuration aircraft
with food and entertainment systems. After about a year of operations, the airline suddenly
shifted its focus to luxury. When an airline keeps changing its model and takes to random
expansion, there is no time for the airline to stabilize. After Kingfisher’s plunge into luxury
came its next folly—a merger with Air Deccan, an airline formed by Captain G R Gopinath in
2003. I believe the fall of Kingfisher airlines started the very day wh en they bought Air
Deccan. Capt. Gopinath, the owner of Air Deccan can be termed as shrewd but smart
investor who knew when to part with his investment , just at the right time. The all-
economy configuration of Air Deccan was rebranded and called Kingfishe r 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. It is widely believed that Kingfisher merged itself with Air Deccan so that it could
classify as an airline with five years of domestic flying in 2008, thus fulfilling requirements
to fly international routes. The fact that Jet had meanwhile swallowed Air Sahara didn’t
help, fuelling a competitive race to be the biggest airline around. Essentially, jet fuel prices
began to sky-rocket and soon touched $150. Then came the 2008 recession that made
fundamentals in the airline industry worse, which is when the airline launched its
international operations.

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Weak business management resulting in Dual crisis
Financial Crisis -

In the December 2011 quarter unaudited financial results, signed by the Chairman Mr.
Mallya, the following note is given:

The Company has incurred substantial losses and its net worth has been eroded. However,
having regard to capital raising plans, group support, the request made by the Company to its
bankers for further credit facilities, planned reconfiguration of aircrafts and other factors,
these interim financial statements have been prepared on the basis that the Company is a
going concern and that no adjustments are required to the carrying value of assets and
liabilities.
KFA posted a loss of Rs 1027.39 crore (USD 205.95 million) in December 2011 quarter. As
of 31 March 2011, its net worth was negative at Rs 3633.08 cror e (USD 728.29 million). It
was last positive in March 2008, and now the picture is dismal. Presently, KFA has a total
debt of Rs 7057.08 crore (USD 1414 million) and total accumulated losses of Rs 6000 crore
(USD 1202 million). The banks refuse to extend further credit as the non-performing
assets (NPA) will jeopardize the profitability and liquidity of the banks.

Here it is a clear case of excessive debt and poor cash flow management systems. The
situation has gradually worsened from March 2008 and in thr ee years the capital is
completely eroded. A better financial risk management may have helped mitigate the
problem. It appears no one in the company was monitoring the risk dashboard. Maybe they
were flying high on optimism.

Operational Crisis –
It’s a well know fact in aviation industry that most airlines nosedive due to high fuel costs.
The rise in fuel costs are an uncontrollable risks as the price of petrol is set internationally.
Additionally, in India, states charge heavy sales tax on petrol. Hence, the fuel costs are
much higher in India. KFA annual report of 31 March 2011 acknowledges this issue:

Aircraft fuel expenses: Expenditure on fuel stood at Rs. 2274 crore (USD 456 million) during
the twelve month period from April 2010 to March 2011 accounting to 28% of the total costs.
While the average fuel prices have come down from a high of Rs. 74 per litre in August 2008,
prices have steadily risen through the year and ended 34% higher than prices at beginning of
the year.
As given in the commentary on the results for the half-year ended 30th September 2008,
The Aviation Industry is going through a challenging phase globally, driven primarily by
spiraling fuel costs, which hit an un-precedent USD 147 per barrel in July 2008. The Indian
industry was hit more adversely due to the cumulative impact of Customs Duty and Sales Tax
on account of this sharp increase in international fuel prices. The average price of ATF in the
six month period from April to September 2008 increased by about 60%. The impact on

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Kingfisher Airlines alone was to the tune of Rs.640 Crores (USD 128 million).

Most airlines to recover fuel costs increase the number of seats in the aircraft by better use
of space. KFA couldn’t do it, as it projected itself as luxury class. Despite enjoyin g an
occupancy rate of 75-85%, the company failed to break-even. Although the management
was aware of the truculent factors in aviation industry it failed to take preemptive
measures timely.

Poor employee management resulting in low customer

satisfaction

All of the above resulting in poor employee morale. Hence daily operations suffered

Some of the flights are being cancelled as a result of employee agitation on account of delayed
salaries. This situation has arisen as a consequence of our bank accounts having been frozen
by the tax authorities. We are making all possible efforts to remedy this temporary situation.”

Frequent cancellation of flights, nonpayment to employees, rude staff laid the ground for
Kingfishers grave. Kingfisher reputation took a beating when it was known that employee’s
tax was not submitted to government on time since the last three years! Government of
India also freezed 40 Kingfisher’s bank account. Latest news is that Kingfisher employees
have been not paid three months salary. We all know how we feel when our salary is
delayed by a day; imagine what happens to them when they are not getting salary for last
three months. How do you expect the employees to keep a smiling face to its customers
when they themselves are crying? A company which forgot its employees, is also soon
forgotten

Problems faced by employees:

Salaries of 5 month worth 3000000 were not paid The wife of an employee of the troubled
Kingfisher Airlines committed suicide F our walkout by the Kingfisher employees over
period of eight months Kingfisher's pilots also feel threatened Indian employees were not
paid while those in London and Hong Kong were paid as laws are strict there

Changes in internal functioning due to employees Technicians went on strike With India's
other airlines hungry for qualified pilots, many of Kingfisher's pilots have fled for greener
pastures Due to non-payment of salaries, pilots and staff started misbehaving with
customers Flights were cancelled as pilots called in sick (fake)

Management reaction the airline has reacted to the job actions by locking out employees
Management has charged that the job actions are “illegal” and a “temporary lockout” The
airline claims it has no money to pay long-overdue salaries and expects employees to

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continue to work without pay to overcome the company’s financial crisis.

Closing thought
The lack of trust was shown recently when Mr Mallya asked the government of India to bail
him out. The new minister Mr. Ajit Singh clearly told that the Government will not bail out
private airline because Air India is itself in need to bail out. I personally feel that Mr Ajit
singh made a good decision because When Kingfisher doesn’t give public anything in return
of its profit , then why is it asking for Public hard earned money ( income tax money) to bail
him out. The brand is tarnished and that’s why investors are reluctant to part with their
money it’s hard for investors and employees to rationalize that the man whose airline is
sinking continued to spend his money on Formula 1, calendar shoots and an IPL team

Some companies just fail to learn—either from the examples that its peers may have set for
the industry, or from its own past mistakes. Now, Kingfisher has decided to change its
model yet again—discontinuing its Kingfisher Red brand and completely converting its
fleet to a dual class, full-service configuration.

Mr. Mallya with KFA Air hostesses

KFA is a good case to understand the impact of failure in People Management. The
management ignored the warning signs of stormy weather and failed to navigate the
company into safety. With hindsight, some of the important decisions made by the airline
appear incorrect.

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Supported Video - http://www.youtube.com/watch?v=AYXEAWxflgg

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