R V COLLEGE OF ENGINEERING, Bangalore

“This is a world-class experience, all at an affordable price. We are not a low-cost carrier and we do not intend to be one.”

-Vijay Mallya

THE KINGFISHER AIRLINES FIASCO

A case-study report for ‘Principles of Management’

Compiled by

Pourush J (1RV10TE035)Pratheek Manjunath (1RV10TE036)

Suraj S Kattige (1RV10TE056)

6TH SEMESTER, TELECOMMUNICATION ENGINEERING

CONTENTS

1. INTRODUCTION INDIAN AVIATION SECTOR BEGINNING OF KINGFISHER AIRLINES

2. THE CRISIS OF KFA ONSET WORSENING

3. ANALYSIS REASONS FOR THE SLUMP SWOT ANALYSIS 5 FORCES MODEL

4. CONCLUSION FUTURE – BLEAK! POSSIBLE SOLUTIONS

INTRODUCTION

BOOM IN THE INDIAN AVIATION SECTOR

After the Indian aviation sector underwent liberalisation in late nineties, it has seen a flurry of private service airlines entering the industry. The aviation sector in India holds immense potential for growth; more so because it receives great impetus from the booming tourism industry driven by higher disposable incomes and favourable demographics. The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline –Air Deccan back in 2003. The success of Air Deccan spurred the entry of other

LCCs like SpiceJet, Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result, the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines.

Last year’s stats peg the number of people passing through Indian Airports at 150 million! By 2020 traffic at Indian airports is expected to reach 450 million, making it the third-largest aviation market in the world.

ENTER- KINGFISHER AIRLINES

Kingfisher Airlines was set up by the flamboyant beer baron Dr. Vijay Mallya. It started operations in 2005, with its major hub in Bengaluru and secondary hubs in Delhi and Mumbai. Though originally conceived as a low cost model, he was quick to morph it into a stylish full-fledged carrier. Hoping to pose as a competitor to the 12 year old market leader-Jet Airways, Kingfisher rapidly expanded its fleet and served 34 destinations. It had raked in INR 13.5 billion. In 2010, the company placed an order for 50 wide body aircrafts (including the A380 and A350) for planned international expansion. Until December 2011, KFA managed to retain the ‘5 star’ airline tag held the 2nd largest share in India’s domestic market.

TIMELINE OF THE KFA CRISIS

ONSET

2007: Things were going as planned. KFA had carried 17.5 million

passengers in its diverse 41-aircraft fleet, on 255 scheduled flights. But the losses had stacked to INR 4 billion.

KFA decided to buy 46% of Air Deccan, with the intention of monopolising the low cost market.

2008: KFA was annually carrying 10.9 million people with its 77-aircraft

fleet, flying 412 daily domestic flights. Finally became India’s largest airline.

This year, they got their international license and for the first time, flew from Bangalore to London.

Their revenue increased to $55 billion, but so did the losses, $16 billion.

2009: KFA continued to run profitably with a healthy market share of

22.9%. Anticipating a dip in the travel segment, KFA shrunk its fleet to 68 aircrafts and 366 destinations. This didn’t help lower their losses which stood at INR17 billion. On the contrary, by March 2010, their revenue fell by INR 5 billion to INR 50 billion.

WORSENING

2010: The clouds over KFA grew dark. Jet re-established its #1 position

with a 25.5% market share, leaving KFA at 19%. By this time, IndiGo had established its hold over the Low cost segment. Struggling to cope with competition and increasing taxes, KFA further reduced its network. The airline reported that their losses lowered to INR 10 billion. But however, this claim was later found to be invalid.

2011: For the first time, KFA declared that is was having some serious

cash flow. It blamed rising fuel costs and taxes. Oil companies refused to supply Aviation Turbine Fuel on credit basis. Delayed salaries caused dozens of pilots and hundreds of crew to leave KFA for other airlines. Finance companies estimated that KFA needed $159 million in equity in order to restructure their debt. But KFA’s top brass believed that the situation was under control, but it eventually slipped out of their hands. Income fell to INR 4 billion, but losses remained at INR 5 billion.

2012: The most turbulent time for KFA had arrived. By January, the

largest creditor of cash-strapped KFA- State Bank of India- had declared it as a Non-Performing Asset. KFA owed SBI a staggering INR 15 billion. Job cuts and strikes by angry unpaid employees made news.

The Man himself, Mr. Mallya declared the the company was in dire need of funds in order to remain operational.

The aircraft lessors roped back their assets. KFA grounded many flights due to operational safety reasons arising out of poor maintenance. Arrears due to airports accumulated. All their bank accounts were frozen. DGCA revoked the

air worthiness certificate and operating licence. IATA suspended KFA from their clearing house.

These series of blows pushed KFA into the books of history.

THE KFA CRISIS1. DELAYED SALARY : Kingfisher Airlines had staff strength of 6,000 and

spent 58 crores on salaries a month. According to the first quarter financial results, it has 173.66 crores under the employees cost head, which has increased from 163.40 crores during the same quarter last year. Kingfisher Airlines delayed salaries of its employees in August 2011, and for four months in succession from October 2011 to January 2012. Kingfisher also defaulted on paying the Tax Deducted at Source from the employee income to the Income Tax Dept.

2. FUEL DUES: In the past several years, Kingfisher airlines had trouble paying their fuel bills. Due non-payment, several Kingfisher's vendors had filed winding up petition with the High Court. As on Nov 2011, winding up petition of seven creditors was pending before the Bangalore High Court. In the past Lufthansa Technik & Bharat Petroleum Corporation Limited (BPCL) had also filed winding up petition against Kingfisher Airlines. Here are some cases: HPCL: In Jul 2011, Hindustan Petroleum Corporation Limited (HPCL) stopped the fuel(ATF) supplies for about two hours to Kingfisher airlines owing to the non-payment of dues. Situation was later resolved. BPCL: Bharat Petroleum Corporation in 2009 had filed a case against Kingfisher airlines for non-payment of dues. High court in an order said that the entire amount 245 crores had to be paid by Nov 2010 and the airline paid it in instalments.

3. AAI REPORTS : Kingfisher received a notice from the Airports Authority of India on February 2012 regarding accumulated dues of 255.06 crores. The airline was operating on a cash and carry basis for the last six months, with payments amounting to 1 crore each day.

4. AIRCRAFT LEASE RENTAL DUES : Since 2008, it had been reported that Kingfisher Airlines was been unable to pay the aircraft lease rentals on time. Due to that, Kingfisher Airlines has grounded 15 out of 66 aircraft in its fleet as it was unable to meet the maintenance and overhaul expenses. An example :

GECAS: In Nov 2008, GE Commercial Aviation Services threatened to repossess 04 leased planes in lieu of default. Kingfisher Airlines initially denied that it missed the payments. GECAS had filed a complaint with DGCA saying Kingfisher had defaulted on rentals for four A320 aircraft, and sought repossession of the planes. In Jan 2009, The Karnataka High Court rejected petition by Kingfisher Airlines to restrain GECAS from taking any step to deregister and repossess the 04 aircraft in dispute. As a result, Kingfisher had to return the A320 aircraft to GECAS.

5. BANK ARREARS : Kingfisher Airlines had not paid some bankers (Lenders) as per the Debt Recast Package (DRP) with lending banks. Till the end of Dec 2011, the arrears were estimated to be 260 crore to 280 crore. Lenders hence had told Kingfisher Airlines to clear its dues before they can release any more money sought by the Airline. Ravi Nedungadi, chief financial officer of UB Group however said that the arrears were 180 crore. State Bank of India (SBI) on 5th Jan 2012 declared Kingfisher Airlines a NPA.SBI is largest creditor and the leader of the consortium of banks in the DRP and has an exposure of 1,457.78 crore. Thus, by Feb 2012, Kingfisher has been declaredNPA by following banks: State Bank of India, Bank of Baroda, Punjab National Bank, IDBI, Central bank of India, Bank of India and Corporation Bank.

ANALYSIS

What went wrong?

1. Failed low cost model - KFA didn’t anticipate the market behaviour well enough. Being a 5 star airline, there was no need to jump into the LCC portfolio. Blindly purchasing Air Deccan cannot guarantee profits. It continued operating Kingfisher Red and Kingfisher Class on identical routes.

2. Government’s role – Laborious procedure to buy aircrafts. Civil Aviation ministry goes all out to protect Air India. Increased ATF and airport taxes. Depreciation in the India rupee value.

3. Competition - with IndiGo, SpiceJet and GoAir dominating the low cost segment, KFA’s business model wasn’t robust enough to take on 5 competitors. It lost the niche it had created for itself in 2006.

4. Aircrafts – Aircrafts are the most important assets of any Airline. KFA had dry leased many aircrafts. It entered into deals with Airbus for wide-bodies like the A340-500, A380-800 and the A350-900 when there was absolutely no need. Poor decision making skills created a diversified fleet. This in turn led to increasing maintenance & spares and Pilot & Crew training. The lessor to withdraw their aircrafts and file suits against KFA all around the globe.

5. Lacked long-term strategy : no long term CEO or MD. Aped the network of rivals. Shifted international operations from Bangalore to Mumbai.

These were the 4 major reasons for the crumble of Sid Mallya’s 18th birthday gift!

SWOT ANALYSIS

STRENGTHS Brand image set by the good-

will of UB group Fleet of new aircraft Bangalore’s first airline Unmatched in-flight service 5* rating by Skytrax

WEAKNESS High Attrition at top brass Services were expensive Expanded in an unplanned

manner, before break-even period

OPPORTUNITIES Under-penetrated domestic

market Expanding leisure and

business travel Untapped Air-cargo sector International market

THREATS Existing operators – Jet , Air

India Fuel price hike Infrastructure cost increase Economic slowdown

PORTER’S 5 FORCES MODEL

1.Threat from new Entrants- Virgin Atlantic, Emirates, Air Asia

2.Threat from existing players- Jet Airways, Air India, Air Deccan

3.Threat from substitute modes- High speed trains, multi axel buses

4.Bargaining power of suppliers – Airports, Aircraft manufacturers,

Ground and maintenance service providers, oil companies

5.Bargaining power of consumers – Changing Passenger demography,

exposure to global brands, increasing awareness, higher disposable income

CONCLUSION:Future- Bleak!

1. KFA is bankrupt and has an accumulating debt of over INR 23.28 billion. It owes Banks, Airports, Oil companies, Aircraft lessors and crew.

2. Frozen Bank Accounts3. DGCA confiscated Air Worthiness certificate4. International Air Transport Association suspended

KFA 5. Highest cost of ATF is in India - $1,700 per tonne or

Rs 62.64/litre6. Government not interested in bailing out KFA

7. KFA missed the bus as Etihad recently invested in JET Airways

Hopes for revival

1. After Government of India modified FDI policy to allow 49% stake by foreign investors, KFA must sleep on the idea of an international airline like Emirates or British Airways investing in it.

2. UB group helps liquidate some cash for restarting operations.

Recommendations

1. Start with Red-eye flights between Bangalore and another metro. Non-peak-hour airport utilization costs are cheap.

2. Then move to Air freight which is less competitive.3. Invest on only 1 type of Aircraft ( IndiGo’s model )4. Sign code-share agreements and become a member

of an airline alliance ( Star or One World) to boost business.