Failure of Kingfisher Airlines

8/10/2019 Failure of Kingfisher Airlines

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PROJECT REPORT

FUNDAMENTALS OF BUSINESS MANAGEMENT

COMPANY REPORT: TOO BIG TO FAIL?

The Failure of KINGFISHER AIRLINES


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ROLL NO: 295, 383NAME: KUNAL AGARWAL

NISERG PANDYACOMPANY: KINGFISHER AIRLINES.


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Acknowledgement

This is to acknowledge that every member of the group has contributed

to his full potential towards the making of this project and that the finaloutlay is the result of the dedicated efforts of all the group members as a

whole.

We would like to thank all the faculty members in the Management

Department for their constant support and advice, without which the

completion of this project would not have been possible. We would also

like to thank them for providing us the opportunity of working together

as a team and discovering how much we could achieve together.


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Table of contents:

1) Introduction2) Early Days of Kingfisher3) SWOT And PESTEL Analysis

4)

Acquisition of Air Deccan5) Financial Unrest & Debt Recast6) Loan Defaults, Loan Diversion and Forensics Audit7) Post-Effects of Kingfisher Airlines8) Conclusion9) Annexures and Tables


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Abstract

Indian Aviation Industry is one of the fastest growing markets in theworld. But nowadays it is in the news due to a different reason. And that

is the failure of one of the leading aviation players - Kingfisher Airlines.The airline has been facing financial issues for many years. TillDecember 2011; Kingfisher Airlines had the second largest share inIndia's domestic air travel market. However due to the severefinancial crisis faced by the airline, it has been grounded. The companyhas no funds to pay the salaries to the employees and is facing severalother issues like fuel dues; aircraft lease rental dues, service tax dues andbank arrears. The main issue at hand is the bank loans and interest

burden which lead the airlines into an accumulated debt and losspile of Rs.12000 crore. The biggest mistake of Kingfisher was the

acquisition of another airline with a different business model.Kingfisher owed an SBI led bank consortium loans to the tune ofRs.7000 crore. And the effects that this led to the Airlines as well as tothe other UB Group companies is shocking. In a way both Kingfisherand UB Group are insolvent.

Word Count: 198 words.


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Introduction:

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'm selling is a lifestyle.Dr.Vijay Mallya

Kingfisher Airlines is an airline group based in India it is a subsidiary ofUnited Breweries Group. The group headed by Dr. Vijay Mallya is aflamboyant businessman having interests in beverage alcohol, aviationinfrastructure, real estate and fertilizer among others.The airline started commercial operations in 9 May 2005 with a fleet offour new Airbus A320-200s operating a flight from Mumbai to Delhi.

The airlines at the time of its start-up,it became the first (and only)Indian airline to order the Airbus A380. It placed orders for fiveA380s, five Airbus A350-800 aircraft and five Airbus A330-200 aircraftin a deal valued at over $3 billion. Delivery of the A330s was due tostart in late 2007, followed by the A380s in 2010 and the A350s in 2012.Ever since its launch in May 2005, Kingfisher Airlines had blazed a trailof innovations and introduced a range of market-firsts that hadcompletely redefined the whole experience of flying. By elevating itscustomers to a level of being guests and not just passengers, KingfisherAirlines had endeared itself to consumers. Kingfisher Airlines was the

first Indian airline to introduce in-flight entertainment (IFE) system

on domestic flights. Passengers on-board are provided

complimentary welcome kit that contains a pen, facial tissue andheadphone to use with the IFE system.Kingfisher Airlines had madealliance with Dish TV to provide live TV entertainment to passengers.As of July 2007, Kingfisher operated only on domestic routes; howeverit started its international operations on 3rd September, 2008 with a

flight between Bangalore and London, and later on added newinternational destinations, namely Hong Kong, Dhaka, Colombo,Singapore, Dubai and Bangkok. However, on 15th September 2009,Kingfisher Airlines withdrew the London service.


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The airline also entered into a breakthrough agreement with Indian

Airlines, making it the first public-private- partnership in the sector.

Under this partnership, IA would provide all ground handling services atits terminals in Mumbai and Delhi.

On December 19th, 2007 Air Deccan and Kingfisher Airlines

decided to merge.Kingfisher Airlines parent company UnitedBreweries (UB Group) have acquired 46% of Air Deccans parent

Deccan Aviation, which possesses 52% of the total stakes.

Kingfisher initially acquired 26% equity stake in Air Deccan for Rs. 550crores. This valued Air Deccan at approximately Rs. 2,115 crore. No

doubt, Air Deccan had the second largest market share after Jet Airways.Just to compare, Jet paid Rs. 1,450 crore for the whole of Sahara.It then bought another 20% stake for Rs. 418 crores through an openoffer to Air Deccans other investors (public, institutional investors).Kingfisher Airlines was merged into Deccan Airlines and then gotrebranded as Kingfisher Airlines.In May 2009, Kingfisher Airlines carrier over a million passengers thatprovided it the highest market share among the airlines in India.

Word Count: 501 word


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Early Days of Kingfisher

The early days of Kingfisher Airlines as in the time before they acquired

the Air Deccan were a great time for Dr. Mallya. Not in monetary termsbut in terms of awards and recognitions.

Since most airlines posted net losses due to surging fuel costs, investors

track a metric called EBITDAR which means earnings before interest,

taxation, depreciation, and amortization and rental costs. Most airlines

lease aircrafts and do not own them. Kingfisher Airlines reported a

revenue of Rs.14.41 Billion in the year ending on 31stMarch, 2008,

but a net loss of Rs.1.88 Billion.

But by that time Kingfisher had been awarded the following awards:

King Club had won the Freddie Awards 2008 in the followingcategories:

Best Bonus Promotion

Best Customer Service

Best Member Communications (First Runner-up)

Best Award Redemption (First Runner-up)

Best Elite Level (Second Runner-up)

Best Website (Second Runner-up)

Program of the Year (Second Runner-up)

Named Best Airline in India / Central Asia; Best Cabin CrewCentral Asia.

NDTV Profit Business Leadership Award for Aviation.

Rated India's Second Buzziest Brand 2008 by The Brand Reporter.

Ranked amongst India's Top Service Brands of 2008 by PitchMagazine.

Voted as India's Favourite Airline.

Rated as Asia Pacific's Top Airline Brand.Brand Leadership Award.


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SWOT and PEST Analysis

STRENGTHS

Strong brand value and reputation in the minds of customers.

Quality of the service.

Route rationalization.

First airline to have a new fleet of airbuses.

Quality and continuous innovation.

WEAKNESSES

Still a not in profit organization.

High ticket pricing.

Facing a tough competition from competitors.

OPPORTUNITIES

The expanding tourism industry.

The non-penetrated domestic market.

International market.

Untapped air cargo market.

THREATS

Competitors

Infrastructure issues.

Fuel price hike.

Tourism saturation


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Economic slowdown.

Promotions and sponsorship declining.

POLITICAL FACTORS

Open sky policy FDI limits: 100% for Greenfield airports

o 74% for the existing airportso 100% through special permissiono 49% for airlines.

ECONOMICAL FACTORS

Contribution to the Indian economy. Rising cost of fuel. Investment in the sector of aviation. The growth of the middle income group family affects the aviation

sector.

SOCIAL FACTORS

Development of cities leads to better services and airports. Employment opportunities. Safety regulations. The status symbol attached to a plane travel.

TECHNOLOGICAL FACTORS

The growth of e-commerce and e-ticketing. Satellite based navigation system. Modernisation and privatisation of the airports. Developing green field airports with private sector for example in

Bangalore the airport corporation limited.


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Acquisition of Air Deccan

Dr. Mallya had a dream of owning an International Airlines. And to

fulfill this dream he started the Kingfisher Airlines. Indian aviationregulations prohibited domestic airlines from flying on international

routes until they had operated in the domestic market for five years.

Dr. Mallya was not going to wait for 5 years so in 2006 he eyed a

stake in the low cost airlines Air Deccan.

In January 2006, when Deccan went public planning to offload 25% of

its stake through an IPO, it could barely manage to offload the 25% even

after extending the issue closing date and reducing the price band.

Air Deccan had reported a net loss of Rs. 340 crore for the 15-month

period between April 1, 2005 and June 30, 2006.

Surprisingly, Deccans owner did not want stake in Air Deccan to be

picked up.When news reports came in that Mallya was interested in

buying a stake in Deccan, its owner said Mallya is from Venus, I am

from Mars. We are here for a long haul. We are not for sale. We arethree times bigger (than Kingfisher) in routes and operations.

The two airlines had different business models and cater to totally

different passenger segments. Dr. Mallya, however, was confident that

he will be able to tap synergies and make the merger successful.

Before Air Deccan arrived on the scene in 2003, a flight from Bangalore

to Delhi cost Rs.12000.

The arrival of Deccan led to this falling to Rs.2500. As LCCs like

SpiceJet, Indigo and others sprouted and followed Air Deccans lead,

even full service airlines were forced to cut fares to stay in the business.


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Result:domestic air travel really took off; the number of passengers

flying within the country jumped from 29.2 million in 2003 to 90.44

million in 2006.

The flip side:the airline industry was awash in red ink, and

collectively incurred losses of Rs 2,000 crore last year; Deccan, in

particular, bled Rs 426 crore during the six months ended

September, 2007.

Kingfisher was not far behind, with losses of Rs 350 crore during this

period.

UB Group executives squarely blame Deccan for this state of affairs.

They pointed out that while Deccans cut rate and unviable fares even

during peak hours ensured that it flew near-full, the premium Kingfisher

(and some other airlines, too) took off near-empty in the afternoons.

The industry was fast losing its pricing power, and to that extent, it

would have destroyed every airline,

(Balasubramanium, 2008)

The first, and obvious, benefit from the merger will accrue to the entiredomestic aviation industry. Dr. Mallyas initiatives, analysts say, will

not only help Kingfisher and Deccan stem their losses, but also improve

the fortunes of other airlines.

The other compelling reason behind the merger is the potential for huge

savings from cost synergies, route rationalization and bulk purchase

deals.

A closer look at the two airlines reveals that except for the conflictingnature of their business models, the two carriers dont seem to have any

other legacy issue.

Dr. Mallya says that following the merger, both brands will retain their

independent identitiesKingfisher targeting the premium and normal

fare segment and Deccan serving budget travelers.


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I see no reason for Mallya to want to dilute that brand equity.

(Gopinath)

The new airline, with 600-plus flights a day and a large network of

70 destinations is valued at an estimated Rs.5000 crore.

The UB Group hopes to save around Rs 250 crore annually as a

result of combined operations and higher revenues, and turn

profitable by the end 2008-09.

The savings, according to KPMG Senior Advisor Mark Martin, will

primarily come from maintenance as Kingfisher and Deccan operate

similar types of aircraft.

Their pilots are type-rated on the same type of aircraft and both airlines

can share their crew. Besides, the marketing network created by Deccan

will be available to Kingfisher and vice versa. (Mark)

Then, route rationalization will allow it to pare down the plan to acquireover 100 new planes, thus, resulting in massive savings.

The combined airline will integrate critical departments like

maintenance, flight operations, cabin crew, airport terminal services and

marketing support and also gain from each others slot allocations and

access to airports.

The international market (both outbound and inbound), though growing

at a healthy 17 per cent per annum, is already crowded and foreign

airlines fly two-thirds of Indian passengers.Investors, though, werent very happy. The Deccan scrip slid from

Rs 330 to a low of Rs.277.90 on NSE on December 20, when the

merger was announced.


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Post-deal the share market and passenger load of Kingfisher Airline

grew massively (see table 1 & 2)

But in-spite such huge market share Kingfisher was still bleedingmoney.

Post-merger with Air Deccan, things kept going south. In the second

quarter of 2009, Kingfisher reported a net loss of Rs.418.77 crore.

Its income from operations declined by 13.6%


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Financial unrest & Debt recast

Post Deccan merger Kingfisher Airlines got heavily leveraged. The

operating costs of the company were high and so were the loan and

interest amounts.

Kingfisher Airlines had accumulated losses of Rs. 4,321 crore at the

end of FY 2010-2011; which amounted to more than 50% of its net

worth!

Dr. Mallya says high cost of aviation turbine fuel (ATF) and weakening

rupee were the reasons.

But the cost of fuel and power as a percentage of Net Sales were steadily

decreasing, but the percentage of Loan and Interest burden kept on

increasing

n. Year Net

Sales

Power

& Fuel

Cost

Power &

Fuel cost

as % of

Sales

PBDIT Interest PBDT

07-2008 1,456.28 889.30 61% -211.56 434.44 -646

08-2009 5,269.17 2,602.62 49% +45.70 2,029.33 -1,983.63

09-2010 5,067.92 1,802.99 36% -12.89 2,425.59 -2,258.48

10-2011 6,233.38 2,274.03 36% 1,025.62 2,340.32 -1,314.70

The table effectively proves that the main burden on Kingfisher was

of its interest and loan amount.


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The debt-equity ratio were at a nightmare proportions:

Fin. Year Equity (Rs. Incrores) Debt (Rs. Incrores) Debt-EquityRatio

2005-2006 98.18 451.66 4.6 : 1

2006-2007 135.47 916.71 6.76 : 1

2007-2008 135.80 934.38 6.8 : 1

2008-2009 362.91 5,665,56 15.6 : 1

2009-2010 362.91 7,922.60 21.88 : 1

2010-2011 1,050.88 7,057.08 6.72 : 1

Kingfishers book equity had been wiped out although audited

financials pretended otherwise.The airline was burning cash at a rapid

rate, an estimated Rs.301 crore in 2012, is in a business that requires

capital perpetually, has no pricing power given six carriers fighting over

the major hubs in India, is dependent on the vagaries of the price of oil

and the largesse of state-run financial institutions in India, and its parent

UB has run out of financial room to accommodate the needs of this

capital-starved child.

In the year 2010 a debt recast package was done.It is believed that

non-performing loans had been repackaged into subordinated debt, and

that Kingfisher had defaulted on its obligations is unquestionable. We do

not believe that Kingfishers antics would have found any takers in a

responsible credit market and that the airline would have been liquidated

by then. During 2010, Kingfisher defaulted in principal repayment of

Rs.203.1 crore and overdue interest of Rs.81.6 crore, for a total default


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of, 284.7 crore. Between July 2010 and March 2011, Kingfisher

defaulted on interest payments of Rs.349.8 crore. Foregone principal

repayments are undisclosed. Therefore, from the beginning of financial

year 2010 to the end of Financial Year 2011, the airline defaulted on

dues of at least Rs.634.5 crore to the financial institutions. (Data for the

period April-June 2010 is unavailable.)Clearly, the loans given by the

banks to Kingfisher were impaired and therefore under the pretext

of a debt recast, the banks had converted some of these unpaid

principal and interest amounts into cumulative convertible

preferred shares {Rs.755 crore of term loans converted into CCPS

of 7.5%} and cumulatively redeemable preferred shares {Rs.553

crore of term loans converted into CRPS of 8% with a maturity of12 years}. Table 3 shows the top three banks in the consortium,

which accounted for 62% of the CCPS. The convoluted logic of debt

restructuring, via acquisition of CCPS, of an organization that

doesnt have the cash to meet its obligations, - which were

subsequently converted into ordinary shares of Kingfisher at a

premium of 61.6% to the closing price of the underlying common

share - speaks eloquently to the financial shenanigans underway at

the banks and Kingfisher. Moreover, subscribing to common equityat a premium implies that the banking consortium is now sitting on

a significant mark-to-market loss on its equity holding in the airline.

At the end of this a consortium of 17 banks owned nearly 25%

equity in Kingfisher and were exposed to debt of around Rs.7000

crore.


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Loan Defaults, Loan Diversion and Forensics Audit

Even after the Debt restructuring, the debt of Kingfisher on 15th

September, 2011 stood at Rs.6500 crore. As a result of this, the company

was not paying its dues to various institutions and certain moves were

initiated by various institutions like theMumbai International Airport

sent notice for Rs.90 crore outstanding dues, Service Tax

Department froze 11 Kingfisher accounts for non-payment of Rs.70

crore despite collecting it from travelers, Kingfisher canceled

several flights after Income-Tax Department frozen some of its

accounts. Kingfisher was in danger of losing a number of prime-

flying slots. International Air Transport Association asked travel

agents to stop booking tickets on Kingfishers behalf for failure to

settle dues since February, Employees protested due to delay salary

payments.

Kingfisher curtailed its international operations initially and then

suspends them.It also suspends its domestic operations from a few

cities.

Then Pilots started reporting sick to protest non-payment of salaries.Flights were cancelled, 34 of its aircrafts are repossessed due to non-

payment of lease rentals.

On October 6, 2012, DGCA issued show-cause notice to Kingfisher

asking why its flying permit should not be suspended or cancelled.

And on October 20, 2012, the airlines permit got suspendedand

experts said Vijay Mallyas United Breweries group needs to pump in

over Rs. 3,000 crore to get Kingfisher airborne again as no foreign

operator would come forward to invest in the airline in its present state.On December 31, 2012: The carrier lost its flying licence as the

DGCA refused to renew its Air Operator Permit (AOP).

In Dr. Mallyas defense, he did try to pump in loans of Rs.450 crore on

February 18 from UBHLs.


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After this the banks started to recall its loans.By February end an SBI

led consortium of 17 banks had granted loans of Rs.7500 crore.

In the following months, many employees went on strike, senior

executives quit and Kingfisher again posted a Net Loss of Rs.822.4 crore

on 31stDecember, 2013 for the quarter.

In the March 2014, the consortium of lenders led by State Bank of

India considered declaring Kingfisher Airlines a wilful defaulter.

Sources cited that the consortium had appointed Ernst & Young to

conduct a forensic audit on Kingfisher, to determine if funds were

diverted from the airline to other group companies.

The forensic audit by consultancy firm Ernst & Young had founddiversion of funds by Kingfisher Airlines to Formula One and other

ventures of promoter Dr. Vijay Mallya, lenders said.Officials from

IDBI Bank and SBI said, "Prima facie, there seems to be diversion of

funds. We now need to study the report and authenticate the mapping

transaction trail undertaken by the consultancy firm."

SBI chairman Arundhati Bhattacharya made a statement saying, "We are

studying the report and it would not be right to discuss the details."

However, the bank has sent show-cause notices to Mallya and threeother directors following the audit report.

On August 21, 2014, Punjab National Bank issued notice to

Kingfisher alleging the carrier had wilfully defaulted in payment of

outstanding dues of over Rs 770 crore.

And on September 1, 2014, United Bank of India declares Vijay

Mallya and three directors of Kingfisher Airlines as wilful

defaulters.


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Post-Effects of Kingfisher Airlines

After Dr. Mallya was declared a wilful defaulter by IDBI, a series of

events in the related companies started taking place.

During the crisis UBHL group had to sell its majority stake in USL

to UK Based distiller Diageo Plc.

Diageo Plc, the worlds largest distiller, is tightening corporate

governance practices at United Spirits Ltd (USL) and the UK-based

company has hired a consulting firm to vet USLs contracts with

other UB Group companies to ensure these agreements are arms

length transactions.Deloitte, which has been working with USL on

various projects, has been asked to ensure that the terms of USLs

contracts with United Breweries Holdings Ltd (UBHL), the UB Groups

holding company, and other group firms, do not give an unfair

advantage to these companies, according to two people familiar with the

matter. According to USLs annual report, the company had

financial dealings with UBHL worth over Rs.1000 crore in the

previous financial year.These transactions included buying and selling

of goods, loans, deposits and advertisement and sales promotionexpenses. USL was owed Rs.1188.7 crore by UBHL as on 31 March

2013, according to the annual report. USL, Indias largest liquor

maker, also gave loans and deposits to a group company worth

Rs.1318.6 crore, the report showed.Both USL and Deloitte declined

to comment. Diageo, which completed its purchase of a 25.02% stake in

USL in July 2013 and made compliance to both laws and company

policy and installing its global business practices at USL one of its

biggest priorities at the Bangalore-based company. On 21 AugustDiageo removed as many as 100 UB Group executives off USL

payrolls as many of these executives were employed by other UB

Group firms, including the grounded Kingfisher Airlines Ltd. The

executives were later transferred to UBHL.The removal of UB

Group executives off the payrolls and the vetting of contracts with UB


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companies are seen as moves by Diageo to distance USL from the larger

UB Group. Dr. Mallya and his firms control less than 10% of USL now,

while Diageo is by far the largest shareholder at USL after building up a

stake of nearly 30%, partly by buying shares on the stock market over

the past few months.

The effect of Kingfishers mismanagement can be seen on UBHL If

Kingfisher is insolvent, then the UB group which owns

approximately 55.57% of Kingfisher in addition to other

investments used as collateral for its airline business will be heavily

exposed to debts.

The following table outlines the valuation of UB groups keyinvestments that are readily marketable:

As outlined in the table, the market value of UB groups holdings is

only Rs.4713.4 crore, compared to debt on its books of Rs.2331.6

crore, in addition to debt guarantees and collateral provided on

behalf of Kingfisher of Rs.16852.9 crore as per its Financial year

2011 Annual Report.That could mean only one thing: Both UB group

and Kingfisher are at the mercy of Indian financial institutions and

shareholders should not stick around for worse to come.

Both, UB group and Kingfisher are effectively insolvent.


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Word count: 3119 words


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Conclusion

Kingfisher Airlines is deep in the debts and losses. So should the

government organize its rescue? Critics say that it has already been

rescued in the past thanks to Dr. Vijay Mallyas political clout, yet it

has never made a profit since inception.When millions of small

businesses are allowed to go bust when banks cut off credit to thousands

of smaller defaulters, rescuing Kingfisher will smack of crony

capitalism.

The airline has defenders too. Kingfisher has justly earned a

reputation for excellent service standards. Quality is always worth

preserving. We need to save Kingfisher without saving Dr. Mallya.Indias airlines suffer from high taxes on fuel, rising world prices and an

obligation to service some uneconomic routes to destinations like the

Northeast. Yet this did not prevent them from making profits in the past.

Even today, Indigo is profitable.

So are many global airlines. Top US carriers like United Airlines,

Delta and US Air reported good profits in the last two quarters.

Indeed, in the quarter ending June, United Airlines turned

profitable after losing money for six years, Delta reported thehighest quarterly profit in history and Lufthansa doubled its profits.

The quarter ending September has been only somewhat less

profitable for them.So, Kingfisher and other Indian carriers cannot

claim that global conditions are terrible.

Kingfisher has already been rescued. Banks converted unpaid loans

to Kingfisher into equity at a very favorable premium of 62% to the

ruling market price, a tribute to Dr. Mallyas political clout rather

than companys future prospects.Even after that the company hassunk deeper into the debt. Even after being restructured and slashed, its

debts exceed Rs 7,000 crore. Government concessions to the industry

may save other airlines, but not Kingfisher.


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One way forward is for banks to convert a big chunk of their

outstanding loans to Kingfisher into equity at the current market

price, giving them a 51% stake in the company

If Dr. Mallya really wants yet another chance, he must be told to bring in

at least Rs 3,000 crore of fresh equity. If he cannot entice the investing

publicwhich is probablehe must sell his other assets. Apart from

liquor company UB Holdings, he owns stakes in the cricket team Royal

Challengers, Bangalore; the Kolkata football teams Mohun Bagan and

East Bengal; and the Formula 1 team Force India. Indeed, UB Holdings

itself is reported to have provided bank guarantees of over Rs 16,000

crore to the banks.

If Dr. Mallya will not sacrifice his other assets for Kingfisher, thenhe cannot ask others to sacrifice their financial interests for him.

Word count: 434 words

Total main text word count: 4063 words


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List of annexures and tables

Table 1

Kingfisher passenger numbers and passenger load factor:1QFY2010 to 3QFY2012

Table 2:

India domestic market share: 3QFY2012

Source: Jet Airways


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Table 3:

Table 4: The Debt Recast Package


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Bibliography

Debt Recast Package: Veritas Investments. (2012).Pie in the Sky.

Toronto.

Bibliography

Graphs of Passenger Load: CAPACentre for Aviation & airline

reports.

Documents

Failure of Kingfisher Airlines