An Overview
Kingfisher Airline is a private airline based in Bangalore, India. The airline is owned by
Vijay Mallya of United Beverages Group. Kingfisher Airlines started its operations on
May 9, 2005 with a fleet of 4 Airbus A320 aircrafts. The airline currently operates on
domestic routes. The destinations covered by Kingfisher Airlines are Bangalore,
Mumbai, Delhi, Goa, Chennai, Hyderabad, Ahmedabad, Cochin, Guwahati, Kolkata,
Pune, Agartala, Dibrugarh, Mangalore and Jaipur.
In a short span of time Kingfisher Airline has carved a niche for itself. The airline offers
several unique services to its customers. These include: personal valet at the airport to
assist in baggage handling and boarding, accompanied with refreshments and music at
the airport, audio and video on-demand, with extra-wide personalized screens in the
aircraft and three-course gourmet cuisine.
Kingfisher Airlines currently operates with a brand new fleet of 8 Airbus A320 aircraft, 3
Airbus A319-100 aircraft and 4 ATR-72 aircraft. It was the first airline in India to operate
with all new aircrafts. Kingfisher Airlines is also the first Indian airline to order the
Airbus A380. UB holdings Ltd, has acquired 26% stake in the budget airline Air Deccan
and has option to buy further of 20% stake from the secondary market.
History
Kingfisher Airline is a private airline based in Bangalore, India. The airline is owned by
Vijay Mallya of United Beverages Group. Kingfisher Airlines started its operations on
May 9, 2005 with a fleet of 4 Airbus A320 aircrafts. The airline currently operates on
domestic routes. The destinations covered by Kingfisher Airlines are Bangalore,
Mumbai, Delhi, Goa, Chennai, Hyderabad, Ahmedabad, Cochin, Guwahati, Kolkata,
Pune, Agartala, Dibrugarh, Mangalore and Jaipur.
In a short span of time Kingfisher Airline has carved a niche for itself. The airline 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 on-demand,
with extra-wide personalised screens in the aircraft, sleeperette seats with extendable
footrests, and three-course gourmet cuisine.
Kingfisher Airlines currently operates with a brand new fleet of 8 Airbus A320 aircraft, 3
Airbus A319-100 aircraft and 4 ATR-72 aircraft. It was the first airline in India to operate
with all new aircrafts. Kingfisher Airlines is also the first Indian airline to order the
Airbus A380. It placed orders for 5 A380s, 5 A350-800 aircrafts and 5 Airbus A330-200
aircrafts in a deal valued at over $3 billion on June 15, 2005. Delivery of the A330s is
due to start in late 2007, followed by the A380s in 2010 and the A350s in 2012.
ENTERTAINMENT
Kingfisher First puts on quite a show for your in-flight entertainment. Every seat is
equipped with the world's most advanced personal in-flight entertainment system, which
offers audio and video on demand, via extra-wide 8.4" LCD swivel wide-screens and
noise-cancelling stereo headphones. Surf your way through Hollywood and Hindi
blockbusters, and pick your favourite movie or best-loved scene. Tune into Fun TV,
Kingfisher Radio, music videos & concerts, news, business, infotainment, sporting
action, a moving map, and plenty more. Entertain yourself with our engaging video
games. Or pit your skills against fellow guests in a virtual tournament with the multi-
player gaming option. World class in-flight service
It is always the little things that make a difference. Kingfisher First offers you a delightful
range of thoughtful services on-board that no Business Class ever will. Exclusive
Kingfisher First stationery in case you need to catch up on your correspondence. A
wealth of national and international news, business & lifestyle magazines and
newspapers, to stay in touch with the world below. An elegant executive restroom with
premium toiletries to pamper you. For anything else you may require, our warm and
thoroughly professional handpicked cabin crew is on call to anticipate your every need,
and take care of your every whim.
OurVision
“The Kingfisher Airlines family will consistently deliver a safe, value-based and
enjoyable travel experience to all our guests.”
Our Values
Safety
This is our overriding value. In our line of business, there is no compromise.
Service
We are all in the hospitality business; we must always seek to serve our guests and gain
their trust, goodwill and loyalty.
Happiness
We seek to build an organization with people who choose to be happy, and will
Endeavour to influence our guests and co-workers to be happy too.
Teamwork
we will succeed or fail as a team. Each one of us must respect our colleagues regardless
of their rank, and we must work together to ensure our mutual success.
Accountability
Each one of us will be held accountable for the successful execution of our duties,
commitments and obligations, and we will strive to lead by example.
Chairman Message
Welcome aboard Kingfisher Airlines.
I am often referred to as the ‘King of Good Times’ and I truly believe that you should
share this experience with me. On a more serious note, I log many air miles myself in
pursuit of my goals and I am sure that you do too.
It is my passion to deliver the best of good times. After all, work and play can go hand in
hand. I am sure that you have several pressing commitments and stressful work
obligations. Like me, you also need some time to chill……with the King of Good Times.
I have personally ensured that every Kingfisher aircraft meets the global standards that I
have set for myself in terms of safety and I am proud of our brand new fleet incorporating
the latest technology available. I have instructed my crew to treat every guest in the same
way as if they visited my home. Since I also believe in cutting-edge technology, I insisted
upon an individual in-flight entertainment system for our guest’s personal viewing and
listening pleasure. I demand individual attention and I suppose our guests do too!
On board Kingfisher Airlines, you will meet a crew that I have hand-picked myself. I
have also personally approved their rigorous training programme. Quite apart from this, I
have devoted a lot of personal time and energy in ensuring that Kingfisher Airlines is
truly world-class in every sense.
Leave the stress of daily life behind and enjoy the good times with Kingfisher Airlines. I
have tried very hard to build an airline that meets your expectations. However, if I have
missed something or fall short of your expectations, please feel free to mail me directly at
I invite you to fly the Good Times. After all, to me, you deserve the Good Times as well
Services offered
Destinations
As of 10 April 2012, Kingfisher Airlines served 25 domestic destinations within India. It
had suspended all international operations from 10 April 2012 with the final flight
between London Heathrow and Delhi.[24] When the airline is flying, all routes are now
operated with the Airbus A320 family, ATR 42s and ATR 72 aircraft. Its first long haul
destination was London, England, which was launched in September 2008. It had plans to
launch new long haul flights to cities in Africa, Asia, Europe, North America and
Oceania with deliveries of new aircraft. All long haul routes used to be operated on the
Airbus A330-200.
Services
Domestic
Economy class meal on board a Kingfisher Airlines domestic flight
Kingfisher First
The domestic Kingfisher First seats have a 48 inch seat pitch and a 126-degree seat
recline. There are laptop and mobile phone chargers on every seat. Passengers can avail
of the latest international newspapers and magazines. There is also a steam ironing
service on board Kingfisher First cabins. Every seat is equipped with a personalised IFE
system with AVOD which offers a wide range of Hollywood and Bollywood movies,
English and Hindi TV programmes, 16 live TV channels and 10 channels of Kingfisher
Radio. Passengers also get BOSE noise cancellation headphones. Domestic Kingfisher
First is only available on selected Airbus A320 family aircraft.
Kingfisher Class
The domestic Kingfisher Class has 32-34 inch seat pitch. Every seat is equipped with
personal IFE systems with AVOD on board the Airbus A320 family aircraft. As in
Kingfisher First, passengers can access movies, English and Hindi TV programmes, a
few live TV channels powered by DishTV, and Kingfisher Radio. The screen is
controlled by a controller-console on the seat armrest. Earcup headphones are provided
free of cost to all passengers. The default channel shows, alternating every few seconds,
the aeroplane's ground speed, outside temperature, altitude, distance and time to
destination, the position of the aircraft on a graphical map, and one or more
advertisements. Passengers are served meals on most flights. Before take-off, passengers
are served bottled lemonade.
Kingfisher Red
Kingfisher Red's logo
Kingfisher Airlines acquired Bangalore based low cost carrier Air Deccan in 2007,[28]
changed its name to Simplifly Deccan and subsequently converted it to Kingfisher Red,
Kingfisher Airline's low-cost class on domestic routes. A special edition of Cine Blitz
magazine was the only reading material provided. Passengers could earn King Miles even
when they flew Kingfisher Red, which they could redeem for free tickets to travel on
Kingfisher Airlines or partner airlines. On 28 September 2011, Vijay Mallya announced
that the company would soon stop operations of Kingfisher Red as it did not believe in
low-cost operations any longer.[29][30]
International
Kingfisher First
Prior to losing its A330 fleet, Kingfisher offered an international business/first product
called Kingfisher First which featured full flat-bed seats with a 180-degree recline, with a
seat pitch of 78 inches, and a seat width of 20-24.54 inches.Passengers were given
Merino wool blankets, a Salvatore Ferragamo toiletry kit, a pyjama to change into, five-
course meals and alcoholic beverages. Also available were in-seat massagers, chargers
and USB connectors. Every Kingfisher First seat had a 17 inch widescreen personal
television with AVOD touchscreen controls and offers 357 hours of programming
content spread over 36 channels, including Hollywood and Bollywood movies along with
16 channels of live TV, so passengers can watch their favorite TV programmes live.
There was also a collection of interactive games, a jukebox with customisable playlists
and Kingfisher Radio. Passengers are given BOSE noise cancellation headphones. The
service on board the Kingfisher First cabins included a social area comprising a full-
fledged bar staffed with a bartender, a break-out seating area just nearby fitted with two
couches and bar stools, a full-fledged chef on board the aircraft and any-time dining. A
turn-down service included the conversion of the seat into a fully flat bed and an air-
hostess making the bed when the passenger is ready to sleep. Both Kingfisher First and
Kingfisher classes featured mood lighting on the Airbus A330-200 with light schemes
corresponding to the time of day and flight position.
Kingfisher Class
The international Kingfisher Class (no longer available since Kingfisher lost its A330
long-haul fleet) seats offered a seat pitch of 34 inches, a seat width of 18 inches and a
seat recline of 25 degrees (6 inches). Passengers received full length modacrylic blankets,
full size pillows and meals. Each Kingfisher Class seat had a 10.6 inch widescreen
personal television with AVOD touchscreen controls. The IFE was similar to that of the
international Kingfisher First class. It could also be controlled by a detachable remote-
control console fitted in the armrest. This device could be used to control the IFE,
reading-lights, play games and even has a credit-card swipe for shopping on Kingfisher's
'Air Boutique'. It also had a facility for sending text-messages, though the service wasn't
provided by Kingfisher.
In-flight entertainment
Kingfisher's IFE system is the Thales TopSeries i3000/i4000 on board the Airbus A320
family aircraft, and Thales TopSeries i5000 on board the Airbus A330 family aircraft
provided by the France-based Thales Group.[32] Kingfisher was the first Indian airline to
have in-flight entertainment (IFE) systems on every seat even on domestic flights. All
passengers were given a "welcome kit" consisting of goodies such as a pen, facial tissue
and headphones to use with the IFE system. Now, passengers of Kingfisher class are not
given "welcome kits" but, as mentioned earlier, a complimentary bottle of lemonade and
earphones for use with the IFE are still given. The inflight magazines are special editions
of magazines owned by Mallya's media publishing house (VJM Media) viz. Hi! Blitz for
domestic flights and Hi! Living for international flights. Initially, passengers were able to
watch only recorded TV programming on the IFE system, but later an alliance was
formed with Dish TV to provide live TV in-flight.[33] And in a marked departure from
tradition, Kingfisher Airlines decided to have an on-screen safety demonstration using the
IFE system, however the conventional safety briefing by the flight attendants still existed
on many flights.
King Club
The frequent-flyer program of Kingfisher Airlines is called the King Club in which
members earn King Miles every time they fly with Kingfisher or its partner airlines,
hotels, car rental, finance and lifestyle businesses. There are four levels in the scheme:
Red, Silver, Gold and Platinum levels. Members can redeem points for over a number of
schemes. Platinum, Gold and Silver members enjoy access to the Kingfisher Lounge,
priority check-in, excess baggage allowance, bonus miles, and 3 Kingfisher First upgrade
vouchers for Gold membership. Platinum members get 5 upgrade vouchers.§
Kingfisher Xpress
Further information: Kingfisher Xpress
Kingfisher Xpress was a Door-to-Door cargo delivery service from Kingfisher Airlines.
Kingfisher Xpress same day service will be India's first and only same day delivery by air
service. The service offered a pick up facility in the 8 main metropolitan cities of India
namely Mumbai, New Delhi, Bengaluru, Hyderabad, Chennai, Ahmedabad, Cochin and
Kolkata with guaranteed same day delivery in up to 22 cities of India namely
Ahmedabad, Bagdogra, Bangalore, Chennai, Coimbatore, Delhi, Kochi, Goa, Guwahati,
Hyderabad, Indore, Jaipur, Kolkata, Mumbai, Patna, Raipur, Ranchi, Lucknow, Nagpur,
Pune, Srinagar and Tiruvanathapuram.
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 terms but 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 31 st
March, 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 following categories:
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 Crew – Central 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 Pitch Magazine.
Voted as India's Favourite Airline.
Rated as Asia Pacific's Top Airline Brand.
Brand Leadership Award.
Economic Times Avaya Award 2006 for Excellence in Customer Responsiveness.
India's No. 1 Airline in customer satisfaction by Business World.
Rated amongst India's most respected companies by Business World.
Rated amongst India's 25 Innovative Companies by Planman Media in 2006.
The Best Airline" and "India's Favourite Carrier' in a Survey conducted by IMB for
The Times of India.
Best New Domestic Airline for Excellent Services and Cuisine by Pacific Area Travel
Writers Association (PATWA).
Service Excellence 2005-2006 for a New Airline by Skytrax.
Ranked Third in the survey on India's Most Successful Brand launch of 2005 under
the Brand Derby Survey conducted by Business Standard.
Buzziest Brands of 2005 by agencyfaqs and The Brand Reporter.
Rated amongst the Top Ten Internet Advertisers by Yahoo.
Rated amongst the top ten in the Best Television Commercial Jingles by NDTV.
Best New Airline of the Year Award for 2005 by Centre for Asia Pacific Aviation
(CAPA) Award in the Asia-Pacific and Middle East region.
Listed in the top 100 most trusted brand in The Brand Trust Report.
In-spite of all such awards, recognition high revenue’s Kingfisher never posted a profit.
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
• Economic slowdown.
• Promotions and sponsorship declining.
POLITICAL FACTORS
• Open sky policy
• FDI limits: 100% for Greenfield airports
o 74% for the existing airports
o 100% through special permission
o 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
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 aviation regulations 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, Deccan’s 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 are three 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 Deccan’s lead, even full service airlines were forced to
cut fares to stay in the business.
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 Deccan’s 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 entire domestic aviation
industry. Dr. Mallya’s 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 conflicting nature of their
business models, the two carriers don’t seem to have any other legacy issue.
Dr. Mallya says that following the merger, both brands will retain their independent
identities—Kingfisher targeting the premium and normal fare segment and Deccan
serving budget travelers.
“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 acquire over 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 other’s 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, weren’t 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.
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 bleeding money.
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%
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
Fin.
Year
Net Sales Power &
Fuel
Cost
Power &
Fuel cost
as % of
Sales
PBDIT Interest PBDT
2007-
2008
1,456.28 889.30 61% -211.56 434.44 -646
2008-
2009
5,269.17 2,602.62 49% +45.70 2,029.33 -1,983.63
2009-
2010
5,067.92 1,802.99 36% -12.89 2,425.59 -2,258.48
2010-
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.
The debt-equity ratios were at a nightmare proportions:
Fin. Year Equity (Rs. In crores) Debt (Rs. In crores) Debt-Equity Ratio
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
Kingfisher’s 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 Kingfisher’s 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 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 Kingfisherwere 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 of 12
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 doesn’t 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 equity at 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.
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 the Mumbai
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 Kingfisher’s 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 airline’s permit got suspended and experts said Vijay
Mallya’s 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. Mallya’s defense, he did try to pump in loans of Rs.450 crore on February 18 from
UBHL’s.
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 31st December, 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 found diversion 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 three other 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 onSeptember 1, 2014, United Bank of India declares Vijay Mallya and three
directors of Kingfisher Airlines as wilful defaulters.
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 world’s largest distiller, is tightening corporate governance practices at
United Spirits Ltd (USL) and the UK-based company has hired a consulting firm to vet
USL’s contracts with other UB Group companies to ensure these agreements are “arm’s
length transactions”. Deloitte, which has been working with USL on various projects, has
been asked to ensure that the terms of USL’s contracts with United Breweries Holdings
Ltd (UBHL), the UB Group’s 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 USL’s 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 promotion expenses. USL
was owed Rs.1188.7 crore by UBHL as on 31 March 2013, according to the annual
report. USL, India’s 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
August Diageo 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 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 Kingfisher’s 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 group’s key investments that are readily
marketable:
As outlined in the table, the market value of UB group’s 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.
Challenges Faced by kingfisher Airways
THE government has rejected the re-appointment of liquor baron Vijay Mallya as
managing director of Kingfisher Airlines (KING.NS), as pressure mounts on the tycoon
to help his company repay its debts.
Kingfisher, which has not flown since 2012, said in a statement on Monday that the
Ministry of Corporate Affairs had rejected an application for Mallya's re-appointment,
without detailing why.
Indian banks want Mallya, once known as "The King of Good Times" for his flamboyant
lifestyle, to help repay more than $1 billion of loans Kingfisher owes to a consortium of
largely state-run banks.
The airline founded by Mallya failed to make a profit during the eight years from launch
to the grounding of its fleet in October 2012, and has been unsuccessful in efforts to find
new investors to revive its operations.
United Bank of India (UBOI.NS), among more than a dozen banks owed money by
Kingfisher, has already declared Mallya a "wilful defaulter", which in Indian law would
mean that he could be forced to stand down from any corporate posts and could damage
the fundraising prospects of businesses with which he is associated.
Besides positions at Kingfisher and his UB Group, Mallya is chairman of United
Breweries (UBBW.NS), the Kingfisher beer maker now 38 percent owned by Heineken
(HEIN.AS), and United Spirits (UNSP.NS), which is majority owned by Diageo
(DGE.L).
he king of good times is facing hard times. Launched in 2006, with much fanfare by its
Chairman, Mr. Vijay Mallya, Kingfisher Airlines (KFA) is presently in dire financial
straits. After the euphoria abated, KFA’s strategy, performance and financial health has
been questioned from mid-2008. Now the company is facing major financial and
operational problems. The press statement from KFA, on 12 March 2012, highlights the
challenges:
“The flight loads have reduced because of our limited distribution ability caused by
IATA suspension. We are therefore combining some of our flights. Also, 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.”
KFA is a good case to understand the impact of failure in risk 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. Let us analyse the top 5 risks.
1. Strategic Risk – Market Analysis
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 differences 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.
2. Strategic Risk – Merger with Air Deccan
KFA acquired Air Deccan, a low-cost airline in 2007. Five years of operations is a key
criteria for an airline to fly internationally. Hence, KFA acquired Air
Deccan’s international flying rightsand 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.
3. Strategic Risk - Investment in Planes
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.”
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.
4. Financial Risk – Excessive Debt
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 crore (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 three 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.
5. Operational Risk – Fuel Costs
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 thtwelve 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,
KFA was aware of the problem.:
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 Kingfisher Airlines alone was to the tune ofRs.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 enjoying
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.
Closing Thoughts
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 have not actively participated in charting the route of the
company. 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.
Conclusions:
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
Mallya’s 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.
India’s 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 the highest
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.
Mallya’s political clout rather than company’s future prospects. Even after that the
company has sunk 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.
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 public—which is probable–
he 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, then he cannot ask others
to sacrifice their financial interests for him.
Bibliography:
http://en.wikipedia.org/wiki/Kingfisher_Airlines
http://www.marketing91.com/swot-kingfisher-airlines/
http://www.slideshare.net/ckhattar/kingfisher-airlines-a-case-study
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