Failure of Kingfisher Airlines
Failure of Kingfisher Airlines
Failure of Kingfisher Airlines
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 final
outlay 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.
Table of contents:
1) Introduction
2) Early Days of Kingfisher
3) SWOT And PESTEL Analysis
4) Acquisition of Air Deccan
5) Financial Unrest & Debt Recast
6) Loan Defaults, Loan Diversion and Forensics Audit
7) Post-Effects of Kingfisher Airlines
8) Conclusion
9) Annexures and Tables
Abstract
Indian Aviation Industry is one of the fastest growing markets in the
world. 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. Till
December 2011; Kingfisher Airlines had the second largest share in
India's domestic air travel market. However due to the severe
financial crisis faced by the airline, it has been grounded. The company
has no funds to pay the salaries to the employees and is facing several
other issues like fuel dues; aircraft lease rental dues, service tax dues and
bank arrears. The main issue at hand is the bank loans and interest
burden which lead the airlines into an accumulated debt and loss
pile 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 of
Rs.7000 crore. And the effects that this led to the Airlines as well as to
the other UB Group companies is shocking. In a way both Kingfisher
and UB Group are insolvent.
Word Count: 198 words.
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 of
United Breweries Group. The group headed by Dr. Vijay Mallya is a
flamboyant businessman having interests in beverage alcohol, aviation
infrastructure, real estate and fertilizer among others.
The airline started commercial operations in 9 May 2005 with a fleet of
four 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 five
A380s, five Airbus A350-800 aircraft and five Airbus A330-200 aircraft
in a deal valued at over $3 billion. Delivery of the A330s was due to
start 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 trail
of innovations and introduced a range of market-firsts that had
completely redefined the whole experience of flying. By elevating its
customers to a level of being guests and not just passengers, Kingfisher
Airlines 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 and
headphone to use with the IFE system. Kingfisher Airlines had made
alliance with Dish TV to provide live TV entertainment to passengers.
As of July 2007, Kingfisher operated only on domestic routes; however
it started its international operations on 3rd September, 2008 with a
flight between Bangalore and London, and later on added new
international destinations, namely Hong Kong, Dhaka, Colombo,
Singapore, Dubai and Bangkok. However, on 15th September 2009,
Kingfisher Airlines withdrew the London service.
Route rationalization.
WEAKNESSES
OPPORTUNITIES
International market.
THREATS
Competitors
Infrastructure issues.
Tourism saturation
Economic slowdown.
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
SOCIAL FACTORS
TECHNOLOGICAL FACTORS
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 entire
domestic 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 conflicting
nature 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.
Net
Sales
2007-2008
Power
& Fuel
Cost
Power &
Fuel cost
as % of
Sales
PBDIT
Interest
PBDT
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.
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
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 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
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 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.
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 on September 1, 2014, United Bank of India declares Vijay
Mallya and three directors of Kingfisher Airlines as wilful
defaulters.
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 key
investments that are readily marketable:
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 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. Mallyas political clout rather
than companys 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.
Table 2:
India domestic market share: 3QFY2012
Table 3:
Bibliography
Company start-up info. Retrieved from www.makemytrip.com:
http://www.makemytrip.com/flights/kingfisher-airlineshistory.html
Awards and recognition: Retrieved from profit.ndtv.com:
http://profit.ndtv.com/stock/kingfisher-airlines-ltd_kfa/reports
Bibliography
Data Regarding Debt Recast: Veritas Investment. (2012). Pie in the Sky.
Toronto.
Bibliography
Forensics Reports: Manju, A. B. (2014, September 10). Retrieved from
www.dnaindia.com: http://www.dnaindia.com/money/reportkingfisher-diverted-funds-to-formula-one-audit-2017440
SBI' Forensics Audit: Ashwin Mohan, Simran Gill. (2014, March 26).
Retrieved from http://articles.economictimes.indiatimes.com/201403-26/news/48595106_1_kfa-kingfisher-airlines-audit-report
Bibliography
UBHL's Insolvency: Veritas Investments. (2012). Pie in the Sky.
Toronto.
Bibliography
Debt Recast Package: Veritas Investments. (2012). Pie in the Sky.
Toronto.
Bibliography
Graphs of Passenger Load: CAPA Centre for Aviation & airline
reports.