CASESTUDY ON KINGFISHER AIRLINES Kingfisher Airlines Ltd. (KAIR) is a private airline based in Bangalore, India.

Currently, the Indian carrier is struggling with a cash shortage and losses, it will end international flights and cut many local routes as it seeks funds to revive operations. KAIR is India's largest domestic airline. Owned by Vijay Mallya of United Beverages Group, Kingfisher Airlines started its operations on May 9, 2005, with a fleet of 4 brand new Airbus - A320. He took over the UB Group even before he turned 30 after his father, Vittal Mallya, passed away suddenly in 1983. Since then, he has consolidated the group holdings, shed those companies, including a car battery making venture, won a corporate battle and Manu Chabbrias Shaw Wallace. Today, his beer business controls half the domestic market while the liquor business controls three-fourths of the market. Kingfisher Airlines was set up in 2003 but hasn't seen a single year of profit since it got listed in 2006. Retrospection on Kingfisher Airlines history proves that it was a stiff competition for other domestic airlines of India. Its brand new aircraft, stylish red interiors, stylishly dressed cabin crew and ground staff added to glamorous flying. The airline introduced in-flight entertainment (IFE) systems, for the first time to Indian consumers. The IFE systems were provided on every seat, even on the domestic flights. Kingfisher Airlines 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 personalized screens in the aircraft, sleeperette seats with extendable footrests, and three-course gourmet cuisine. The airline offers attractive services to its on board passengers. Years following its inception proved to be beneficial for the airline, in terms of its booming business, with a good track record of customer satisfaction. Kingfisher Airlines was the first airline in India to operate with all new aircrafts. It was also the first airline in the country to order the Airbus A380. Kingfisher Airlines currently operates ATR 42, ATR 72 and Airbus A320 aircraft for domestic and Airbus A330s for international services. In the present time, the airline operates with a fleet of 74 aircrafts, which include 25 Airbus A320-200 aircraft, 6 ATR 42-500, 27 ATR 72-500, 3 Airbus A319-100, 8 Airbus A321-200 and 5 Airbus A330-200. Delivery of A380s is due in 2010 and A350s in 2012. The question is, did Mr. Mallyas problems lie in acquisitive excess? He acquired Whyte & Mackay, a Scottish bulk liquor maker amidst drama and glamour, holding a press conference in London to announce the deal. He bought newspapers like Asian Age, fashion and movie magazines, bought and sold a TV company and added football teams to his ever expanding empire. He added a cricket team Royal Challengers to his list of acquisitions. He funded a party and became a Rajya Sabha MP. He owns a racing team (Force India) which regularly competes in Formula One racing events, launched a calendar Kingfisher, in which the best of the models, feature. The biggest venture of them all was Kingfisher Airlines and he promised flyers a first class service not usually seen among the domestic airlines. Jet Airways was good and on time, but was for busy executives; Air Deccan was for the Aam Aadmi, a sort of shuttle service. Mallya brought glamour into the business of running airlines. Each seat in his aircraft had a TV screen just like the international air carriers offered welcoming guests by appearing on the screen and asking them to write to him personally if they were unhappy with any service. He handpicked air hostesses, gave away goody bags to each passenger. Kingfisher Airlines made you feel special. The corporate sector wanted all top executives to fly Kingfisher and they came back admiring the service. In 2008, due to the prevalent economic downturn, the civil aviation industry faced the worst period in its history. It was the time, when air passenger traffic started dripping, and the aircraft fuel prices went sky rocketing. Deccan Aviation's Capt G.R. Gopinath, who was desperately looking for a buyer for his airline, Air Deccan, had all but tied up with the Anil Ambani for a sell-out. Some last-minute delays eventually led to the collapse of the deal. That's when Mallya, suddenly put in his bid, apparently offering more money than the previous one to clinch the deal. Mallya got Air Deccan's huge market share and several aircraft as well, plus an immediate listing. The licence to fly on international routes

as Air Deccan had been in the business for five years a requirement by the regulator for any airline to fly overseas. But he also acquired the losses incurred by the airline. Through a reverse merger, Kingfisher Airlines became Air Deccan and once the entire acquisition was completed with necessary approvals from the regulator SEBI in place, Mallya quickly changed the airline's name back to Kingfisher Airlines in 2008. He spun off Air Deccan's fleet into a subsidiary called Kingfisher Red. So, Kingfisher Airlines had an economy as well as business class and flew on trunk routes including the metros, while Red did the rounds of tier-II cities. Kingfisher Chairman Vijay Mallya and his Jet Airways counterpart Naresh Goyal announced an alliance, both the airline companies decided to implement code-sharing on both domestic and international flights. It was a step to reduce the expenses. Subsequently, frequent flier programs were announced by both the airlines, namely King Club and Jet Privilege. The Kingfisher Airline had everything going for itself: great brand visibility, loyal customers and a wide network. But, the business model was coming apart and losses kept mounting. There was cannibalisation from the mother brand, that is If two brands look alike, then obviously, passengers will opt for the cheaper priced. Industry analysts say that the airline should have first consolidated its domestic operations and then introduced international routes because on the foreign routes, the competition only gets bigger and with those who have deeper pockets. The airline is today saddled with total debts of over Rs. 8,000 crore. Mallya was forced to take loans from banks which now have a total exposure of about Rs. 7,000 crore to Kingfisher Airlines, of which over Rs 1,300 crore had been converted into equity during the last fiscal as part of a debt restructuring exercise. Of the banks' total exposure, over Rs. 4,000 crore are in the form of term loans. The consortium, led by State Bank of India, also includes a number of other public and private banks. But early this year, after the airline missed one of the milestones to raise Rs. 1,000 crore through global depository receipts because of the crisis in the Arab world, the lenders converted part of their loans to equity at a premium to market price. As a consequence, these banks now hold 23 per cent stake in the airline. These loans for Kingfisher have also come at an enormous cost for the UB group. More than nine out of 10 shares of its crown jewel, United Spirits have been pledged as collateral to the banks. Kingfisher is also struggling to meet its working capital needs, and has sought relief from lenders. It owes close to Rs 7,060 crore to 14 banks, and they are at present assessing the viability of the airline. Kingfisher reported a net loss of Rs 469 crore for the September quarter, though there was a 10.2% rise in revenues at Rs1,528 crore. The loss was on account of massive spike in aviation fuel prices, and inability to hike fares due to the competition. Vijay Mallya is said to have been moved to tears for the employees of the Airlines, who have been suffering as they have been left unpaid since last few months. Vijay Mallya expressed his concern for the employees while sending a personal letter addressing all people working with Kingfisher. Expressing his helplessness, Mallya, who was once known as the King of Good Times, claimed that the company was handicapped because its bank accounts have been frozen by the income tax authorities. The frozen accounts had disrupted payments to suppliers, including the International Air Transport Association, contributing to the carrier cutting flights and delaying salaries to employees. Kingfisher got access to some bank accounts that were earlier blocked by tax authorities because of late payments. The Kingfisher chief reportedly informed that he has organized funds to be able to pay overdue salaries, adding that the delay in payments is a "source of great personal sorrow." Awash in liabilities, Kingfisher Airlines is today asking the banks for another debt recast and perhaps some easier terms to pay interest costs. In its bid to reduce costs, the airline has started cancelling flights and has recently closed down its low-cost carrier Kingfisher Red. Indian passengers are extremely price conscious and this measure may just lead the airline into a deeper mess. This might prove to be another costly mistake. Now, it seems likely that the carrier may lose its license as billionaire Chairman Vijay Mallya struggles to implement turnaround plans, according to Aviation Minister Ajit Singh. The new proposal is at least the second reduction in services in less than a month for the Bangalore-based carrier, which had 340 flights a day in October 2011. Kingfisher rose 1.1 percent to 19.20 rupees as of 9:51 a.m. in Mumbai, after gaining as much as 4.2 percent. Jet Airways (India) Ltd. (JETIN), the nations biggest airline, fell as much as 1.9 percent,

while SpiceJet Ltd. (SJET) dropped as much as 2.4 percent. The carrier had a market share of 9.7 percent last month from 11.3 percent in January. Kingfisher will pare local flights by as much as 37 percent to between 110 and 125 a day with a 20-plane fleet, Chief Executive Officer Sanjay Aggarwal th after submitting a new plan to Indias aviation regulator, on 20 March. The airline will stop services to eight overseas destinations by April 10 after bookings were hit by a suspension from an international billing facility. The airline is also in talks with local investors for funds. But in a recent interview to Business Line, UB Group chief financial officer Ravi Nedungadi pointed out that when the first debt recast happened, the price of crude was about $80 per barrel, which has now gone up to $100 per barrel while the rupee has eased past Rs. 50 per dollar from about Rs. 40 earlier. It is obvious that the working capital requirements too has gone up, Paul Stephen Dempsey, an expert in aviation and the law at Canada's McGill University, has analysed that barely a decade after the Airline Deregulation Act of 1978 was implemented; the US airline industry lost all the money it made since the Wright Brothers' inaugural fight in 1903. The core problem of the aviation sector could be traced to a single cause, which is when Indian government deregulated the airlines industry, taking cue from the US government. There was the time when airlines industry flew as the government dictated who could fly where and how much they could be charged, which let the airlines to generate a good profit but tickets were expensive. But hard times started after the implementing deregulation act, which wide opened the gates for competition. This led for the sharp fall in ticket prices and profit followed the same suit. The old airlines which failed to cope with business model set for the new era by the new competitors, crash landed their airlines once and for all. Deregulation has not only led to fall of ticket prices but also increased the monopoly and concentration to tenfold. For instance, just four airlines are controlling the two-third of the US market, country that gave birth to the deregulation. Expensive labor contracts, skyrocketing fuel prices and passengers used to cheap cross-country fares to be blamed for the current crisis. Other times, costly planes, fears of terrorism and even outbreaks of disease adds to the woes of ailing aviation. When people endure the unemployment difficulties due to recession, airlines lose passengers. There are many lessons which Indian aviation have failed to learn or still being defiant to those reasons led to the sorry state of few airlines. Some anti-competitive, greedy airlines in order to control huge aviation market cause unhealthy competition, that eventually raise economical pressure. But India has removed the Monopolies and Restrictive Trade Practices Commission from aviation markets, under the guidance of PM Manmohan Singh. However, the government have shown no will to appoint the promised Competition Commission. Mallya has blamed the paid media as being responsible for the downfall of Kingfisher Airlines. These comments were made in Mallya's letter to his employees. He said, "I'm trying my best to revive the airlines, employees must have patience." The letter is believed to have come shortly ahead of the Directorate General of Civil Aviation's (DGCA) call on the airline's new flight schedule. Kingfisher had submitted a copy of the revised schedule to the DGCA after last week's massive cancellation of flights causing great distress to flyers. It is now operating only 28 out of 64 flights. But market analysts believe flaws in Mallya's business plans and style of functioning lie at the root of Kingfisher airlines' woes. In a controversial report on the airline, Veritas Investment Research analysts point out that Mallya should have never got into the airline business. We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India's premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions, two analysts with the research company said in a report in September this year. The report was hotly contested by the UB Group management which felt there was nothing wrong with the airline. Mallya was not just into one business but several and each as different as the other. Normally, for such diverse businesses, one would appoint a CEO each to run it with a hands-on approach who would, in turn, report to the group chairman. While the liquor and the beer businesses had an experienced set of officials running the show, the others needed the undivided attention of Mallya himself. The carrier has been seeking new funds or loans since at least November when it shuttered

low-cost services and deferred plane deliveries as part of a turnaround plan. The company has posted more than 10 straight quarterly losses as it contended with high jetfuel expenses and a price war. Some of the potential investments in Kingfisher depend on a change in foreign ownership rules. Finance Minister Pranab Mukherjee during his budget speech, proposed allowing airlines to borrow as much as $1 billion industrywide from overseas for working-capital requirements. Mukherjee also earmarked 40 billion rupees in the federal budget to bail out Air India Ltd., the state-owned carrier. The government doesnt want to ground Kingfisher because of concerns about employees, passengers and fares. Kingfisher also had its five-star service rating suspended by SkyTrax Research following cuts in its international network. The carrier is paring overseas operations that are bleeding heavily. Suspension from the IATA system used by travel agents because of overdue fees affected bookings. Airline executives have gone to Geneva to work to regain access as soon as possible. Kingfisher lost domestic market share every month from October through February, according to data available with the regulator, as it cut flights and as service disruptions deterred passengers from booking tickets. Kingfisher Airlines, which hogged the limelight during the previous two editions of India Aviation, an international exhibition and conference on civil aviation held once in two years in Hyderabad, has decided to stay away from the five-day event this year. Today, Kingfisher Airlines accumulated losses stand at about Rs 8,200 crore and the money to pay for fuel, salaries and airport fees is running out, prompting Mallya to approach the government for a bailout.

QUESTIONS: a) What changes would you suggest to KAIR to salvage the situation? b) What led to the failure of Kingfisher Airlines? c) Give supportive reasons for this statement Mallyas personality got in the way of CEO Mallya d) Give reasons for the Indian Government to intervene and bailout Kingfisher Airlines. e) What are the problems plaguing the aviation industry and Kingfisher Airlines business? NOTES: 1. 2. 3. 4. 5. 6. How an airline obsession put a liquor baron on the rocks excerpts from www.thehindu.com Kingfisher airlines www.businessweek.com Excerpts from www.wikipedia.com Excerpts from www.news.oneindia.in Excerpts from www.business-standard.com Statement From Kingfisher Airlines - Mumbai, March 14, 2012

Prakash Mirpuri - Vice President - Corporate Communications, Kingfisher Airlines Ltd 1. Despite the shortage of crew, Kingfisher Airlines operated 101 flights on March 13th and will operate 101 flights on March 14th. 2. Our prime mission is to maintain schedule integrity by predicting in advance what we can with the sole objective of minimising, if not eliminating guest inconvenience. 3. We try hard 24X7 to inform guests in advance of cancelled or combined flights and to give them the option of travelling on other airlines or to take a full refund.

4. There will, inevitably, be a small number of guests who are inconvenienced partially because we could not access them personally but only via their agents. 5. Kingfisher apologises to all those who were affected.

6. Whilst many of our pilots and engineers have expressed their disappointment, we not only sincerely apologise to them but wish to advise that our Chairman will meet the pilot fraternity on Thursday March 15 in Delhi. 7. There is a lot of sensational speculation and assumption about us.

8. We request one and all to appreciate the serious handicaps we face not only because of our frozen accounts but because of the operating environment. We are working hard to resolve the issues that confront us given the current environment. 9. We would like to confirm that we are curtailing our wide body overseas operations that are bleeding heavily. To this end we have already returned one Airbus A 330-200 to the lessor in the UK. Positive and immediate action is being taken on all fronts to cut costs. 10. We are trying to protect the interests of our valuable employees. We share their pain caused by unpaid salaries and we are also trying to protect their jobs apart from paying salaries. 11. Whatever the schedule we operate, we would like to assure our valued customers that your flights will depart as shown and on time. 12. The suspension of our ICH and BSP accounts with IATA resulted from the freeze of our IATA accounts by the tax authorities. 13. We have, obviously suffered as guests are not able to book seamlessly through IATA travel agents as before. This serious handicap has been partially mitigated by encouraging our travel partners to establish booking arrangements on their individual platforms. Nevertheless, this greatly influences our ability to operate certain flights and it is, therefore, incorrect to assume that pilots are solely responsible. 14. We continue to work with the tax authorities to arrive at a solution to de-freeze our accounts as early as possible. 15. We are also working with our Bankers to realise the urgent interim working capital as approved in the Bankers Consortium meeting held on February 17th. This is not dependant on State Bank of India as widely reported. 16. We fully understand that State Bank of India can only consider additional facilities once our account with them is standard and this has been debated and minuted at the last Consortium meeting. 17. The Government's final verdict on removing the restriction on investment by a foreign airline within the existing FDI limit of 49% is awaited. We can confirm that there is interest from prospectives on this basis. 18. Finally, we wish to assure all guests, employees and all stakeholders that we are doing our very best. (FLYKINGFISHER.COM)