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Case Study:Crisis and Debt Restructuring at Kingfisher Airlines

Abstract:Airlines industry has always been a very challenging one to operate in. Very few companies are actually earning profit in this industry. Kingfisher Airlines, a dream venture of Vijaya Mallya also stepped into this industry to create a difference and to redefine the experience of flying. But Kingfisher Airlines once known for its premium quality and class is in the deep crisis now and is actually fighting for its space in the sky. The study aims to analyze the crisis at Kingfisher Airlines and the measures taken by the company to overcome the same with a special focus on Debt Restructuring done by the company in 2010-11. News of Kingfisher Airlines:May 2009: Kingfisher Airlines carried more than 1 million passengers, giving it the highest market share among airlines in india. March 2010:5 Star Airline crown for kingfisher airlines, top global recognition for india premiun carrier again for 3rd consecutive. November 2010:Kingfisher Airlines king club program awarded the best program of the year in the middle east & Asia/Oceania region by the frequent traveler awards. December 2011:Kingfisher airlines has the second largest share in india domestic air travel market. 2011:Kingfisher airlines crowned the best Indian airline in UK. 2012: By early 2012, the airline accumulated losses of over 7,000 crore (US$1.4 billion) with half of its fleet grounded and several members of its staff going on strike because of their unpaid salaries. Kingfisher's position in top Indian airlines on the basis of market share slipped to last from second because of the crisis. Kingfisher airlines once the king of sky is fighting for the sky. I will bounce back Vijay Mallya

Brief about Kingfisher Airlines:Kingfisher Airlines established in 2003 is owned by the Bengaluru based United Breweries Group. The airline commenced its domestic commercial operations from 9 May 2005 with a fleet of four new Airbus taken on lease and operating from Mumbai to Delhi. Ever since its launch, Kingfisher redefined the experience of flying by adding all new range of innovative products and services for its customers, like the In-flight Entertainment (IFE) system on domestic flights. Kingfisher planes crossed the domestic sky on 3 September 2008 by starting a flight from Bengaluru to London and further to Hong Kong, Dhaka, Colombo, Singapore, Bangkok and Dubai. On December 19th 2007, the big fish (Kingfisher Airlines) galloped the small fish (Air Deccan, low cost airlines). United Breweries (UB Group), the parent company of Kingfisher Airlines acquired 46% of Air Deccan parent Deccan Aviation. How Problems started at Kingfisher Airlines:Kingfisher Airlines had been reporting losses since 2005, as it never reached its break-even and the situation aggravated in 2007, when Kingfisher acquired Air Deccan after which the former suffered a loss of over 1,000 crore INR for three consecutive years. By early 2012, Kingfisher had accumulated losses of over 7,000 crore INR with several flights grounded and staff going on strike due to non-payment of salaries. The market share of Kingfisher Airlines slipped to last from second due to this crisis.

Start of the Crisis and Financial Problems at Kingfisher Airlines:Kingfisher Airlines witnessed various problems during its crisis. How all it started and what were the difficulties faced by Kingfisher during this have been highlighted as follows: Fuel Dues:Since past several years, Kingfisher Airlines was defaulting in making fuel bill payments and in July 2011, HPCL (Hindustan Petroleum Corporation Limited) expurgated the fuel supply for around 2 hours to Kingfisher Airlines in lieu of non-payment of overdue fuel bills. Bharat Petroleum Corporation in 2009 filed a case against Kingfisher airlines again for non-payment of fuel dues. High Court in its order directed Kingfisher to pay the entire due amount (INR 245 crore) by November 2010 and Kingfisher obliged the Court order by paying the dues in installments. Delayed Salary:Owing to dearth of funds Kingfisher airlines didnt paid salaries to its employees from October 2011 to January 2012. Kingfisher in its report to DGCA (9th Jan, 2012) stated that the salary dues has been paid to 60% of its employees and the remaining due salary will be paid latest by 31st January 2012. In between, Kingfisher pilots, protesting against the non-payment of salaries started making in-flight announcements quoting "It is their sense of duty towards the guest that is making them fly despite not being paid salaries for the past two months". Kingfisher also defaulted in paying Tax Deducted at Source from the employees income to the tax department. Dues of Aircraft Lease Rent:Kingfisher Airlines was making default in aircraft lease rentals. As a result, in Nov 2008, GE Commercial Aviation Services (one of the lessors to Kingfisher Airlines) cautioned Kingfisher to retrieve 04 leased A320 planes in lieu of default. Kingfisher Airlines initially denied regarding any default in payment. GECAS in return filed a complaint with DGCA seeking repossession of four A320 aircrafts. To this, Kingfisher Airlines in Jan 2009 made petition with Karnataka High Court that to refrain GECAS from repossessing the aircrafts, but the Court rejected the same and Kingfisher had to return aircrafts to GECAS. Again in July 2010, DVB Aviation Finance Asia Ltd (a lessor from Singapore), prosecuted Kingfisher Airlines in a UK court for not paying lease rent of A320 (Aircraft leased from DVB) for three months. Till now, 15 out of total 66 aircrafts in the fleet of Kingfisher Airlines were grounded and Kingfisher was facing problem in meeting maintenance and overhaul expenses. AAI Slams Notice:Kingfisher Airlines was functioning on a cash & carry basis for the past 6 months, with daily payments amounting to 0.8 crore INR. As a result, Airports Authority of India on February 2012 slammed notice to Kingfisher regarding accumulated dues of 255.06 crore INR. The airline was operating on a cash and carry basis for the last six months, with daily payments amounting to 0.8 crore INR. Service Tax Dues:Kingfisher also being a defaulter in service tax payments got warning from S.K. Goel (Chairman, Central Board of Excise and Customs) on 9 December 2011 regarding possibility of legal action against Kingfisher for not paying service tax. Kingfisher Airlines as on 10th Jan 2012, had service tax arrears of 60 crore INR. The Airlines got a concession from Ministry of Finance and an order to pay the dues by 31st March 2012. Kingfisher paid 20 crore INR in January 2012 towards its dues for December 2011 and part of its arrears.

Kingfisher Airlines A NPA:Till December 2011 end, the bank dues of Kingfisher Airlines were around INR 260 crore to INR 280 crore. Lenders refused to lend any more money to Kingfisher till the previous dues are clear. If the dues were not paid in time, Kingfisher Airlines would automatically have been treated as NPA (Non-performing asset) in the accounts of banks. So, the airlines paid one month interest amount to the banks on the last working day of 3rd quarter of financial year 2011-12 to avoid turning Kingfisher Airlines account into NPA. But, State Bank of India (SBI), the largest creditor to Kingfisher Airlines and the leader of consortium of banks in DRP (Debt Recast Package) declared Kingfisher Airlines a NPA on 5th Jan 2012. SBI had an exposure of INR 1,457 crore in Kingfisher Airlines. By Feb 2012, many more banks declared Kingfisher Airlines as NPA. Those were SBI, Bank of Baroda, PNB, IDBI, Central Bank, BOI and Corporation Bank Other Problems:Kingfisher Airlines suffered many other problems like, Erosion of its net worth; Frozen bank accounts; Much of its fleet grounded; and Suspension of ticket sales by IATA on March 7, 2012 on account of nonpayment of dues. All these problems further graved the situation. Measures taken by Kingfisher Airlines During Crisis:Key Revenue Initiatives: One world alliance Membership: to drive inbound domestic passenger
growth Co-branded credit cards: introduced King Club ICICI co-brand card Kingfisher Express: DTD Cargo Express service to tap under penetrated aircargo delivery service .

Key Cost Reduction Initiatives:Rationalizing distribution channels: Reduction of S&D costs by reviewing distribution channels, negotiating GDS contracts Renegotiating vendor agreements: o Additional airport and fuel discount o Additional discounts from airports o E&M costs to reduce with new vendor o Renewal of operating leases at a discount to existing rates Control discretionary Spend o Reduce rentals, cost of transportation, local conveyance and communication o Optimize space Operational efficiency o Reduce fuel consumption for Airbus and ATR operations o Target E&M spend reduction (in house C-checks, Controlled re-delivery)

Capital Recast: Debt Re-schedulement (discussed in detail in later section of this study) Equity Infusion Kingfisher Airlines Capitalizing its Expenses:Kingfisher Airlines moved from expensing to capitalizing in its Financial Statements in 2011. Capitalizing: When the company distribute the cost of acquiring asset over a period of years. Expensing: When cost of acquiring is shown in one year as a current expense. The benefit of capitalizing costs is that both the EBITDAR and the EBITDA metric dear to KAIR are inflated and remain unaffected by the subsequent increase in amortization that flows below the EBITDA/EBITDAR line, which was highly criticized by Veritas, a Canadian research Company. Effects of Capitalization on Key Figures:Company may follow expensing or capitalizing method to record some items in its financial statements. And both the methods affect company balance sheet, income statement and cash flow statement in a different manner. Apart from this, the company s financial ratios also depict different picture based on the method used. The impact of capitalizing over expensing on various ratios has been summarized below:

Net Income: A company capitalizing its expenses will report higher profit initially as compared to expensing where higher profits will be shown in the later years. Stockholders' Equity: Expensing firms will have lower stockholders equity in the initial years, lesser profits and thus slighter retained earnings vis--vis capitalizing. Assets Reported on the Balance Sheet: A company that capitalizes its costs will report higher total assets as compared to the case when company expenses the same costs. Debt Recast by Kingfisher Airlines:Kingfisher Airlines in 2010 was allowed to recast its debt in lieu of ongoing crisis. By Nov 2010, Kingfisher has restructured 8000 crore INR worth of debt in which all of its 18 lenders agreed to cut interest rates and convert part of their loans given to Kingfisher into equity. Lenders converted 650 crore INR of debt into preference shares which further was to be converted into equity when the airline lists on the Luxembourg Stock Exchange by selling global depositary receipts (GDR). Shares were to be converted into ordinary equity at a price at which the GDRs are sold to investors. Besides the 1,400 crore INR debt which was converted into preference shares, another 800 crore INR debt was converted into redeemable shares for 12 years. As a part of debt recast, Promoters and Bank debt which were converted to Compulsory Convertible Preference Shares, were further on 31st March 2011 converted into equity at INR 64.48 which was higher than the then market price of INR 39.90. After the Recast Airline's average interest rate came down to 11%, helping the airline save 500 crore INR every year on interest cost. Consortium of banks, who were lenders to Kingfisher and a part of debt recast, was represented by SBI Capital Markets. The salient features of the DRP thus include: Conversion of debt of up to 1,355 crore INR from lenders into share capital. Conversion of debt of up to 648 crore INR from promoters into share capital. Reschedulement of repayment of the balance debt to lenders over 9 years with a moratorium of 2 years. Reduction in interest rates. Sanction of additional fund and non-fund based facilities by the lenders.
The recast plan involved the issuing of the following types of preference shares:
Share type Redeemable Cumulative Preference Shares Compulsorily Convertible Preference Shares Compulsorily Convertible Preference Shares Optionally Convertible Debentures Optionally Convertible Debentures Optionally Convertible Debentures Dividend 8% 7.50% 7.50% 8% 8% 8% Maturity 12 years 12 years 12 years 12 years 12 years 12 years Quantity 575,000,000 780,000,000 648,000,000 20,000,000 30,000,000 30,000,000 Price 10 (US$0.2) 10 (US$0.2) 10 (US$0.2) 100 (US$2) 100 (US$2) 100 (US$2) Recipient Consortium of lenders Consortium of lenders United Breweries (Holdings) Ltd, Kingfisher Finvest India Ltd Star Investments Ltd. Margosa Consultancy Pvt. Ltd. Redect Consultancy Pvt. Ltd.

In addition to these issues, 9,700,000 units of 6% Redeemable Preference Shares of INR 100 each issued to United Breweries (Holdings) Ltd. (Promoter Company) were converted to 97,000,000 units of 6% Compulsorily Convertible Preference Shares of INR 10 each. The loans given by the banks to KAIR were impaired and therefore under the pretext of a debt recast, the banks have converted some of these unpaid principal and interest amounts into cumulative convertible preferred shares and cumulatively redeemable preferred shares. The banking consortium was now both an

owner and a creditor to the airline. Kingfisher Airlines, in Nov 2011 tried for a second debt recast, but was ruled out by Government of India. Recast Pledge:Kingfisher Airlines has pledged its brand as collateral with its lender consortium for 4,100 crore INR. The brand valuation being done by Grant Thorton in 2010. The Brand was valued and loan raised worth triple the carrier market value. On July 6, 2011, pursuant to requirements prescribed under the Debt Recast Package Kingfisher Airlines' founder companies, United Breweries (Holdings) Ltd and Kingfisher Finvest Ltd, have pledged their entire stake in the airline with certain of its lenders. United Breweries Holdings Ltd held 199,598,555 shares (representing 40.1% of total outstanding shares) in the airline and pledged all the shares to lenders. At the same time, Kingfisher Finvest Ltd held 63,478,570 shares (representing 12.75% of total outstanding shares) pledged its entire holding to the lenders.
The following table concludes the Debt Recast Structure:
Particulars (In Rs. Crore) Working capital Term loan PDP loan Promoter loan Inter corporate deposit (ICD) Sub Total Other short term loan Hire Purchase Finance lease Grand total Debt before recast 590.5 4,263.49 166.44 656.30 1,137.32 6,814.0 75.20 86.15 675.73 7,651.12 (1,398.10) (553.10) Conversion of debt To To CCPS CRPS (750.10) (648.00) (709.32) (709.32) 248.42 768.30 (553.10) Additional loan To OCDS To WCTL (297.40) 297.40 FITL 248.42 RTL 768.30 Debt post recast 293.10 4,274.40 166.44 8.30 428.00 5,170.2 75.20 86.15 675.73 6,007.30






Table 2


Commulative Convertible Preference Shares Commulative Redeemable Preference Shares Optionally Convertible Debentures Working Capital Term Loan Funded Interest Term Loan Rupee Term Loan