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Chetan Bhawsar
INDIAN INSTITUTE OF MANAGEMENT ROHTAK
Scheduled air transport service which involves domestic and international passenger airline services. Non-scheduled air transport service which consists of charter operated flights and air taxi operators. Air cargo service which involves air transportation of cargo and mail.
Aviation industry as a whole generates 56.6 million jobs and revenues more than 2.2 trillion US$ for global gross domestic product (GDP) of which Indian airline industry contributes 1.4million direct jobs and 7 million indirect jobs. There are about 1091 registered aircrafts and a total of 132 airports in the country, which include 14 international airports, 7 custom airports, 83 domestic airports and 28 civil enclaves are managed by The Airport Authority of India (AAI).
India is currently the 9th largest aviation market handling 121 million domestic and 41 million international passengers. Today, we have more than 85 international airlines operate to India and 5 Indian carriers connect over 40 countries. The traffic of air passenger in India is increasing on a tremendous speed. Currently, Indias airport infrastructure is undergoing modernisation with the induction of highly sophisticated and most advanced facilities and infrastructure which includes setting up of new Greenfield airports and installation of security, air traffic navigation systems and surveillance. Among the existing air carriers, IndiGo lead in terms of market share with 29.7 per cent of the total market share, followed by Jet Airways-Jet Lite combine at 25.3 per cent of market share. Next place is taken by Air India Domestic which holds 19.2 per cent followed by Spice Jet at 17.5 per cent and finally Go Air at 8.3 per cent for the financial year of 201213. From April 2000 to July 2013, the aviation industry (including air freight) in India has attracted foreign direct investment (FDI) worth US$ 456.84 million as per the data released by Department of Industrial Policy and Promotion (DIPP).
segment, KFA reduced its fleet to 68 aircrafts from 77 and cut down to 366 destinations. Kingfisher also decided to lay off nearly 100 pilots and hiked fuel surcharges. But overseas operations were increased significantly to 12 flights daily. KFA also won numerous awards and accolades and was rated as Indias only 5-Star Airline by Skytrax, for three years in a row. It had also been 4 years since its birth and shareholders were still waiting to receive their first dividend but the company continued to run in losses and reported a loss which stood at around INR17 billion and the revenue shrunk to INR 52.7 billion as per the financial statement of March 2010.
WORSENING
2010: The clouds over KFA grew darker with Jet Airways re-establishing its #1 position in the market with a 25.5% market share, leaving KFA at 19.8%. By this time, IndiGo had also started establishing its grasp over the Low cost segment and was rapidly gaining market share. KFAs domestic flights remained same at 366 but international operations were increased to 28 flights per day. In spite of increase in the number of flights, KFA failed to increase its market unlike its other competitors and this should have been taken as a warning alarm but company let it go unnoticed. The airline reported that they had lowered their losses to INR 10.2 billion. But however, this claim was later proved to be invalid. In September, Sanjay Aggarwal, former CEO of SpiceJet, was appointed as CEO. Mr. Mallya also announced that staff would be further pruned. In November, Kingfisher Airlines Board approved debt recast package and KFAs debt stood at over Rs 6,000 crore. 2011: For the first time, KFA announced that is was having some serious cash flow troubles and it blamed it on the rising fuel costs and taxes. But since KFA was not paying its dues to oil companies, this claim seemed wrong, Oil companies now refused to supply Aviation Turbine Fuel on credit basis. Delayed salaries caused dozens of pilots and hundreds of crew to leave KFA for other airlines. Finance companies estimated that KFA needed $159 million in equity in order to restructure their debt. But KFAs top brass believed that the situation was under control, but it eventually slipped out of their hands. Income fell to the new low INR 13.4 billion, but losses also doubled to INR 469 Crore for the September 2011 quarter. Mr Mallya decided to exit the low cost business towards the end of September. On November 20th, Mr Vayalar Ravi, Minister of Civil Aviation, said that the Centre had no plans for any package to salvage the airlines. In December, Mumbai International Airport Pvt. Ltd. froze 11 KFA accounts for non-payment of INR 70 Crore dues, which were later de-frozen part-payment of the service tax dues. 2012: The most turbulent time for KFA had arrived. By January, the largest creditor of cash-strapped KFA- State Bank of India- had declared it as a Non-Performing Asset. KFA owed SBI a staggering INR 15 billion. Revenue dept. also threatened to take KFA to the court over alleged service tax evasion, saying the company has not deposited taxes it collected from travellers. Mr. Mallya, the man himself, declared that the company was in dire need of funds in order to remain operational. Things were now out of hands of the management as the company declared around 2000 job cuts along with longer work hours. KFA became the headline as it grounded most of its flights and declared that it is operating mere 28 aircrafts with a curtailed schedule of 175 daily flights. On March 15th, KFA announced curtailing of its international operations. And in the same month, IATA (International Air Transport Association) suspended KFA from their clearing house asking travel agents to immediately stop booking tickets on the private airline's behalf for failure in settling dues since February. Job cuts and strikes by angry unpaid employees made news. Arrears due to airports accumulated. In September, the State Bank of India-led lenders consortium turned down a request for Rs.200-crore working loan by Kingfisher, and asked SBI Capitals to chalk out a fresh revival plan for the cash-strapped airline in the next 2-3 weeks. Meanwhile, on October 2nd the carrier declared a partial lockout following a strike by a section of its employees, which was revived following banks agreeing to release Rs.60 crore locked in an escrow account to pay employees salaries. On 20 October 2012, Kingfisher's licence was suspended by the Directorate General of Civil Aviation after it failed to address the Indian regulator's concerns about its operations. Finally, On 25 Feb 2013, its international flying rights and domestic slots were scrapped by the Indian aviation authorities
Apart from the large fleet of airlines, Air Deccan had its own hangar in Chennai which was a useful tool for Aircraft maintenance. In an interview, Mallya said There are opportunities for line maintenance or a maintenance, repair and overhaul (MRO) facility, The group will have 41 Airbus aircraft flying and there is a compelling need for an MRO. The Global companies would be interested in partnering us. The Kingfisher-Air Deccan group became the largest domestic airline with a fleet of 71 aircraft and will straddle all segments of air travel from low fares to premium fares and offer the maximum of 537 daily flights, covering the single largest network in the country connecting 69 cities.
This was a strategic benefit for Kingfisher Airlines as well. There was a minimum 5 year requirement from the Union Cabinet of India to allow an Airline to start flying internationally. Kingfisher airline came into existence mere 2 year ago, Air Deccan was in operations for 5 year and this can be utilized as a window of opportunity to enter into international skies.
Consultancy reports aside, Kingfisher and Deccan were, prima facie, as different as chalk and cheese, or, as Capt. G.R. Gopinath, founder and erstwhile Chairman of the upstart airline, and Vice Chairman designate of the merged one, once famously put it: Were from Mars and he (Mallya) is from Venus. The two airlines have different business models and cater to totally different passenger segments. A flight from Bangalore to Delhi cost Rs 12,000 before Air Deccan came into operation. The arrival of Deccan led to this falling to Rs 2,500. As Low Cost Carriers like SpiceJet, Indigo and others sprouted and followed Air Deccan, even full service airlines were forced to cut fares to stay in the business. Result being domestic air travel really took off, and the number of passengers flying within the country jumped from 29.2 million in 2003 to 90.44 million in 2006.
On 19 December 2007, it was announced that Air Deccan would merge with Kingfisher Airlines. The merger became effective April 2008, with Vijay Mallya becoming the Chairman and CEO of the new company, while G. R. Gopinath became the Vice-Chairman. Kingfisher Airlines' parent company United Breweries Group had a 26 percent stake in Air Deccan's parent company, Deccan Aviation. The total fleet of 71 Airbus A320 family and the ATR aircrafts operated 537 flights to 69 Indian cities taking advantage of synergy benefits arising from a common fleet of aircraft that improved financial prospects for both the carriers. Kingfisher Airlines continued to give high quality service to the corporate and business travel segment while Air Deccan would focus on serving the low-fare segment. In October 2007, after the acquisition by Kingfisher Airlines, Air Deccan was renamed as "Simplifly Deccan" with its new tagline being "The choice is simple". Its old logo was replaced by the Kingfisher logo and even the fonts were adopted from kingfisher. The old yellow and blue colors of Air Deccan were replaced by Kingfisher Airlines' red and white, supposedly to give the same premium look and feel to Deccan passengers as well. Some Changes were also made in the flight schedule of Simplifly Deccan airlines to better align with that of Kingfisher Airlines. According to agencies, the re-branding was expected to cost Rs 15 crore (approximately $3.8m). After the merger, Air Deccan switched to the Sabre reservation system used by Kingfisher Airlines, thereby replacing the previous solution provided by Radixx. In August 2008, the airline announced further changes in its branding to Kingfisher Red and said that it will begin operating under Kingfisher's IATA code IT.
Later in september 2011 Vijay Mallya announced after the company's annual general meeting in Bangalore that he was discontinuing the low-cost service. Kingfisher Red would cease to exist over the next four months. Its 15 single cabin, no-frills aircraft would be converted into a mix of business and full-service economy class seats to become part of the airline's fullservice fleet. The then CEO of Kingfisher Airlines, Sanjay Aggarwal commented, A detailed study over the last six months during the high oil price regime has clearly demonstrated that Kingfisher's full-service product generated higher yields and load factors. This is consistent with our assessment that the business travel segment is more sustainable than the extremely price sensitive low-fare segment.
Customers
In the good days, Kingfisher Airlines was regarded as the most customer friendly airlines in India. The service of kingfisher including the excellent quality of food, in flight entertainment service, and cabin crew assistance was regarded as the best. It also ran a frequent flyer program called the King club which had many enrolments.. The lounge facilities also had unmatched quality. The customer base was highly loyal. All this reputation went into dust, when the airline cancelled dozens of flights in November 2011 and the cancellations was carried on till mid-December. According to the DGCA report, the airline did not operate 175 daily flights owing to non-availability of aircraft during the winter schedule.
Suppliers
Kingfisher needed a host of resources from different suppliers to keep its flights operational. Largest public bank at India, SBI, was a major source of the funding that Kingfisher needed to scale up its operations. by the end of 2011, SBI withdrew from further financial support as the business no longer seemed profitable to them. Fuel companies like the Hindustan Petrol corporation limited and Bharat Petroleum corporation limited had also faced payment issues but they maintained strict policies, refused to supply fuel at several occasions and involved courts for settlement of payments. The Aircraft producers were also unhappy. In one instance, following the order of the High court in Karnataka, Kinfisher had to return an aircraft to GE Commercial aviation services. In another instance, they faced litigation at UK court against DVB Aviation finance asia Ltd for non payment of lease rentals. Further, Airport authority of India had pending dues of over Rs 200 crores. The Mumbai International Airport Limited had on an earlier occasion put the airline on cash-and-carry mode and threatened to put Kingfisher on the same mode unless it paid its dues.
Employees
In 2011, Kingfisher used to spend around Rs 58 crores per month on its 6000 employees. But since July 2011, Kingfisher had been delaying the salaries by a few week or a few months. Even the taxes deducted from the the employees salaries were not deposited with the Income tax authorities. This inconsistency in payments created a large unrest amongst the employees which led to several flight cancellations in november-december 2011. According to DGCA report, 24 pilots resigned from KFA during NovemberDecember 2011.
Community
Organizations function with the consent of society. There have been instances all over the world when governments have helped organizations that are critical to society. Kingfisher Airlines had asked the government to help it survive by ensuring three-months of credit period from its suppliers. But the government was in no mood to provide assistance. The civil aviation minister said "There is no bailout scheme or plan by the government for any of the private airlines before me." During the same time, other government agencies were unhappy with Kingfisher Airlines and wanted to disengage with Kingfisher, which would eventually mean that the airlines would have to shut down at least its domestic services. The DGCA believed that about one-third of Kingfishers fleet was grounded due to lack of engines, components, and spare parts. The airline was using components and parts from the unused aircraft to keep the remaining aircraft in operation. They were worried about the safety implications for the passengers. DGCA also suggested withdrawal of Kingfishers License to fly. The service tax department had frozen Kingfishers bank accounts for non-payment of dues
Shareholders
The share price is a reflection of confidence of the shareholders in the profitability of the company, Kingfisher share price were being traded at Rs 50 in 2008-2009 and after the air deccan deal they went upto Rs 62. but later when it started accumulating losses, the stock price went down to Rs. 20 in 2011, and now they are being traded at Rs 4. Analysts were very critical of Kingfishers performance on some critical financial parameters like operating margins and cash flow. It was already well-known that Kingfisher airlines costs were higher relative to its competition, and also the ratio of interest expense to total revenue was several times higher than others. Its debt to equity ratio was a creating concern, and most importantly had a problem of poor cash flow.
Exhibit
References
1. http://www.hindu.com/2007/05/08/stories/2007050805701600.htm 2. http://articles.economictimes.indiatimes.com/2007-12-18/news/28414449_1_kingfisher-airlineskingfisher-deccan-deccan-aviation 3. Jeff Glekin, Gloats about India's Icarus. Vijay Mallya misses the point, Wednesday, November 16, 2011 3:42PM IST http://in.reuters.com/article/2011/11/16/idINIndia60558820111116?type=economicNews 4. Saurabh Sinha, Kingfisher Airlines safety an issue: DGCA, TNN | January 5, 2012, 01.18AM IST http://timesofindia.indiatimes.com/business/india-business/Kingfisher-Airlines-safety-an-issueDGCA/articleshow/11368768.cms 5. Ram Prasad Sahu, Kingfisher Airlines: Survival hinges on improving yields, rights offer Mumbai November 17, 2011, 0:36 IST http://www.businessstandard.com/india/news/kingfisher-airlines-survival-hingesimproving-yields-rights-offer/455732/ 6. DGCA Data for 200910 7. Cover Story, Business World, December 5, 2011 8. Pricewaterhouse coopers Changing Dynamics- Indias Aerospace Industry 2011 report 9. Kingfisher Annual Report 2012