Kingfisher Airlines- A Case Study

A CAS TUDY
SE ST Y

Ch
haahat Khat
ttar

“This is a world class experience, all at an affordable price. We are not a low‐cost carrier and
we do not intend to be one.”

“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 am selling is lifestyle.”

‐ Vijay Mallya

KINGFISHER AIRLINES is a major airline based in Mumbai, India. It is India’s fifth
largest passenger airline that primarily provides national and international, short and long
haul, high‐frequency, medium to high fare service. Kingfisher Airlines was established in
2003. It is owned by the Bengaluru based United Breweries Group. 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. It started its international operations on 3 September 2008 by
connecting Bengaluru with London.

Indian Airline Industry
Air India was founded by J. R. D. Tata in July 1932 as Tata Airlines, a division of Tata Sons Ltd
which became the first airline of India and was later taken over by Government of India. At
the time of India’s independence from the British in 1947, several small airlines operated in
the country. Soon, however, in 1953, the government of India decided to “guide the orderly
growth and evolution” of the industry by creating two state‐owned national carriers– Air
India (for international travel) and Indian Airlines (for domestic travel). Air India was
founded by J. R. D. Tata in July 1932 as Tata Airlines, a division of Tata Sons Ltd (Exhibit 1)
which became the first airline of India and was later taken over by Government of India.
Existing carriers (many of which were making losses) were folded into these airlines. In a
country of India’s size and diverse topological features, air travel was expected to be an
important mode of travel. Air India and Indian Airlines retained a monopoly over civil
aviation in India till 1992. During this time they grew steadily but slowly. Air travel was
patronised by the government, business, and rich individuals and otherwise seen as a
luxury, with the masses travelling by train or bus. The deregulation of the Indian economy
that started in the mid‐1980s, and proceeded more aggressively after the New Economic
Policy in 1991, led to calls for opening up of the airline sector. The government responded
by first allowing the operation of “Air Taxi” services, and, in 1994, the operation of
scheduled air services.

User published content is licensed under a Creative Commons License. Copyright © 2012 Chaahat Khattar, All rights reserved.

The new entrants started small with a few leased aircraft apiece, but charted different
strategies. Damania positioned itself as a luxury airline with on‐board entertainment such as
fashion shows. EastWest tried to grow aggressively and had the most ambitious fleet
expansion strategy. Jet established a reputation for punctuality and good service, and
rapidly became the preferred airline of the business sector. With its base in Lucknow, Sahara
offered excellent connectivity to a part of the country that was historically under‐served.
Modiluft sought to exploit a technical tie‐up with Lufthansa by projecting itself as a safe and
reliable airline. Quite a lot of airlines became non‐functional to financial pressures much
before entering millennium century (Exhibit 2).

The steady growth of the Indian economy after liberalisation at a compounded annual
growth rate exceeding 6% increased the size of the economy, and hence demands for both
business and leisure travel. The emergence of a new Indian middle class was a well‐
documented and internationally recognised phenomenon. Besides, the number of air
travellers and per capita use of airline services in China were about eight times that of India.
Sensing opportunity, a new phase of development of the Indian airline industry kicked off in
2003 with the entry of new players into the airline industry.  In spite of the fact that several
costs of operating an airline were fixed irrespective of business model (one estimate put the
proportion as high as 80%), most of the new entrants chose to use low fares as their main
competitive weapon and hoped to create low‐cost operations to make these low fares
viable.

Currently there are close to 140 million air travellers in India with around 98 million as
repeat travellers. The air‐traffic passenger in India is expected to grow at 18% per annum
despite of the fact that airlines are bleeding and running out of cash (Exhibit 3).

Kingfisher Airlines
Kingfisher Airlines started by flamboyant beer baron Vijay Mallya in May 2005 shared the
name of India’s leading beer brand. Though originally conceived and announced as a “value”
carrier, Kingfisher rapidly morphed into a full‐service airline more in keeping with Mallya’s
style and went head‐on at Jet Airways. By September 2007, Kingfisher had 34 aircraft in its
fleet (4 A‐319, 12 A‐320, 6 A‐321, 12 ATR‐72) and served 34 destinations. The airline had 51
A‐320 family aircraft on order for delivery by 2014, 35 ATR aircraft on order for delivery
between 2006 and 2010, and 50 wide‐bodied aircraft (including the A‐380) on order for
delivery between 2008 and 2018 for a planned international expansion (Exhibit 4).


Timeline
2005: Kingfisher Airlines began its operations on 9th May 2005 with its inaugural flight being
from Mumbai to Delhi. Who at that point of time would predict that 7 years down the line,
this shinning A‐320 would be the only flight operative out of over 200 other routes? Indian
Airlines was nowhere close to be quoted as a class a part carrier so only Jet Airways and
Sahara were dominant players in the Indian aviation industry. Kingfisher’s income for year
ending on 30th June 2006 was INR 13.5 Billion but this amount couldn’t over shadow losses
amounting to INR 3.4 Billion (Exhibit 5).

2006: Kingfisher Airlines was soon becoming an airline synonym with five star air travel and
was becoming famous among business travellers. In December 2006 Kingfisher announced
that it would provide live in‐flight entertainment which was first in its class by partnering
with DTH pioneer Dish TV India Limited (Exhibit 6).

Also the airlines went in some serious talks with Air Deccan which was supposedly working
on a totally different and virtually an opposite business model providing extremely low fare
based services. The income for period ending 30th June 2007 increased to INR 4.1 Billion but
losses also accumulated to INR 4.19 Billion (Exhibit 7).

2007: Things were pretty much on right track and were almost going as per plans. Kingfisher
had carried 17.5 Million passengers with a fleet of 41 aircrafts and a schedule of 255 flights.
Ironically the situation today is such that Kingfisher is fighting to even fly mere 10% of those
flights. Finally by the year end on December 19th 2007 Kingfisher Airlines acquired entire
46% of Deccan Aviation in Air Deccan (Exhibit 8). The period ending 31st March 2008
generated gross income of INR 15.4 Billion and losses dramatically were reduced to INR 1.8
Billion but this does not include the aftermath of merger of Deccan (Exhibit 9). Since it was a
streamlined and well planned year by Kingfisher, this year proved to be the best year right
from inception till today.

2008: Kingfisher Airlines finally became the larger passenger airliner of world’s second most
populous nation. Now Kingfisher was carrying 10.9 Million passengers annually with a fleet
of 77 aircrafts operating 412 domestic flights daily. Also this year was quite historic was
Kingfisher Airlines as it finally got permit to operate on international routes and on
September 2008 Kingfisher flew for the first time overseas from Bangalore to London.
Kingfisher was no offering 3 classes of travel to passengers: Kingfisher First: Premium
Business Class which was truly best in class, Kingfisher Class: Premium Economy or the basic
economy of flagship carrier Kingfisher and Kingfisher Red: Low fare basic class or in other
words the new name of Air Deccan. Financial statements for year ending March 31st 2009
were actually supposed to be consolidated statements of both Kingfisher Airlines and Air
Deccan hence now the income increased many folds to INR 55 Billion but so did the losses
which increased to INR 16 Billion.


2009: Kingfisher Airlines continued its run of the being the nation’s largest passenger carrier
and was having a healthy market share of 22.9% with 11 Million passengers flying with
Kingfisher in last fiscal year. The fleet although got reduced to 68 aircrafts from 77 aircrafts
and domestic flights per year got reduced to 366 but international operations increased
significantly to 12 flights daily. During the year Kingfisher won numerous accolades from
agencies around the globe and continued being rated as India’s only Five Star Airline by
Skytrax for three years in a row. It had been 4 years since birth of Kingfisher Airlines and
shareholders were still waiting to receive first dividend from the company but company
continued its run of losses and reported a marginally increased losses of INR 16.4 Billion and
gross income shrunk to INR 52.7 Billion for year ending March 31st 2010 (Exhibit 10).

2010: The dark clouds over Kingfisher Airlines were getting darker and dense with no ray of
sunshine. Jet Airways (Undoubtedly a much stable and sustainable carrier but also badly
affected financially due to its acquisition of Sahara Airways) surpassed Kingfisher Airlines to
become country’s largest passenger airliner as it reported a market share of 25.5% whereas
for Kingfisher it came down to 19.8% down by almost 3% from last year. There was one
player in the industry which was finally getting noticed‐ IndiGo as it reported a good 90%
seats being filled and was gaining market share rapidly. Kingfisher’s domestic daily
operations were same 366 flights daily but its international operations increased to 28
flights daily. Despite of the increase in flights, Kingfisher failed to capture market unlike its
competitors and this should have been considered as a red flag by the company which
unfortunately went unnoticed by the company. The airline reported an increased gross
income of INR 64.9 Billion and reduced losses of INR 10.2 Billion for the year ending 31st
March 2011 (Exhibit 11).

2011: Kingfisher Airlines for the very first time declared in year 2011 that it is having some
serious cash flow problems. It simply blamed the same to rising fuel costs. Now the thing
that needs to be noticed is that when Kingfisher was not paying its dues to oil companies
then how the fuel costs would hit its cash flows so deeply? Dozens of pilots left Kingfisher
for rival airlines during 2011. Creditors warned the firm that if it would fail to raise almost
USD 159 Million in equity then they will not be able to restructure its debt. But Kingfisher’s
top brass believed that they would continue being the way they have till now but the
problems were bound to get really out of hands. The income for year ending 31st December
2011 stood at approx. INR 13.4 Billion which was lowest since 2007 and the losses increased
sharply to INR 4.4 Billion ( Exhibit 12: Both income and losses are for just one quarter as
yearly report is due to be released on 31st March 2012).

2012: The most turbulent year of all for Kingfisher Airlines is here. The New Year
celebrations were not even over yet when on 5th January 2012 State Bank of India (largest
creditor of cash strapped Kingfisher Airlines) declared Kingfisher Airlines as a non‐
performing asset. SBI’s exposure to Kingfisher is staggering over INR 14.5 Billion.


It was like a mother saying to the world that his child is useless now and nothing can be
expected out from him. Things were now out of hands of the management of Kingfisher and
it declared 2000 job cuts along with longer work hours. Seemed like someone in the
management assumed Kingfisher to be a manufacturer and not a service provider where
each employee is a jewel for the firm. For the very first time the man himself Mr. Mallya
declared that the airline was in dire need of funds in order to maintain operations. And on
18th February the airline became headline of almost all newspapers when it grounded most
of its aircrafts and declared that it is operating mere 28 aircrafts with curtailed schedule of
175 daily flights (Exhibit 13). The consortium of banks led by SBI also declined to further
issue more debt to Kingfisher until and unless Kingfisher itself raises some funds through
fresh equity.

Now Kingfisher Airline’s all accounts stand frozen by banking agencies and export import
houses due to non‐payment of dues. Also The International Air Transport Association (IATA)
has suspended Kingfisher from its International Clearing House dealing a fresh blow to the
ailing carrier as it seeks funds to stay aloft.

What went wrong?
Failed low cost model:

It cannot be understood that why airlines (read Kingfisher and Jet) tried to replicate
business models of international LCCs (Low Cost Carriers) RyanAir or Southwest Airlines
(Exhibit 14)? Is low cost the only way to make money? If this would have been the case then
Singapore Airlines would have been bankrupt by now.  It looks like that Kingfisher failed to
study the models carefully and blindly acquired Air Deccan. The primary way any low cost
carrier makes money is by operating on non‐primary routes using secondary airports which
reduces costs for the airlines and then the benefits are passed on to the customers unlike
Kingfisher which charged low fare for Kingfisher Red but continued operating at prime
routes including metros. Kingfisher should have avoided flying even a single aircraft to
metros and should have taken advantage of hundreds of uncommon routes and we all know
that India is under penetrated market and much advantage could have been taken by
exploring newer routes. Kingfisher was a five star airliner then there was no reason to
operate on two different business models at the same time. These were simply the over
ambitious plans of the management of Kingfisher Airlines.


Government’s Role:

One of the reasons for this is the abrupt end to reforms in aviation sector. In India starting
an airline is not at all everyone’s cup of tea. Ask  M Thiagarajan, CEO, Paramount Airways
who although entered the Guinness Book of Records for being youngest chairman of a
scheduled airline but his airline Paramount Airways is yet to receive an aircraft and officially
a defunct airline. In India every time an airliner wants to buy an aircraft, it has to seek
permission of the government and everyone knows that there are numerous procedural
delays by our governmental agencies. Also there is an unusual rule that in order to fly
overseas, the carrier needs to complete minimum five years of operations domestically.
Further adding to the suffocating operational environment, the government is still
continuing its protectionist approach towards Air India. For example many of Indian airports
are capable of catering super jumbo Airbus A‐380 aircrafts but since Air India don’t have any
of those so the government has not allowed any other private player from anywhere in the
world to land A‐380 for commercial in Indian territory. There was no privatization of airports
since 2006 but even after that only handful of airports has been privatized which does not
make much sense. The government also has differential fuel pricing (Exhibit 15) which
seems very much biased towards Air India.

One must understand that if Air India is India’s flag ship carrier, Kingfisher, Jet or IndiGo are
not transferring their earnings to Bahamas or Dubai. Their revenues also contribute towards
Gross Domestic Product of India only and they also employ Indians and not some aliens.

Competition:

Competition is definitely extremely intense in the Indian aviation industry with 5 carriers
fighting one on one. We cannot say that IndiGo, SpiceJet or GoAir are new entrants in the
industry. They are almost as old as Kingfisher Airlines but what new about them is that they
have restructured themselves with time but have always stayed on course with it comes
down to business model. All of them are low cost carriers so they have not introduced
business class in their aircrafts in so many years of operations. The plus point of India’s low
cost carriers is that they have not compromised when it comes down to quality and security
unlike other low cost carriers around the globe.

The other form of competition in Indian aviation sector is from railways. Even though we
cannot say that Indian Railways is safer mode of travel, still majority of Indians travel via
railways especially for shorter routes. Now this makes the idea of having an airline
exclusively for point‐to‐point short haul routes a waste of time and money. Where airlines
can gain here is by hitting on the weakest point of railways‐ Quality. Kingfisher Airlines was a
favourite among business travellers hence it should have continued being a business centric
airlines and even if it would have increased the prices say by ten per cent business travellers
would have still travelled by Kingfisher only because they were sure of getting five star
treatment along with on time departures and arrivals.

Kingfisher most probably believed that people in majority are more important that people in
minority but it forgot that there are four other players in the country serving the majority of
people and it was the only one serving the minority and hence failed to capitalize upon its
own strength and unique selling point (USP).

Bargaining Power of Buyers:

Since Kingfisher Airlines decided to introduce Kingfisher Red it automatically entered into a
price war against all other carriers especially domestically. If Air Deccan was offering tickets
for meagre one rupee then naturally Kingfisher had to continue such kind of marketing
campaigns. But the problem was that Kingfisher almost trashed all the marketing strategies
of Air Deccan thinking of reducing operational costs but here came the deviation. Airline
business has extremely long gestation periods. For Kingfisher, Air Deccan was a totally new
business so it should have considered that Kingfisher Red will take some years to completely
reap benefits of being a low cost carrier but Kingfisher believed that Air Deccan has been in
the market much before Kingfisher Airlines so it should bring Kingfisher Airline’s financial
statements into green very soon. The business fliers which were earlier loyal to Kingfisher
Airlines used all their frequent flier miles, bought free tickets, gave the same to their family
to enjoy and they never returned back to Kingfisher.

For them Kingfisher Airlines became a compromised airliner and they started going back to
Jet Airways which also is cash strapped but has a sustainable business model. As soon as
Kingfisher realised that they had committed a mistake by changing model of Air Deccan, it in
a haphazard way increased prices of Kingfisher Red and brought the same on par with other
airlines. At this point of time Kingfisher Red had become a lost opportunity and even the
management was confused if it would call it a normal carrier or a low cost one. Finally in
February 2012 the brand Kingfisher Red was officially declared non‐functional, marked one
of the biggest examples of failed consolidation and became a land mark failure in terms of
merger and acquisitions.

Aircrafts:

Aircrafts are the most important assets of any airliner. Choosing and inducting the same
requires major decision making skills. Kingfisher Airlines started with an Airbus A‐320
aircraft and went on using aircrafts on the same line. Now the business model of Kingfisher
Airlines is such that it does not have any aircraft of its own. All the aircrafts of Kingfisher
Airlines are dry leased. Dry leased means that the lessor (who actually owns the aircraft)
gives the aircraft to the lessee (Kingfisher in this case) for a period of minimum two years
without insurance, crew, ground staff, supporting equipment, maintenance, etc. The
problem here is that aircrafts instead of being fixed assets for the airlines becomes an
operational asset and plays a crucial role in cash flow calculations. Kingfisher’s dues kept on
piling up and it is goodwill of United Breweries group that the lessors allowed the same.


The amount has piled up way so much that lessors have filed suits against Kingfisher Airlines
across globe and has forced Kingfisher to ground majority of aircrafts. Another issue with
Kingfisher Airways is that it has itself created confusion for itself. Since it does not buy
aircrafts, it cannot command any bargaining power over Boeing or Airbus but it can abstain
from duplicity of tasks. Kingfisher Airlines operates both Airbus and ATRs. This is absolutely
an unwanted headache caused due to management’s poor decision making skills. Kingfisher
requires double personnel just because of the fact that it operates aircrafts of two different
makes. If it would have relied only on Airbus then it could have easily reduced its
operational costs. When Kingfisher Airlines knew that it is entering market for a long term
then instead of wasting cash on acquiring Deccan Aviation, it should have bought planes
from Airbus or Boeing. Kingfisher wasted millions on ordering A‐380 jumbo aircrafts. It knew
that government would not provide permit to fly the same any time soon. Majority of
carriers around the globe which ordered A‐380s such as Emirates, Qantas etc. are having
profits on their books, have almost non‐significant competition domestically and they
operate at an extremely large scale around the globe unlike Kingfisher Airlines for which
neither the competition is low nor it used to operate at such a huge scale. Just to prove your
superiority over other domestic carriers or to show how powerful you can be, it is pretty
much wasteful first mover loss instead of first mover advantage.

The Future:
Kingfisher Airlines is unofficially bankrupt and officially out of funds. The difference between
two statements? Kingfisher Airlines is operating without any cash. The bank accounts are
frozen and customers are not willing to fly with the carrier. The steps Kingfisher Airlines
must take now‐

 With accumulated losses of Rs.6,524 crores, outstanding loans of Rs.7,057 crores,
overdue to tax authorities, airports and fuel suppliers, and less than half of its fleet
flying, Kingfisher does not present a pretty picture for any airline company. If Kingfisher
Airlines wants to fly then the promoters need to induce few thousand millions. With that
money they should first clear due of oil companies, IATA and other regulatory
authorities otherwise Kingfisher would fly into sunset.
 Kingfisher Airlines definitely needs to raise fresh capital as well. Banks did give Kingfisher
one last chance last year by infusing capital which was on request converted into shares
but due to landslide fall in share price of Kingfisher Airlines, the investments of Banks
have almost eroded. Consortium of banks in any case will not pour good money after
bad. The promoters need to give personal guarantees in order to raise funds.


 Even if there are some suicidal investors who are interested to invest in Kingfisher
Airlines, they would be looking forward to restructuring of the airline. So promoters and
board of Kingfisher Airlines must restructure the entire business model of the airline
before they approach for investors. They must make the fundamentals of the airline
very clear and instead of gifting free Kingfisher Calendar with an investor’s presentation,
Kingfisher Airlines must give an assurity report to investors explaining how the airline
can capture the lost market share.
 The pilots and staff of Kingfisher Airlines are unpaid since several months. Indirectly the
safety seems compromised here. The issue of unpaid salaries must been getting
discussed in the cockpits as well and the quality pilots would have joined rivals.
Kingfisher Airlines must clear their dues as well or at least assure them of enough funds
which would not put any financial pressure on families of pilots and staff otherwise
sooner or later Kingfisher would become a serious victim a major air mishap forcing it to
shut down operations.
 Kingfisher Airlines should cut down on its fleet and cancel all the orders it has given for
new aircrafts. Cutting down the fleet means that it would owe fewer amounts to lessors
which would in turn mean better cash flows. Also Kingfisher is bound to cancel order for
new planes. It cannot operate on existing routes so how it can operate on newer routes?
Instead of operating on heavy charging metro airports, Kingfisher must focus on
secondary cities which primarily have smaller airports. No one can say that such airports
do not have much passenger traffic, but most would believe that such airports do not
charge hefty charges lifting up some operational cost pressure from Kingfisher Airlines
and this would also help Kingfisher to lure investors.
 The government also needs to help cash strapped airliner. The most it can easily do is
forcing oil companies to provide tax free aviation fuel to Kingfisher for the time being.
Also government along with Reserve Bank of India can guide the banks to release the
accounts of Kingfisher for a certain guaranteed period of time till which Kingfisher can
assure of a proper restructuring plan.
 Rahul Bajaj has very well said that if the bailout is given to Kingfisher Airlines then it will
be "privatisation of profits and socialisation of losses". Hence some really punishable
steps must be taken by banks instead of acting soft on Kingfisher Airlines. They must
convert the entire debt into equity. This way they will recover a part of their
investments. Also since banks are major stakeholders of Kingfisher Airlines, they must
act tough and force the flamboyant namesake promoter to exit Kingfisher Airlines and
some responsible backed by banks person must be given the responsibility of being the
Managing Director of the airline in the last bid to turn around the airliner.

No wonder that once India’s number airline is on the brink of complete shutdown,
Kingfisher Airlines was started with a very basic motto‐ providing high quality and luxurious
air travel. It has to live up to the same motto and the only way to do so is to reinvent itself
and new skies await the never ending journey of Kingfisher Airlines.


Exhibit 1

Tata Airlines Routine M
Map 1939 from
m http://onlybo
ombay.blogspot
t.in

Exhibit 2
2

Defun
nct Airlines of In
ndia from http:/
//gyaniz.wordp
press.com

User publis
shed content is lic
censed under a C
Creative Common
ns License. Copyri
ight © 2012 Chaa
ahat Khattar, All r ights reserved.
r

Exhibit 3

http
p://www.anna.aero

Exhibit 4

http://ww /doc/42444902/Kingfisher‐Airllines
ww.scribd.com/

User publis
shed content is lic
censed under a C
Creative Common
ns License. Copyri
ight © 2012 Chaa
r

Exhibit 5

Exhibit 6

http://
/www.andhrane
ews.net

User publis
shed content is lic
censed under a Creative Common
C ns License. Copyri
ight © 2012 Chaa
r

References

Annual Reports of Kingfisher Airlines from http://www.flykingfisher.com/investor‐

relations/information‐packs/financial‐information.aspx

http://iimb‐vista.com/2008/IndianAirlineIndustry.pdf

http://en.wikipedia.org/wiki/Kingfisher_Airlines

http://www.thehindu.com/opinion/op‐ed/article2935711.ece

http://www.businessworld.in/businessworld/businessworld/taxonomy/term/200

http://www.hindustantimes.com/News‐Feed/SectorsAviation/Indian‐air‐passenger‐traffic‐

to‐grow‐by‐18‐per‐annum‐Experts/Article1‐722159.aspx


Kingfisher Airlines- A Case Study

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