Friday, 16 December 2011

Kingfisher: What went wrong?

Once rated as Asia Pacific’s most respected brand, Kingfisher Airlines reels under the pressure of rising oil prices and the price war plaguing the airline industry of India. Since its inception in 2005, India’s only 5 star accredited airline has yet to post a profit.  The situation has become so grave for India’s third largest airline that it might have to ask for a government bailout. The Income Tax authorities froze bank accounts of the airline for the non-payment of service tax arrears. The share price of the airline has plummeted from a Rs. 320 peak in 2007 to a life time low of Rs. 17.55. The company even made losses of Rs. 1,027 crores in the FY 2010-11.
What might be the possible reasons for such a miserable performance by a company that looks so promising on paper? Some people are of the opinion that it is the bad business model that has been the root cause for this situation. Mallya cites high taxes on aviation fuel, high user charges at the airport and compulsory flying on unprofitable routes as some of the reasons for the losses. But one must remind him that these are the conditions that every airline in the industry faces. Yet there are examples like Indigo and Spice jet that have reported profits. There seems to be something fundamentally wrong with Vijay Mallya’s business model that has not allowed Kingfisher to make profits even after 5 years operating in the same environment and in the same markets as other airlines.
The debt story for Kingfisher has been on a constant uphill track rising from Rs. 284.48 crores in 2005 to a whopping Rs. 7,057.08 crores in 2011. The interest payments alone on this $1.3 billion debt are close to Rs. 2,343 crores. Kingfisher’s balance sheets show that Mallya has put substantial equity in the business. Over the last six years, he has leveraged personal equity of Rs. 3,593 crores with the banks who have provided the huge loan to the airline. In the last 12 months alone, Mallya has put Rs. 720 crores of his own or associates, of which Rs. 150 Crore came in October. Even then, the company has not been able to sustain itself and has doubled its losses in the September quarter. In the annual report for 2010, Kingfisher’s auditor pointed out that the company’s net worth has “completely eroded” due to increasing loses and that it needs to infuse funds if has to continue operations.
For an airline company, the fuel cost comprises of 50 percent of the operating cost. Jet fuel in India costs between Rs. 60,000-70,000 per kilo litre on an average between different cities. Domestic jet fuel is sold at a much lower price in other Asian cities like Kuala Lumpur where ATF is sold at Rs. 41,009 per kilo litre, followed by Singapore at Rs. 42,289 and Dubai at Rs. 43,087. Jet fuel prices have increased by 30 percent since December 2010, and domestic airlines are expected to lose Rs. 3,500 crore in the first two quarters itself. The high price in India is due to the government imposing various taxes on ATF. On an average, sales tax varies from 25 to 35 percent across various states in India. Taxes make ATF in India 60-70 percent more expensive than the global average.
Can the merger with Deccan Air be one of the reasons for this crisis? Air Deccan was originally a low cost airline. With the entry of other low cost carriers, Kingfisher was having trouble competing in the Indian aerospace. More and more numbers of people were shifting to the low cost carriers(LCCs). So in 2007, Vijay Mallya decided to take over Air Deccan and starting from May till December UB group acquired a 49 percent stake in the airline. Kingfisher could achieve economies of scale, more customers and more routes through the merger. It also helped Mallya to get license to fly to high-traffic global destination.  The merger helped in cost cutting to the tune of Rs. 300 crore through cost synergies. It also helped Kingfisher in gaining a 32-34% market share. But the main problem with the merger was that Kingfisher and Air Deccan were in a way, completely different airlines. The segment each of them targeted, the service they provided, the business model, everything was different. The business policies of Kingfisher were also not right. Mallya treated Air Deccan as a step child. Wherever Kingfisher and Air Deccan had a flight at the same time, Kingfisher got the green flag. Mallya was of the view that the Air Deccan customer would shift to the premium Kingfisher, but the complete opposite happened. The customer shifted to other LCCs.  The company finally decided to shut down the low cost carrier Kingfisher Red in September.
The situation is not good for Kingfisher at this time. The share price is at a rock bottom, the pilots have started taking leaves; some are even looking for other job options. SBI has asked the company to raise fresh equity if it wants the bank to release funds or restructure the loan. Mallya had hinted that he has sealed a deal with a local investor and a consortium of banks for $370 million that will save the airlines but there are serious doubts about the life of the airline.
The present situation of Kingfisher can be attributed to mismanagement of the airlines and the over-ambitious plans of Vijay Mallya. So much borrowing has led Kingfisher into a debt trap and coming out of is going to take one big effort. Amid all this, Mallya is still confident that he will make through this crisis. The “King of Good Times” has said that kingfisher will not ask the government for a bailout. Though he requested for FDI in airline industry, lowering of the taxes and letting the airlines import fuel directly. 

Article by Navjeet Sidhu,
Student of PGP 2011-2013,
Member of FINATIX,
For any comments and further discussion please reach me at

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