Strategy Formulation - Kingfisher Airlines

Assignment :

Strategy Formulation : “Kingfisher Airline” “Strategies adopted by Kingfisher airlines & causes of its Failure” Submitted by : Japkirat Singh Oberai Submitted to : Dr. Supriti Mishra

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Contents 1) ABSTRACT 2) INTRODUCTION 3) HISTORY 4) STARTING OF THE CRISES 5) DEBT RESTRUCTURING 6) CRISIS TILL CONTINUE 7) FUEL DUES a. HPCL: In Jul 2011, Hindustan Petroleum 8) AIRCRAFT LEASE RENTAL DUES 9) AAI REPORTS 10) THE CRISIS CONTINUE 11) FROZEN BANK ACCOUNTS 12) IATA SUSPENSION 13) SWOT ANALYSIS a. KINGFISHER’S STRENGTHS b. KINGFISHER’S WEAKNESSES c. KINGFISHER’S OPPORTUNITIES d. KINGFISHER’S THREATS 14) PEST ANALYSIS a. Political Factors b. Social Factors c. Technological Factors d. Economical Factors 15) STRATEGIC PARTNERS 16) Strategy’s of Kingfisher Airlines a. Functional strategies b. KFA’s Promotional Strategies & Marketing Strategies c. Financial strategies: d. Expansion strategy e. Human Resource Strategies

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UNCERTAINTY AHEAD

Kingfisher Airlines – has a paradoxical situation faced by the airline industry in India which experienced exponential growth in passenger volumes; but with the exception of IndiGo Airlines, all the airlines failed to make profits. However, in general, the low-cost airlines did better than the full service airlines. Other than the governmentowned Air India, Kingfisher Airlines, a full service airline, was in the worst possible shape and close to bankruptcy during that period. Lack of cash forced the airline to cancel about 35 flights in a day in November 2011, disappointing customers, the only stakeholder group that was happy with the airline. This event brought the whole industry under public scrutiny. Using the stakeholder perspective, the case suggests that owing to an excessive focus on one stakeholder group, the customers; and the neglect of the other four stakeholder groups, namely, suppliers, employees, community and society, including government agencies, and also the owners or shareholders; the organization had nearly gone bankrupt. The top management has to chalk out a strategy that reengages with all the stakeholders to get them to support it during Kingfisher's struggle for survival and to put the airline on a track of recovery.

ABSTRACT

 Indian Aviation Industry is one of the fastest growing markets in the world. But nowadays it is in the news due to different reason. And that is the failure of one of the leading aviation player Kingfisher Airlines.  The airline has been facing financial issues for many years. Till December 2011; Kingfisher Airlines had the second largest share in India's domestic air travel market. However due to the severe financial crisis faced by the airline, it has the fifth largest market share currently.  Even the company have no funds to pay the salaries to the employees and is facing several other issues like fuel dues; aircraft lease rental dues, service tax dues and bank arrears.  This case outlines the financial turmoil of the Kingfisher in detail.

INTRODUCTION

Kingfisher Airlines is an airline group based in India. Its head office is The Qube in Andheri (East), Mumbai; and Registered Office in UB city, Bangalore. Kingfisher Airlines was established in 2003. It is owned by the Bengaluru based United Breweries Group. Kingfisher Airlines, through its parent company United Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red. 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. The airline has been facing financial issues for many years. Till December 2011; Kingfisher Airlines had the second largest share in India's domestic air travel market. However due to the severe financial crisis faced by the airline, it has the fifth largest market share currently, only above Go Air. Kingfisher Airlines is one of the only seven airlines awarded 5- star rating by Skytrax along with Cathay Pacific, Qatar Airways, Asiana Airlines, Malaysia Airlines, Singapore Airlines, and Hainan Airlines. Kingfisher operates 250 daily flights with regional and long-haul international services. In May 2009, Kingfisher Airlines carried more than 1 million passengers, giving it the highest market share among airlines in India. Kingfisher also owns the Skytrax award for India's best airline of the year 2011. HISTORY

Kingfisher Airline is a private airline based in Bangalore, India. The airline is owned by Vijay Mallya of United Beverages Group. Kingfisher Airlines started its operations on May 9, 2005 with a fleet of 4 Airbus A320 aircrafts. The destinations covered by Kingfisher Airlines are Bangalore, Mumbai, Delhi, Goa, Chennai, Hyderabad, Ahmedabad, Cochin, Guwahati, Kolkata, Pune, Agartala, Dibrugarh, Mangalore and Jaipur. In a short span of time Kingfisher Airline has carved a niche for itself. The airline 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 personalised screens in the aircraft, sleeperette seats with extendable footrests, and threecourse gourmet cuisine. STARTING OF THE CRISES

Ever since the airline commenced operations in 2005, the company is reporting the losses. But the situation became more horrible after acquiring the Air Deccan in 2007. After acquiring the Air Deccan, the company suffered a loss of over Rs. 1,000 crore for three executive years. By early 2012, the airline accumulated the losses of over Rs. 7,000 crore with half of its fleet grounded and several members of its staff going on strike. Following table 1 highlights losses of the company since inception Net Reported Losses and debts since inception (Rs. In Crores):

DEBT RESTRUCTURING

In the situation of loss and tough financial condition, the company went for more loans. The above table shows the portion of secured and unsecured loans taken by the company. Due to heavy burden of debt and interest, in November 2010, the company adopted the way of debt restructuring and under that total 18 leading lenders, those have landed total Rs. 8,000 crores, agreed to cut interest rates and convert part of loans to equity. As per the contract, lenders have converted Rs. 650 crores debt into preference shares which will be

converted into equity when the company lists the on the Luxembourg Stock Exchange by selling global depositary receipts (GDR). Shares will be converted into ordinary equity at the price at which the GDRs are sold to investors. Besides the 1,400 crore debt which will be converted into preference shares, another 800 crore debt has been converted into redeemable shares for 12 years. Due to debt restructuring, the company able to down the average interest rate to 11% and to save Rs. 500 crores every year in interest cost. CRISIS TILL CONTINUE

Debt restructuring also couldn’t change the game. By restructuring, company had reduced the interest charges by Rs. 500 crores every year, but due to the high leverage condition and increase in cost, the company started to face the liquidity problem. The company had no funds in hand and it created the following payment problems. DELAYED SALARY

Kingfisher Airline has staff strength of 6,000 and spends 58 crore on salaries a month. According to the first quarter financial results, it has 173.66 crore under the employees cost head, which has increased from 163.40 crore during the same quarter last year. Kingfisher Airlines delayed salaries of its employees in August 2011, and for four months in succession from October 2011 to January 2012. Kingfisher also defaulted on paying the Tax Deducted at Source from the employee income to the tax department. FUEL DUES

In the past several years, Kingfisher airlines had trouble paying their fuel bills. Due non-payment, several Kingfisher's vendors had filed

winding up petition with the High Court. As on Nov 2011, winding up petition of seven creditors was pending before the Bangalore High Court. In the past Lufthansa Technik & Bharat Petroleum Corporation Limited (BPCL) had also filed winding up petition against Kingfisher Airlines. Here are some cases: HPCL: In Jul 2011, Hindustan Petroleum

Corporation Limited (HPCL) stopped the fuel (ATF) supplies for about two hours to Kingfisher airlines owing to the non-payment of dues. Situation was later resolved. BPCL: Bharat Petroleum

Corporation in 2009 had filed a case against Kingfisher airlines for non-payment of dues. High court in an order said that the entire amount 245 crore had to be paid by Nov 2010 and the airline paid it in instalments. AIRCRAFT LEASE RENTAL DUES

Since 2008, it has been reported that Kingfisher Airlines has been unable to pay the aircraft lease rentals on time. Due to that, the Kingfisher Airlines has grounded 15 out of 66 aircraft in its fleet as it was unable to meet the maintenance and overhaul expenses. Here are the some major issues with:  GECAS: In Nov 2008, GE Commercial Aviation Services threatened to repossess 04 leased planes in lieu of default. Kingfisher Airlines initially denied that it missed the payments. GECAS had filed a complaint with DGCA saying Kingfisher had defaulted on rentals for four A320 aircraft, and sought repossession of the planes. In Jan 2009, The Karnataka High Court rejected petition by Kingfisher Airlines to restrain GECAS from taking any step to deregister and repossess the 04 aircraft

in dispute. As a result, Kingfisher had to return the A320 aircraft to GECAS.  DVB: In Jul 2010, DVB Aviation Finance Asia Ltd (a lessor from Singapore), sued Kingfisher Airlines for lease rental default. Case was filed in a UK court on Jul 16, 2010 after Kingfisher did not pay for three month lease rental for A320 aircraft it leased from DVB.

AAI REPORTS

Kingfisher received a notice from the Airports Authority of India on February 2012 regarding accumulated dues of 255.06 crore. The airline was operating on a cash and carry basis for the last six months, with daily payments amounting to 0.8 crore.

SERVICE TAX

On 9 December 2011, S.K. Goel, chairman, Central Board of Excise and Customs (CBEC) announced that CBEC is considering legal action against Kingfisher for not paying service tax. As on 10th Jan 2012, Kingfisher Airlines has service tax arrears of 70 crore. The Ministry of Finance has given a concession to Kingfisher and instructed them to pay the dues by 31st Mar 2012. In Jan 2012, Kingfisher paid 20 crore towards its dues for December 2011 and part of the arrears. BANK ARREARS

Kingfisher Airlines had not paid some bankers (Lenders) as per the Debt Recast Package (DRP) with lending banks. Till the end of Dec 2011, the arrears were estimated to be 260 crore to 280 crore.

Lenders hence had told Kingfisher Airlines to clear its dues before they can release any more money sought by the Airline. Ravi Nedungadi, chief financial officer of UB Group however said that the arrears were 180 crore. State Bank of India (SBI) on 5th Jan 2012 declared Kingfisher Airlines a NPA. SBI is largest creditor and the leader of the consortium of banks in the DRP (Debt Recast Package) and has an exposure of 1,457.78 crore. Thus, by Feb 2012, Kingfisher has been declared NPA by following banks:      

State Bank of India Bank of Baroda Punjab National Bank IDBI Central bank of India Bank of India Corporation Bank

THE CRISIS CONTINUE

During late February, 2012, Kingfisher Airlines started to sink into a fresh crisis. Several flights were cancelled and aircraft were grounded. The airline shut down most international short-haul operations and also temporarily closed bookings. Out of the 64 aircraft, only 22 were known to be operational by February 20. With this, Kingfisher's market share clearly dropped to 11.3%. The cancellation of the flights was accompanied by a 13.5% drop in the stocks of the company on 20 February 2012. The CEO of the airlines, Sanjay Agarwal was summoned by the Directorate General of Civil Aviation to explain the disruptions of the operations. The State Bank of India, which is the lead lender to Kingfisher airlines said that they would not consider giving any more loans to Kingfisher unless and until it comes up with a new equity by itself. Political activists also claimed that bailing or helping a private airline would lead to problems within the Government. By February 27, Kingfisher

operated only above 150 out of its 400 flights and only 28 aircraft were functional. Reuters reported that if Kingfisher were to shutdown, it would be the biggest failure in the History of Indian Aviation. It was announced that the direct flights to the smaller airports of Jaipur, Thiruvananthapuram, Nagpur and also to Hyderabad's Rajiv Gandhi International Airport were all shut down and only one/two-stop flights from its main hubs of Delhi and Mumbai would operate. In response to a situation as bad as bankruptcy, Vijay Mallya announced that he had organized funds to pay all the employees' overdue salaries. With bank accounts frozen and huge debts due, it is unknown so as from where he arranged the money. But he apologized to his workers and said that he would pay them immediately. By this time, kingfisher had accumulated losses of 444 crore during the third quarter of the fiscal year 2011-12.

FROZEN BANK ACCOUNTS

On March 3, 2012, The Central Board of Excise & Customs of India froze many more Kingfisher accounts as it was unable to pay all the dues as per schedule. Kingfisher was meant to pay 1 crore per working day. Aviation minister Ajit Singh warned the airline about the temporary suspension of the license until the crisis was sorted out. He announced that the rest of the airline's fleet would be grounded and all flights cancelled until the crisis came to an end. This would be only one step from permanently closing the airline.

IATA SUSPENSION

On March 7, 2012 IATA suspended ticket sales of Kingfisher airlines citing non-payment of dues as the primary reason, and they said that sales services will only be restored once Kingfisher settles ICH (IATA Clearing House) account. IATA also immediately directed all travel agents to stop booking tickets for Kingfisher. This would affect Kingfisher's business by around 30%. Kingfisher claimed that frozen bank accounts was the main cause of being unable to pay the IATA, and the airline started making alternate arrangements for the sale of tickets. Soon it became difficult for the airline to follow the much smaller schedule that it earlier released as even more pilots began to go on strike. SWOT ANALYSIS KINGFISHER’S STRENGTHS

 Superior product on ground; in the air Jet business class is being equated with Kingfisher’s economy  UB group backing for raising financing  Well capitalised airline, prepared to take losses  Better handling of employees and staff; less centralised style of functioning  Chairman Mallya’s grand vision where it is looking to be among the best in the world.  The Deccan deal — which gives it market share, a new market segment and was cheap KINGFISHER’S WEAKNESSES

 Kingfisher is yet to build itself into an organisation; structures yet to fall in place  Not as professionally run as Jet; yet to build a professionally competent team  Mallya’s knowledge of the sector does not parallel Goyal’s  Chairman’s people skills are better but employees have to work very erratic hours  Unable to leverage connections to the same extent while lobbying

 Kingfisher’s loads are lower than Jet’s, which could be a reflection of its marketing and sales ability KINGFISHER’S OPPORTUNITIES

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Under penetrated domestic market International market Untapped air cargo market Expanding tourism industry Fleet size expansion

KINGFISHER’S THREATS

 Existing Operators  Infrastructure issue  Fuel price hike PEST ANALYSIS Political Factors

• Ecological/Environmental Issues • Current Legislation • Future Legislation • Regulatory Bodies And Processes • Government Policies • Government Term And Change • Trading Policies • International Pressure Groups Economic • Home Economy Situation • Overseas Economies And Trends • General Taxation Issues • Seasonality/Weather Issues Interest And Exchange Rates Social Factors

• Lifestyle Trends • Demographics • Consumer Attitudes And Opinions • Media Views • Law Changes Affecting Social Factors • Brand, Company, Technology Image

• Major Events And Influences • Sound Pollution • Plane hijacking • 9/11 Incident Technological Factors

• manufacturing maturity and capacity • information and communications • technology legislation • innovation potential • technology access, licensing, patents • intellectual property issues • modernization of aircrafts Economical Factors

      

Economic meltdown Overall growth of the company Operating cost Capital Airlines acquisition/leasing cost Rising income level Reduced fare but yet not enough

STRATEGIC PARTNERS

1. Kingfisher Airlines Inks Strategic Alliance with American Express. Partners launch India’s first Airline Corporate Charge Card Program Fast track Corporate Savings with exclusive Rebates, Discounts, and Employee Rewards with King Club and Bonus Points. 2. Strategic and operational alliance with rival domestic carrier Jet Airways owned by Naresh Goel in 2009. Strategy’s of Kingfisher Airlines

Following strategies were followed to make it one of the leading Airlines in India.

Functional strategies

 It planned to re-launch its commercial air service called UB Airway again which it had to withdraw it due to government restrictions.  The company gave best services to its customers that were like providing world class interiors, and in-flight entertainment systems.  The company came up with only one class airlines rather than other airlines that had Business Class; Economy Class the idea was to combine Business Class experiences and Economy Class experiences in one.  Having a single class freed up more leg space for passengers when compared to normal economy class flights.  The company started addressing its customers as “GUEST” rather than passengers.  The company made its mark by providing its guests with more legroom and bigger seats so as to provide better comfort.  KFA has set its sight to become India’s largest airline both is capacity and in market share. KFA’s Promotional Strategies & Marketing Strategies

 It came up with a very appealing promotional line “Fly the good times” and it reflected in the experience the company offered to its passengers.  KFA is also launched Kingfisher express in order to tap into the growing LCC segment.  Also launched the facility of web check-in, allowing travelers to print their boarding passes via www.flykingfisher.com and the introduction of the Roving Agent at the airport. The Roving Agent is like a check-in counter on the move. You no longer need to go to the check-in counter and wait for long.  As part of its promotional strategy the marketing team of KFA showcased the airline as “the new flying experience”. The following initiatives were taken as part of its promotional strategy…Advertisements hoardings at airports depicted the

   

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stylish interiors of the “Fun liners”, which conveyed youthful, fun-filled, and world class image. INOX multiplexes in Mumbai publicized KFA’s special offers for a month. KFA was the official travel airlines for the cast and crew of “Mangal Pandey”- the movie. KFA made use of various fashion shows, celebrity golf matches, New Year parties all to build its “Kingfisher” brand. The UB groups’ monthly magazine called “Pegasus” published information about KFA along with other information related to UB group. KFA launched many attractive offers to promote its sales like the “King Card” in association with ICICI Bank, in August 2005. This was meant to create loyal customers for KFA by providing benefits like privileged access to lounges, restaurants, free refreshments at airports, access to 180 golf clubs across India, special invites for lifestyle shows. In October, KFA launched “Chill Times Offer” in the month of August 2005 and September 2005. In October they launched the “King Saver Offer” which said “Fly like a King, don’t play like one”. KFA targeted the frequent fliers business traveler segment, which was dominated by Jet Airways. By offering a “King Saver Booklet”, This booklet contained six free flight tickets and was presented as a free gift if the passenger bought two such booklets each worth Rs. 26,999.Passengers could avail off this offer if they showed there Jet Privilege Member (Gold or Platinum) card.

Financial strategies:

 KFA came up with many new financial strategic moves that made it one of the leaders of aviation industry the company had adopted following strategies: The company is planning to spend close to Rs 40 crore on various media and below-the-line marketing activities for the year 2009-10 Cut down the salaries

of the staff like trainee pilot now drawing Rs20k as compare to Rs2.0lacs.  To come over the financial crisis the KFL is considering an option of retrenchment.  It purchased brand new A320 aircrafts powered by the cockpit that was a paperless environment.  KFA was first Indian carrier to place an order for A380s. Expansion strategy

 To further its expansion plan KFA put in its bid to buy Sahara in November 2005.How  ever negotiation came to a standstill when KFA felt the valuation of Sahara Airlines of  around US$750mn to US$1 bn. was too high.  KFA has plans to make an Initial Public Offer (IPO) and raise around US$200 mn that  would be used for its fleet acquisition and route expansion activities.  KFA set up Kingfisher International Inc. (KII), a subsidiary in US for its international  operations. KFA plans to operate international routs by end of 2007. But KFA had yet to  receive permission from the Indian government.  According to Indian government domestic air carriers are not allowed to fly international  routes without five year of domestic flying experience. But Mr. Mallya said if he failed to  convince the government to change its rules, it would start an airline in a foreign country  and fly it to India. Human Resource Strategies

Prior to launch, KFA signed a “non-poaching alliance” with Air Deccan under which both the airlines agreed not to hire each other’s employee. KFA’s flight attendants called “Flying models” were selected through a national level model contest. KFA also stressed the fact that its employees had to be capable enough to meet the

airlines’ high service standards. Mr. Mallya said “Kingfisher Airlines Limited has a first class management team not just at top most level but also in the second line. This is part of the UB group’s Commitment to human resources”. UNCERTAINTY AHEAD After analysing the entire scenario, there are strong possibilities of more difficult situation in the last month of fiscal year 2011-12. The company is in dilemma of finding help, but from where?

Government has refused for bailing and all the lenders and bankers have no more trust. The employees are also not able to tolerate the salary crisis and the slipping market share leads the more difficulties. Promoter Vijay Malya has to decide the way ahead. Whether is it possible to save the company? There are very few alternatives. As per the previous news, Etihad Airways was interested in investing in Kingfisher by providing equity in exchange for a stake in the airline. Also involved in the talks was the International Airlines Group, owner of British flag carrier British Airways and Spanish flag carrier Iberia. But the question is the permission by Government. So at present there is very tough situation for Vijay Malya and for the company. Will new fiscal year bring any solution for the company? Let’s wait and watch. Refferences: http://profit.ndtv.com/News/Article/aai-warnskingfisher-airlines-to-settle-dues-297284 http://articles.economictimes.indiatimes.com/2010-09-26/news/27585421_1_cash-and-carrymodebpcl-schairman-kingfisher-airlines http://timesofindia.indiatimes.com/business/indiabusiness/Kingfisher-may-have-to-weather-pilotstormnext/articleshow/12214372.cms