INTRODUCTION

Kingfisher Airlines Limited is an airline group based in . Its head office is in Andheri (East), and Registered Office in UB City, Bangalore. Airlines, through its parent company , has a 50% stake in low-cost carrier Kingfisher Red. The airline had been facing financial issues for many years. Until December 2011, had the second largest share in India's domestic air travel market. However due to a severe financial crisis faced by the airline at the beginning of 2012, it has the lowest market share since April 2012.

The airline had shut down its operations when on October 20, 2012 the DGCA suspended its flying license. This suspension had been due to failure to give an effective response to the show- cause notice issued by DGCA. However, The airline had locked out its employees for several days before this suspension. On 25 October 2012, the employees agreed to return to work. On 7 June 2010 Kingfisher became a member elect of the Oneworld airline alliance when it signed a formal membership agreement. Kingfisher confirmed on the 20 December 2011 that it will join the Oneworld airline alliance on 10 February 2012. Kingfisher would have been the first Indian carrier to join one of the big airline alliances. However on February 3, 2012, owing to bad financial situation and two days after the International Air Transport Association (IATA) clearing house suspended Kingfisher Airlines; the airlines participation to Oneworld has been put on hold.

History

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. Kingfisher's head office is located in The Qube in Andheri (East), Mumbai and its registered office is located in UB City, Bangalore. Its head office was previously in the Kingfisher House in Vile Parle (East), Mumbai. In 2012 Vijay Mallya was trying to sell the Vile Parle Kingfisher House. With the freezing of the bank accounts of the airline by the Indian Income Tax Department, the airline entered a period of

1 financial unrest. Following are the year by year financial results of Kingfisher Airlines, all values are depicted in Indian rupee (INR) crore except EPS, which is in plain INR.

In September 2011, the chairman and managing director of Kingfisher Airlines made following disclosure to the Bombay Stock Exchange(BSE); "The Company has incurred substantial losses and its net worth has been eroded. However, having regard to improvement in the economic sentiment, rationalization measures adopted by the Company, fleet recovery and the implementation of the debt recast package with the lenders and promoters including conversion of debt into share capital, these interim financial statements have been prepared on the basis that the Company is a going concern and that no adjustments are required to the carrying value of assets and liabilities" This filing was widely covered by Indian and international print and electronic media and analysts. It was stated by analysts and media that the company needed capital infusion to remain viable and this has pushed shares to near historic lows. Kingfisher Airlines Lenders later stated that they consider that company is viable. On 15 November 2011 the airline released poor financial results, indicating that it was "drowning in high-interest debt and losing money". Mallya indicated that his solution was for the government to reduce fuel and other taxes. The government was engaged in assessing whether to bail out the company and other airlines or let market forces determine which ones survive.

Ever since the airline commenced operations in 2005, it has been reporting losses. After acquiring , Kingfisher suffered a loss of over 1,000 crore (US$182 million) for three consecutive years. By early 2012, the airline accumulated losses of over Rs. 7,000 crore (US$ 1.27 billion) with half of its fleet grounded and several members of its staff going on strike. Kingfisher's position in top on the basis of market share had slipped to last from 2 because of the crisis. In December 2011, for the second time in two months, Kingfisher's bank accounts were frozen by the Mumbai Income Tax department for non-payment of dues. Kingfisher Airlines owes 70 crore (US$12.74 million) to the service tax department. Indian tax body also stated that Kingfisher Airlines is delinquent 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. On Feb 25, 2013, its international flying rights and domestic slots were scrapped by the Indian aviation authorities.

Destinations

2 As of 10 April 2012, Kingfisher Airlines served 25 domestic destinations within India. It had suspended all international operations from 10 April 2012 with the final flight between London Heathrow and Delhi. When the airline is flying, all routes are now operated with the , ATR 42s and ATR 72 aircraft. Its first long haul destination was London, United Kingdom which was launched in September 2008. It had plans to launch new long haul flights to cities in Africa, Asia, Europe, North America and Oceania with deliveries of new aircraft. All long haul routes used to be operated on the Airbus A330-200.

MISSION STATEMENT AND OBJECTIVE OF THE COMPANY

Kingfisher Airlines passion is to deliver a world-class experience to its flyers. And since work and play can go hand-in-hand, they want to make sure that guests get some time to relax in the skies after several pressing commitments and stressful work obligations.

Their objective is to be personally involved and ensure that every Kingfisher aircraft meets the global standards that I have set in terms of safety. They have also introduced a brand-new fleet which incorporates the latest technology available and in spite of the personalized entertainment system for personal viewing and listening pleasure, they manage a unique class price between low cost carrier and contemporary competitor‘s class. Creating an environment that feels first class but is in the budget.

Read more: http://www.ukessays.com/essays/marketing/marketing-and-management-strategies- of-kingfisher-airlines-marketing-essay.php#ixzz2MRZiKMsC

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

3 FINANCIAL PROBLEMAS

The saga of Kingfisher Airlines‘ financial problems and its potential bailout exposes ugliest face of Indian business—crony capitalism, breakdown in corporate governance, poor regulation, banking impurdence and complete lack of accountability at all levels. Ironically, it is happening at a time whey Dr Veerappa Moily, minister for corporate affairs made an impassioned speech in Mumbai urging corporate India to have better governance standards, talked about protecting investors and spoke of instituting patriotism awards for Indian companies. The Kingfisher story, clearly anticipated and documented by Veritas, a Canadian research firm, in September 2011 has played out as anticipated by this hard hitting report. The report titled, ‗A Pie in the Sky‘ wrote: UB Holdings (‗UB‘ or the ‗Company‘), the parent of Kingfisher Airlines (‗KAIR‘ or ‗Kingfisher‘), is teetering on the verge of bankruptcy, and incidentally, so is KAIR. It also says that the true state of affairs are not reflected in the share price of the company and warned, right then, that investors should ―sell the stock and salvage whatever value they can‖ out of it. Unfortunately, under pressure from our government, Indian bankers were in no position to do the same. Veritas also examines the state of the parent UB Holdings, in a report whose title says it all: ―Debt Recast: Deadman Walking …‖ but more about that later. What can be a more forthright description of the state of affairs than this? Veritas writes: ―We believe that KAIR‘s book equity has been wiped out although audited financials pretend otherwise. The airline is burning cash at a rapid rate, we estimate Rs301.10 core ($ 65 million) in the first quarter of 2011-12, is in a business that requires capital perpetually, has no pricing power given six carriers fighting over the major hubs in India, is dependent on the vagaries of the price of oil and the largesse of state-run financial institutions in India, and its parent UB has run out of financial room to accommodate the needs of this capital-starved child. Moreover, in spite of the so-called debt recast, we believe that once the non-cancelable operating and financing lease commitments of KAIR are included, KAIR‘s enterprise value is less than its contractually required cash obligations, implying negative residual equity value for KAIR, as illustrated in Figure 1. (All USD amounts @1USD = Rs46.45, 9th September 2011).‖ Despite this situation, in the past five months, banks have done nothing to prevent Vijay Mallya continuing to burn cash as this rate, even to protect their own and ultimately taxpayers‘ money. So bad are Kingfisher Airlines‘ finances that they will drag down its parent United Breweries, too. But that is if Dr Mallya is ever made to pay and if banks are not forced to swallow his

4 losses. Veritas says: ―UB, which has marketable assets of Rs4713.40 crore ($ 1,037 million), compared to guarantees provided on behalf of KAIR of Rs16,853 crore ($ 3,638 million), is also staring into a black hole. We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India‘s premier liquor and assets has been sacrificed at the altar of egoistic ambitions. More importantly, we believe that unless the banking institutions have provisioned judiciously for the debt provided to KAIR—approximately Rs4567 crore ($ 986 million) in loans to Kingfisher in addition to standby letters of credit, etc—it renders the disclosed capital position of the banks unreliable.‖ At this stage, a comparison with how the government has behaved with the national carrier is inevitable. Veritas calls calls the ―civil aviation ministry involving Air India—the state owned carrier—to pull its act together duplicitous‖. It adds: ―Our view stems from the fact that it could be on the diktat of the regulatory authorities involving various ministries of the that an unviable airline, KAIR, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions. It is not only the financial institutions that are suffering. As per the fiscal 2010-11 auditors report, KAIR was also in default of the dues owed on behalf of its employees to regulatory authorities, which it doesn‘t count as debt. As per the auditors of Kingfisher, ―Undisputed amounts payable in respect of employees state insurance of Rs0.75 lakh ($ 1,619), provident fund of Rs43.80 lakh ($ 94,564), tax deducted at source of Rs422.98 crore($ 93 million), service tax of Rs10.48 crore ($ 2.3 million), professional tax of Rs2.46 lakh ($ 5,412) (In all cases relating to the years 2008-09, 2009- 2010 and 2010 - 2011) and fringe benefit tax of Rs 4.51 crore ($ 1 million) (balance of tax and interest for the financial year 2008-09). The due dates for these amounts are as per respective statutes. Clearly, KAIR is funding itself at the expense of its employees and the Indian exchequer, to which it owed tax deducted at source on behalf of its employees of Rs42.29 crore ($ 93 million) as per the 2010-11 auditors report‖. If all these facts were available to a Candian company, why was the civil aviation ministry and the tax authorities so soft on Kingfisher? Here is how blunt Veritas is about the UB group: ―We also believe that the current management of UB has lost all legitimacy to run the vast liquor and beer business, and that the financial institutions should auction the collateral to the highest bidder

5 and recoup whatever is left for their respective shareholders‖. Now here is what Veritas says about ―Deadman Walking‖ —the dubious debt recast that is being fed to us, a gullible public. It says, ―In our view, the debt restructuring touted by KAIR is nothing to write home about. We believe that non-performing loans have been rechristened/repackaged into subordinated debt, and that Kingfisher has defaulted on its obligations is unquestionable. We do not believe that KAIR‘s antics would have found any takers in a responsible credit market and that the airline would have been liquidated by now. During 2009-10, Kingfisher defaulted in principal repayment of Rs203.10 crore ($ 45 million) and overdue interest of Rs 81.6 crore ($ 18 million), for a total default of Rs284.7 crore ($ 63 million). Between July 2010 and March 2011, KAIR defaulted on interest payments of Rs349.80 crore ($ 77 million). Foregone principal repayments are undisclosed. Therefore, from the beginning of FY09-10 to the end of FY10-11, the airline defaulted on dues of at least Rs634.50 crore ($ 140 crore) to the financial institutions. (Data for the period April-June 2010 is unavailable.) Clearly, the loans given by the banks to KAIR are 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 {Rs755 crore ($ 166 million) of term loans converted into CCPS of 7.5%} and cumulatively redeemable preferred shares {Rs553 crore ($ 122 million) of term loans converted into CRPS of 8% with a maturity of 12 years}.‖ http://www.suchetadalal.com/?id=1378e7df-f8a0-f273-4f44f85621a3&base=sections&f

6 FINANCIAL ISSUES

The challenges continue in India‘s aviation sector with the country‘s three-listed carriers – Kingfisher Airlines, and SpiceJet – posting losses in the three months ended 31-Dec- 2011 (3QFY2012), traditionally the strongest quarter for Indian carriers, marking four consecutive quarters in the red. Kingfisher Airlines, as expected, posted the heaviest loss among the listed carriers in what was a tough quarter for India‘s aviation sector as a whole.

Government-owned Air India is also heavily loss-making. SpiceJet, while also feeling the pain, is better placed than some of its rivals, while unlisted IndiGo is likely to be the sole profitable carrier in the current fiscal year.

Jet Airways, SpiceJet and Kingfisher net profit (loss) margin: 1QFY2010 to 3QFY2012

Source: CAPA – Centre for Aviation & company reports

The losses in the quarter reflect not only issues at the individual carriers but some fundamental and structural challenges in the Indian aviation sector. As previously noted, growth in the robust domestic market has failed to translate into profits for India's airline industry, where all the major carriers except IndiGo are loss-making, as a result of the impact of high jet fuel costs (during the quarter crude oil price remained well above the USD100 mark to constitute around 40-50% of airline operating costs), compounded by heavy taxation, inefficient infrastructure and an inability to raise fares in a highly competitive market. In addition, rising debt levels and a depreciating 7 rupee (leading to increased payments for fuel and aircraft rentals) are placing further pressure on margins. As a result, the nation‘s airlines are seeing a sharp increase in their cost base at a time when yield and unit revenue growth is pressured.

Carriers in the market are attempting to rectify this situation through a number of measures such as entering into sale and leaseback agreements to reduce debt and interest costs, restructuring their operations and divesting non-core assets.

The road to recovery for the nation‘s airlines will likely be bumpy, with the heavily indebted sector having already accumulated losses of USD6 billion in the last five years, which will be compounded by a record USD2.5 billion loss in the 12 months to 31-Mar-2012. Lender banks are now increasingly concerned about their exposure to the troubled sector at a time when financing requirements are significant and the net worth of the nation‘s airlines have declined substantially, as noted by the carriers' auditors.

Auditor commentary for SpiceJet, Kingfisher Airlines and Jet Airways

Carrier Auditor’s report Kingfisher Airlines' auditors have raised concern over its ability to remain a "going concern", stating it would need to inject more funds to remain in such a position. "The financial statements being prepared on a going concern basis, notwithstanding the fact that the company's net worth is eroded. The appropriateness of the said basis is inter- alia dependent on the company's ability to infuse the requisite funds for meeting its obligations," BK Ramadhayani & Co said in its report. Kingfisher Airlines chairman Kingfisher and MD Vijay Mallya, upon the release of the carrier's unaudited financial results for Airlines the nine months ended 31-Dec-2011, conceded that the company has "incurred substantial losses and its net worth has been eroded". He continued: "However, having regard to capital raising plans, group support, the request made by the Company to its bankers for further credit facilities, planned reconfiguration of aircrafts and other factors, these interim financial statements have been prepared on the basis that the Company is a going concern and that no adjustments are required to the carrying value of assets and liabilities."

8 COMBINED LOSSES OF USD2.5 BILLION IN FY2012 FORECAST

CAPA estimates Indian carriers combined will lose USD2.5 billion in the 12 months ending 31- Mar-2012. This is on total revenues of just under USD10 billion – a worse result than even FY2008/09, when traffic was declining and fuel prices spiked at USD150/barrel. In the domestic market, India‘s airlines lose USD25-30 every time a passenger boards an aircraft. All three listed carriers have been weak performers on the stock exchange in 2011, losing considerable value amid concern from investors about the financial state of the industry.

Shares comparison (indexed) for SpiceJet, Kingfisher Airlines and Jet Airways: Mar-2011 to Feb-2012

Source: CAPA – Centre for Aviation & Rediff

The Indian Government is, however, responding to these very real challenges, with plans in the works to open up foreign direct investment (FDI) in domestic carriers by international airlines to bring in much-needed capital and management expertise. The Government has also stated it will permit domestic airlines to directly import jet fuel (a positive sentiment but the practicality of this questionable) and open up more bilaterals to private Indian carriers to operate international routes. Pressure is also mounting on the Government to lower taxation on jet fuel, third party maintenance and aircraft lease payments, with certain changes to the Income Tax Act and the duty structure also being recommended.

9 Looking forward, greater pricing discipline and a focus on cost-containment efforts are necessary, while simultaneously focussing on ancillary revenue development. Capacity rationalisation is expected to continue in the domestic market, led by Kingfisher, with downward yield pressures in the domestic market easing since Nov-2011 for all carriers.

KINGFISHER AIRLINES REPORTS HEAVIEST LOSSES AMONG LISTED INDIAN CARRIERS

While the financial results for all three listed Indian carriers were less than ideal, Kingfisher‘s profitability situation is the most concerning. While the carrier reported an EBTIDAR profit of INR1.25 billion (USD25 million) in the quarter (EBITDAR margin declined from 17.5% to 8.1%), it was loss-making at the EBITDA level (INR1.47 billion/USD30 million) with its EBITDA margin declining from 2.5% to -9.5% in the quarter. The carrier also reported a loss before exceptional items and tax of INR5.78 billion (USD117 million) and a net loss of INR4.44 billion (USD90.2 million) for a net loss margin of 33%.

Kingfisher has been consistently loss-making due to an ill-timed expansion that included ordering A380s (subsequently deferred) and a merger with Air Deccan. The global economic crisis and rising fuel prices contributed to the carrier's problems and has left it heavily indebted to lessors, suppliers, lenders, airline partners, employees and the tax department. This financial situation is now impacting its operations, with the carrier this month grounding aircraft, cutting services and withholding salaries as India's tax authorities recently froze the airline's bank accounts for the second time. The carrier, which is seeking additional loans from banks to fund its continued operations, is now operating less than half its fleet (although it will add aircraft progressively at the beginning of Mar-2012) and a significantly curtailed schedule.

Kingfisher Airlines, which has featured heavily in local and international media in the first two months of the year, faces a pivotal year in 2012. Accumulated losses have left the company heavily indebted and requiring urgent recapitalisation to support its ongoing operations. The financially stressed carrier has limited funding options available given recent performance and market sentiment, unless the promoter first infuses additional equity.

10 REVENUE DECLINES FOR KINGFISHER BUT DOUBLE-DIGIT REVENUE GROWTH FOR JET AIRWAYS AND SPICEJET

Kingfisher Airlines reported a 5% decline in revenue in the quarter to USD314 million, reflecting the carrier curtailing operations during the Dec-2011 quarter. Revenue moved in the other direction for Jet Airways and SpiceJet, with revenue growth of 14% to INR39,869 million (USD794 million) for Jet Airways and 42% to INR11,758 million (USD240 million) for SpiceJet. Jet Airways, which expects revenue to remain flat in FY2013, benefited from revenue gains from a real-estate agreement and foreign exchange gains in 3QFY2012. "Going forward, there are more gains to be had on foreign exchange," the carrier said.

Jet Airways reported unit revenue growth of 3.8% to INR4.06 (USD8.09 cents) while Kingfisher Airlines reported unit revenue of INR4.03 (USD8.18 cents), a 0.1% year-on-year reduction.

Kingfisher revenue per ASK vs cost per ASK: 1QFY2012 to 3QFY2012

Source: CAPA – Centre for Aviation & airline reports

FUEL WEIGHS HEAVILY ON OPERATING COST BASE

11 SpiceJet reported the largest year-on-year increase in total operating costs, by 67% to INR11,949 million (USD244 million). Jet Airways also reported double-digit operating costs increases, of 34% to INR44,527 million (USD887 million).

While Kingfisher Airlines reported a lower increase in operating costs, of 7% to INR16,940 million (USD344 million), its unit costs remained high at INR4.42/USD8.97 (+12%), and its staff and fuel costs remained higher than its peers as a proportion of revenue. By comparison, Jet Airways‘ cost per ASK increased 25.3% INR3.63/USD7.23 cents, with the carrier noting that while ―everyone is selling below cost‖, high fuel and wage costs are driving up the cost of operations.

The cost of fuel was an issue for all carriers in the quarter. SpiceJet noted aircraft fuel expenses increased 90% year-on-year and fuel costs "constituted 50% of the total revenue" in the quarter, compared to 37% in the Dec-2010 quarter. The carrier stated the increased cost of crude oil plus 24% tax on ATF is "continuing to impact" the sector "very adversely". Fuel costs as a percentage of sales, however, declined for SpiceJet, from 63% in the Sep-2011 quarter to 51.4% in the Dec- 2011 quarter. Jet Airways also pared this ratio slightly, from 47.7% to 47.4%. It was the opposite for Kingfisher, whose fuel cost grew from 53.5% of sales in the Sep-2011 quarter to 55% in the Dec-2011 quarter.

Meanwhile, Kingfisher's employee expenses as a percentage of sales increased from around 12% in Sep-2011 quarter to more than 13% in Dec-2012 quarter. On the other hand, Jet Airways and SpiceJet saw the ratio of employee expenses to sales reduce, from 13% to 11.4% for Jet Airways and from 11.4% to 9.7% for SpiceJet.

Kingfisher Airlines revenue down 5% – financial highlights for three months ended 31-Dec- 2011:

 Revenue: USD313.9 million, -5% year-on-year;  Total operating costs: USD343.7 million, +7%; o Fuel: USD149.9 million, +37%;  EBITDA (loss): (USD29.8 million), compared to a profit of USD8.1 million in p-c-p;  Profit (loss) after tax: (USD90.1 million), compared to a loss of USD51.5 million in p-c- p; 12  Passenger numbers: 2.6 million, -15%;  Passenger load factor: 75.2%, -8.4 ppts;  Total revenue per ASK: USD 8.18 cents, -0.1%;  Cost per ASK: USD 8.97 cents, +12%;  Cost per ASK excl fuel: USD 5.05 cents, -4%;  Fleet: 64 aircraft, compared to a fleet of 66 aircraft in p-c-p.

*Based on the conversion rate at USD1 = INR49.2888

JET AIRWAYS MAINTAINS MARKET SHARE DOMINANCE WITH KINGFISHER RELEGATED TO FIFTH IN 3QFY2012

During 3Q2012, Indian domestic demand increased by 12% year-on-year, although capacity additions outstripped demand with a 17% capacity increase. Consequently load factors declined from 77% to 74%. Jet Airways, last month, stated it expects the Indian domestic market will continue to grow at a rate of 12-15% in the short to medium term.

India domestic industry capacity and passenger numbers: Dec-2010 to Dec-2011

Source: Jet Airways

13 During 3Q2012, Jet Airways maintained its market share dominance, with a combined market share of 26.5% for Jet Airways and JetLite, ahead of IndiGo (20.0%) and Air India (17.2%). Kingfisher Airlines saw its market share decline substantially, relegated to fifth place in the domestic market. Kingfisher Airlines was until the end of Sep-2011 the largest single carrier in the domestic market.

India domestic market share by carrier: Mar-2012

Source: CAPA – Centre for Aviation & Indian DGCA

Source: Jet Airways

The market share decline at Kingfisher Airlines, and the 15% year-on-year reduction in passenger numbers in the quarter to 2.6 million, occurred after the cash-strapped carrier grounded aircraft and cut routes, resulting in significant capacity reductions in the month. Up until recently, IndiGo and Kingfisher had been almost neck-to-neck in the market share race, although Kingfisher‘s market share has seen a slump from a high of 20% in Apr-2012 to around 12% in Dec-2012, while IndiGo has continued to add capacity and is operating with industry-

14 leading load factors. With continued service cancellations, Kingfisher will likely see further market share losses in the coming months.

JET AIRWAYS LARGEST BENEFICIARY OF KINGFISHER DEVELOPMENTS

Jet Airways, which reported a 15% increase in revenue passengers in 3QFY2012 to 4.5 million, is the largest beneficiary of the developments at Kingfisher Airlines, as it has also been able to increase its corporate travel market share, with yields understood to have benefited from the capacity cutbacks by Kingfisher Airlines seen across the board.

Kingfisher passenger numbers and passenger load factor: 1QFY2010 to 3QFY2012

Source: CAPA – Centre for Aviation & airline reports

Looking forward, the carrier expects to see continued yield improvements in the market, with the carrier noting: ―The capacity induction in the market has slowed down thereby giving considerable scope for airlines to push for higher yields and we saw some semblance of this from November 2011". The carried added: "Passenger bookings in the fourth quarter show encouraging trends, however, it will reflect some seasonality." Jet Airways, which continues to report a sizeable gap between load factors and breakeven load factors, also stated it is

15 "continuing to see a steady increase in our corporate and bookings over the last few weeks, given what has been happening in the industry and with competition."

OUTLOOK: CHALLENGES AND CHANGES AHEAD AS INDIAN AVIATION SECTOR SEES RED

India‘s domestic aviation sector is a tough place to be in at present. All three listed carriers have been weak performers, both financially and on the stock exchange in 2011, as a steep increase in their cost base and lack of pricing power has translated into increasing losses and financial pressures in the quarter ended Dec-2011.

Meanwhile, while the domestic market continues to see an increase in passenger volumes, pricing continues to be weak despite recent improvements in light of cutbacks at Kingfisher Airlines. However, with capacity growth slowing in 2012/13, yield improvement will likely follow. However, there are some positives, with the outlook for the industry ―considerably better

16 now‖, as noted by SpiceJet CEO Mr Mills, in light of some demonstration by the Government of an intent to address structural distortions to assist the sector.

FINANCIAL PLANS

KINGFISHER AIRLINES SUBMITS REVIVAL PLAN, DGCA SEEKS CLARITY

Kingfisher Airlines has gone through the motions of presenting a revival plan to aviation regulator DGCA today but the regulator appears far from satisfied.

Official sources said more details are needed on financial aspects of the plan and also there will be detailed consultations with all stakeholders such as airport operators etc. before a nod is given to the airline to resume operations.

But as of today, there seems little clarity on whether Kingfisher‘s talks with Abu Dhabi based Etihad Airways or any other strategic investor have been successful. So a limited operation is all the airline may achieve in the short run, provided it can satisfy additional queries the DGCA will shortly pose.

Here are five important things related to the airline‘s revival:

1) Promoters will infuse Rs 652 crore into the airline but over the next 12 months. Of this Rs 120 crore has been earmarked for employee dues. The airline has said lender banks are unwilling to extend any more loans so all this money will come from the parent, UB group. Apart from salaries, a major portion of this Rs 652 crore will be used for refurbishing aircraft.

2) Kingfisher has denied having any dues with oil companies except some ―interest dues‖ with HPCL. It has also clarified that payments of any dues will be outside the Rs 652 crore earmarked for operational revival.

3) The DGCA is not sure if Rs 652 crore infusion is enough to get the airline up and running. Source said prima facie, the plan does not look satisfactory. How will the plan become workable is what DGCA wants to know. Needs more clarity on financial matters. The Centre for Asia

17 Pacific Aviation (Capa) has advised infusion of Rs 3,000 crore into the airline for it to be able to pay off vendors, ensure adequate spares and begin flights.

4) To begin with, the airline will put five Airbus 320 and two ATR aircraft to use. In a meeting with lending banks a few days ago, Kingfisher Airline officials had said they would be able to ramp up operations to 21 aircraft within a couple of months of getting DGCA permission to fly. Today‘s plan speaks of getting 10 A 320 and 11 ATRs up and running within 10 weeks.

5) The DGCA says once it completes consultation with stakeholders and with the airline, Kingfisher will require six to eight weeks to begin operations. The revival plan also speaks of paying employees two months‘ salary (salary and arrears) each month once operations actually start.

Chairman Vijay Mallya is believed to have held extensive discussions with Etihad for offloading minority equity stake in Kingfisher to the Abu Dhabi carrier, while also relinquishing management control. But sources tell us that Etihad has made it clear it will not shoulder Kingfisher‘s debt and other liabilities.

Debt alone stands at over Rs 7,000 crore.

Airline employees say that though submission of the revival plan is good news, it may be end January before the airline actually begins to fly—if DGCA allows it to—and another four weeks before any kind of operational schedule is arrived at.

―Passengers need to be sure that they can trust the airline to maintain its schedule. This building of trust will need time. Also, the airline needs to ensure it takes employees along if it actually wants to get back to the skies,‖ says an employee.

Trust deficit is something Kingfisher will need to work hard on. It has been grounded since 1 October, when engineers refused to certify aircraft and all flights were suspended. http://www.firstpost.com/business/kingfisher-airlines-submits-revival-plan-dgca-seeks-clarity- 568086.html

INVESTMENT PLAN

18 Government is not satisfied with Kingfisher Airlines' plans to invest Rs 650 crore to resume its operations as it may not guarantee an efficient and reliable service, a senior DGCA official said today.

"We want an airline to operate in consistent, efficient and reliable manner. The revival plan, which was submitted by the airline, had lots of issues regarding lenders, staff payment which we felt may not lead to reliable services," the official said.

Kingfisher Airlines' plans to invest Rs 650 crore as part of its plan to return to the skies. The airlines had lost its operating licence on December 31, 2012 and had stopped flying since October.

The official, not wishing to be named, said the revival plan filed by Kingfisher Chairman Vijay Mallya last month with the country's aviation regulator Directorate General of Civil Aviation (DGCA) may not be sufficient to carry out a reliable service.

"The plan had no provision for payment of airport operators, who want their dues to be paid before the airlines starts flying again," the official said.

The official said the payment plan of due salary and wages of staff was in a phased manner, which "we felt may not lead to reliable services.

"If the employees were not paid, then the staff may stop working again which may cause inconvenience to passengers. There should be no inconvenience to passengers," the official said.

Yesterday, Mallya had written a letter to Kingfisher employees, who have not been paid for eight months now, after they threatened to file a winding up petition in the court under the Company's Act if the management did not share its revival plan with them.

In his letter, Mallya said, "We have submitted a detailed restart plan to the DGCA which is in two parts. The first part deals with a limited re-start utilising 7 aircraft ramping up to 21 aircraft in 4 months. The second part is a full scale rehabilitation of our airline growing to 57 aircraft within 12 months of recapitalisation".

19 The letter, however, did not mention anything about the payment schedule of dues of the employees, but it said that "both plans contain detailed information on key assumptions and funding requirements, including payment of outstanding salaries to employees."

The airline has not paid to its employees since May last year.

The official also said that four of Kingfisher's leased Airbus 320 aircraft had been deregistered by the DGCA on the request of lessor two years back.

Once India's second-largest airline, Kingfisher is burdened with a loss of Rs 8,000 crore and a debt burden of another over Rs 7,524 crore, a large part of that has not been serviced since January.

Kingfisher Airlines' revival plan not enough to restart ops: source

(Reuters): Kingisher Airlines' planned investment of 6.5 billion rupees ($119 million) is not enough to restart operations at the grounded Indian carrier, according to a senior government.

The revival plan, which Kingfisher Chairman Vijay Mallya filed last month with India's Directorate General of Civil Aviation (DGCA), does not include details on payment of dues to airports and may not guarantee a reliable service, said the source, declining to be named.

DGCA suspended the airline's licence to fly in October after months of cancelled flights and staff walkouts.

Kingfisher, once India's second-largest airline, is estimated to owe $2.5 billion in debt to banks, staff, vendors and others. The airline, which has not flown since October, has tried unsuccessfully for over a year to bring in new investors. http://www.financialexpress.com/news/govt-not-satisfied-with-kingfishers-investment- plan/1057946/0#sthash.fBVbS2dZ.dpuf

GOVT WILLING TO SUPPORT KINGFISHER AIRLINES REVIVAL PLAN IF EMPLOYEES' DUES CLEARED

20 India is willing to support the revival plan of grounded Kingfisher Airlines Ltd if the company were to settle its employees' dues, a senior government source told reporters on Tuesday.

The statement came after Kingfisher Chief Executive Sanjay Aggarwal met officials at the ministry of civil aviation to discuss the revival plan, which was earlier rejected by the regulator.

Kingfisher, which lost its operating licence at the end of 2012 and has not flown since the start of October, is estimated to owe $2.5 billion in debt to banks, staff, vendors and others and is scrabbling to find new investors. http://www.financialexpress.com/news/govt-willing-to-support-kingfisher-airlines-revival-plan- if-employees-dues-cleared-source/1063072#sthash.AXsiLy2A.dpuf

LENDERS TO START RECOVERY OF KINGFISHER AIRLINES’ LOANS

Lenders to grounded Kingfisher Airlines(KING.NS) have decided to take initial steps towards recovering $1.4 billion of loans in default after the company failed to come up with a viable funding plan.

Kingfisher Airlines, owned by the flamboyant Vijay Mallya, has not flown since October 2012 after operations were halted due to a cash crunch. Its lenders had first declared the company‘s loans in default in early 2012 but held back recovery after the carrier‘s promises of capital infusion.

Kingfisher said in December it was in talks with several investors, including gulf carrier Etihad for stake sale but those hopes have faded as the airline continues to be grounded and expands its losses.

Debt-ridden and with no customers, Kingfisher posted a 7.55 billion rupees loss in the three months to December 31 as its planes sat idle, and regulators rebuffed its revival plans.

A decision on further action will now be taken by the boards of the 17 creditor banks, after which the consortium will take decisions on valuing the assets and potentially pursuing legal options, Acharya said, adding it is a lengthy process.

21 http://www.firstpost.com/fwire/lenders-to-start-recovery-of-kingfisher-airlines-loans- 623161.html

22 FINANCIAL POLICIES

Mallya—known as much for his love of the good life and the popular as for Kingfisher beer, India‘s largest selling brew, and the grounded Kingfisher Airlines Ltd—was accompanied by Sanjay Aggarwal, chief executive of the airline; Ravi Nedungadi, president and chief financial officer of the group; and A. Harish Bhat, deputy president, corporate finance. The always-articulate Mallya made a PowerPoint presentation in which he meticulously charted the future of the airline, the licence of which was suspended in October by the Directorate General of Civil Aviation (DGCA), India‘s aviation regulator, following a strike by the airline‘s employees. The airline‘s operating licence has since expired. According to the proposal presented by Mallya—based on a revival plan submitted by the airline to DGCA—Kingfisher would restart operations with seven aircraft and increase it to 21 in four months. At its peak, Kingfisher Airlines was flying 66 planes to 68 locations, including eight international destinations, with 374 flights a day, and accounted for 20% of the market. Mallya‘s audience—representatives of a consortium of 14 banks that have a Rs.7,000 crore exposure to the troubled airline—gave him a patient hearing. At the end of it, one of them asked Mallya a question: what‘s in it for the lenders? Mallya didn‘t have an answer. Still, the meeting wasn‘t entirely unproductive. It ended with the formation of a core group to assess the airline‘s proposal to restart operations and identify ways for lenders to recover their money. The members of the core group are State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, Bank of India, IDBI Bank Ltd and United Bank of India. The group met in Bangalore on 4 January but made no headway. With Plc of the UK buying a 27.4% stake in UB Group company Ltd for £660 million (this will be followed by an open offer to buy another 26% from the public shareholders of United Spirits), the bankers went into that meeting hoping Mallya would come up with a concrete plan to take care of their interests. Their belief was strengthened by an offering Mallya made on 18 December, his birthday, at Hindu god Venkateswara‘s shrine in in Andhra Pradesh—3kg of gold worth close to Rs.1 crore. But Mallya did not oblige.

LENDERS’ LARGESSE

23 The core group will meet again in Mumbai on 18 January, possibly to take a final call on the money owed by Kingfisher Airlines—arguably the most high-profile bad asset Indian banks have ever had on their books. The banks can‘t be blamed; if anything, they have been far too patient and much too generous. They first restructured Kingfisher‘s debt in November 2010. To infuse life into the airline, ailing even then, banks in the consortium converted Rs.1,355 crore of debt into equity, at a 61.6% premium to the market price of Kingfisher Airlines‘ stock. Following this, banks own 23.21% of the airline‘s equity. The promoter, too, converted Rs.648 crore of debt into equity. Apart from this, the bankers also stretched the period of repayment of loans to nine years with a two-year moratorium, cut the interest rates, and sanctioned a fresh loan. The idea was to bring down the debt of the airline, push up its equity-debt ratio, and improve its cash flow. Since its inception in 2005, Kingfisher has never returned a net profit. And its losses zoomed after it acquired low-cost airline Deccan Aviation Ltd in 2007. Between fiscal 2008-09 and September 2012, its accumulated losses reached Rs.8,015.8 crore. The bankers agreed to throw good money after bad money in the belief that this would improve the health of the airline and ultimately help them recover their dues. Now, they regret it. Interestingly, some of them admit there were more than just commercial interests at play in their generosity. In private, some bankers hint at pressure from certain quarters to restructure the loan. Mallya has been a member of the , the Upper House of India‘s Parliament, since 2002. Still, whatever forces may have been at work, the bankers insisted on a safety net. Since most airlines lease aircraft, banks do not get planes as primary security for loans given to airlines. So what do the bankers have as collateral? They took fresh collateral from Mallya during the restructuring—two properties in Mumbai and worth Rs.70 crore, two helicopters worth Rs.84 crore, and shares of United Spirits and Chemicals and Fertilizers Ltd worth Rs.450 crore at current market prices. They also took the first charge on fixed assets such as coaches that ferry passengers to the tarmac and tractors, worth Rs.150 crore. In case of a default, lenders with a first charge have the option to seize the assets. The banks also received a corporate guarantee from United Breweries Holdings Ltd, the holding company of the group, and a personal guarantee from Mallya. Finally, they also took as collateral the Kingfisher brand, valued at Rs.3,000 crore by audit firm Grant Thornton India.

24 PERSONAL GUARANTEE In an indication of the kind of sway he once exerted over the bankers, Mallya charged the banks Rs.98 crore for offering a personal guarantee. Once the banking regulator Reserve Bank of India (RBI) got to know of this, it asked the banks to recover the money. The amount was initially debited from Kingfisher Airlines‘ liability to banks in its 2010-11 profit and loss account, but the next year the entry was reversed, thus doing away with the fee. Now, the banks seem determined to take their dealings with the airline to their logical end—one that could well mean the end of the airline, too. Mallya is willing to bring in money to make the airline operational and have a limited restart in the summer of 2013. In a 10 January letter to employees, he promised to infuse Rs.650 crore to do this. The money will come from the UB Group and its associates. Among Kingfisher‘s dues are unpaid salaries, and payments to oil marketing companies and private and public airport operators, and the Rs.650 crore will be used to meet these obligations, at least partially. The banks are unlikely to allow this to happen. They want around Rs.800 crore on the table for themselves—half of which is technically called an ―irregular amount‖, or the dues not paid. This means Mallya would need to bring in at least Rs.1,450 crore to restart operations (that is if Rs.650 crore is enough to take care of other obligations at this point). If indeed he does that, technically the banks will have scope to restructure the account once again—this is within the realm of the possible—through the so-called corporate debt restructuring (CDR) route. If Mallya does not bring in the money for the lenders, he won‘t be able to restart the airline because the aviation regulator, DGCA, will seek a no-objection note from banks and that might not be forthcoming. The banks can afford to be aggressive as they have nothing to lose. Technically, the Kingfisher debt account turned bad in 2009 even before the first restructuring happened. This is because when a restructured loan turns bad, RBI norms mandate that the lenders backdate it to the time before the restructuring exercise was taken up. Most banks have already set aside money to cover the bad loan, and every rupee recovered from Kingfisher will add to their profits. SBI, the leader of the consortium, has the maximum exposure at Rs.1,600 crore, followed by PNB (Rs.800 crore), IDBI Bank (Rs.800 crore), Bank of India (Rs.650 crore), Bank of Baroda (Rs.550 crore), United Bank of India (Rs.430 crore), Central Bank of India (Rs.410 crore), Uco Bank (Rs.320 crore), Corporation Bank (Rs.310 crore), State Bank of Mysore, an SBI associate bank (Rs.150 crore), Indian Overseas Bank (Rs.140 crore), Federal Bank Ltd (Rs.90 crore),

25 Punjab and Sind Bank (Rs.60 crore) and Axis Bank Ltd (Rs.50 crore). Overall, their exposure is Rs.6,360 crore, and once the unapplied interest is added, it becomes Rs.7,000 crore. There are other lenders outside the consortium. They are Srei Infrastructure Finance Ltd (Rs.430 crore), Jammu and Kashmir Bank Ltd (Rs.80 crore) and Oriental Bank of Commerce (Rs.50 crore). A debt fund operated by Kolkata-based Srei Infrastructure Finance bought ICICI Bank Ltd‘s exposure to the airline in July 2012. The non-banking financial company and Jammu and Kashmir Bank has shares of United Spirits and McDowell Holdings Ltd as collateral. The current market value of these shares is about Rs.350 crore—more than their exposure. The consortium has an arrangement with these two entities to get hold of the additional shares and sell them to recover their dues.

RECALLING THE LOAN At least one lender claims to have sent a recall notice to the company some time back, but claims it could not follow up because of pressure from a certain quarter. A senior executive of the bank said he received a call from a bureaucrat from Delhi asking him to follow the leader of the consortium and not to do anything outside that. But things have changed in the Capital as well, and it now looks like there will not be any pressure from any quarter and banks can chart out their course. What can they do? They can move for liquidation of Kingfisher. And for this, they do not need to take legal recourse. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, secured creditors can move a debt recovery tribunal to recover their money. A sale of the Mumbai and Goa properties, two helicopters, other fixed assets and shares of UB Group companies can generate around Rs.1,000 crore, roughly 15% of the money that Mallya owes banks. By virtue of holding the Kingfisher brand as collateral, the banks can prevent United Breweries from using it for its beer, which is sold in 52 markets and accounts for more than one-third of the Indian beer market. And if indeed the banks become aggressive—as they are planning to be— Mallya will have to stop printing the Kingfisher calendar, too, a prestigious project since 2003 in

26 which ace photographer shoots models and film actors on the beaches of , the and the French Riviera. The corporate guarantee of United Breweries Holdings will also come in handy. Finally, the banks can play havoc with Mallya‘s personal guarantee by seizing all his assets. If Mallya transfers his personal assets to others in his family for fear of losing them to the banks, the banks can move criminal proceedings against him. As if these are not enough, if banks choose to declare Mallya as a ―wilful defaulter‖, none of his group companies will be able to access bank funding. All this is in theory, and I am not convinced the banks will be able to stick to their guns, but at this point, one thing is certain—they are fast losing their patience. With no pressure from other quarters to throw another lifeline to the airline, they are expected to firm up a plan of action by the end of January and start executing it before the fiscal year ends in March. Their position will change if Mallya is able to offer money to them in addition to generating funds that he needs to make the airline operational in a modest way. If he fails, banks can remove him from the cockpit and hijack his entire empire. They are not as vulnerable as they seem to be.

http://www.livemint.com/Opinion/RvAmZQhi7Q6jra34xtQJwO/Ki ngfisher-Airlines-the-beginning-of-the-endgame.html

27 MARKETING

KFA has always positioned themselves as a budget carrier and not as Low Cost Carrier (LCC). Till this year they have created their recognition through very cost effective yet classy services both domestically and internationally. They have followed uniquely fun marketing strategies to make it one of the leading airlines in Asia.

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 RED in order to tap into the growing Low Cost Carrier (LCC) segment.

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 by combining combine Business Class experiences and experiences in one rather than other airlines that had Business Class; Economy Class.

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.

KFA‘s promotional strategy team showcased the airline as ―the new flying experience‖.

Advertisements hoardings at airports depicted the stylish interiors of the ―Funliners‖, which conveyed youthful, fun-filled, and world class image.

KFA made use of various fashion shows, celebrity golf matches, New Year parties all to build its ―Kingfisher‖ brand.

The UB group‘s monthly magazine called ―Pegasus‖ published information about KFA along with other information related to UB group.

28 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.

KFA targeted the frequent fliers business traveller 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.

Marketing Mix

Product

Kingfisher Airlines offers unparalleled service to its guests. The success of this airline in a very short period of time can be attributed to the novel services introduced by it e.g.

Roving agents: A roving agent is a check-in counter on the move. The guests with hand baggage are not required to stand in the queue at the check-in counters. The roving agents come to the customers and assist them.

Different check-in options: The airline allows it customers to do a web check-in from its website apart from the option of the airport check-in.

Special care for unaccompanied minors, senior citizens and those with reduced mobility: The airline takes the responsibility of escorting the children safely to their destination. The ground crew assists in check-in and boarding process. Guest with disabilities can expect a personalized and caring treatment. An escort with a wheel chair can be assigned to the Guest. Help in check- in, boarding and disembarkation can also be availed by guests.

In-flight entertainment: Every seat is treated to an individual TV with Live TV as well as well as pre recorded in-flight entertainment channels and Radio.

Place

29 Connectivity: Kingfisher Airlines flies to 38 destinations across India. These 38 locations cover a wide geography of the country and connect all the metros and the major cities.

Booking of tickets: The customers have an option of booking tickets at the airport, by calling the customer care, through travel agents and by logging on to their website.

Price

Kingfisher Airlines has been termed as the ―first full frills-true value carrier.‖ The airline has a very well defined target audience which is the Sec A and Sec B+ of the Indian economy and that falls within the age group of 25-45 years with high disposable incomes. This section of the population is modern, trendy and upwardly mobile looking for a great flying experience. They have traveled extensively and are aware if the international flying trends. This segment really doesn‘t mind shelling out the money as long as they get the experience they are looking for.

Promotion

Kingfisher Airlines has adopted a well rounded approach to reach out to their customers. Their objective is to create a place in the minds of their customers for their brand and to ensure that the message gets across effectively. Kingfisher Airlines has a 360 degree promotion strategy in place. They reach out to their customers through all media of communication such as television, radio, print, outdoor, malls and multiplexes, clubs and pubs and their in-flight magazine. They ensure that they communicate with their customers at multiple touch points.

King Club is the airline‘s loyalty program. As a member of King Club, customers enjoy a range of exclusive privileges and benefits for each membership level. The more a customer flies with Kingfisher Airlines the more he will be rewarded.

People

Kingfisher Airline‘s cabin and ground crew is the hallmark of their services. The real winning factor for Kingfisher Airlines is the quality of staff service being provided to customers. The crew undergoes rigorous training programs. Kingfisher Airlines has also instituted the Kingfisher Training Academy to cater to the growing demand for trained Service oriented professionals.

30 The academy provides intensive training on Airlines Orientation covering Airline Rules & Regulations, Cabin Familiarization and Announcement Delivery.

Process

Following are the processes that add to the satisfaction experienced by Kingfisher passengers:

Kingfisher Airlines facilitates easy booking of tickets. The passengers can book their seats by calling their 24/7 customer care, by logging on to their website, designated travel agents and at the airports.

Personalized valet service at all airports across the country. The valet service staff assists the passengers‘ right from the time they reach at the airport till they check-in and also upon arrival at the destination they provide assistance with their baggage.

Read more: http://www.ukessays.com/essays/marketing/marketing-and-management-strategies- of-kingfisher-airlines-marketing-essay.php#ixzz2MRZtG1Pt

31 OPERATIONS

Kingfisher Airlines is reported to have almost shut down 25 centres. These include Hyderabad, Kolkata, Lucknow, Ahmedabad, Ranchi, Patna, Amritsar, Bhubaneswar, Indore, Kochi, Nagpur, Coimbatore, Bagdogra, Trivandrum and Kochi, company executives told NDTV Profit. They declined to be named because of the sensitivity of the matter. The company is likely to inform its 7,000-strong workforce about these closures in a day or two, following which some of them will be asked to go on so-called ‗leave without pay‘, they said, adding that, eventually, nearly 50 per cent of employees may be asked to go. The ‗leave without pay‘ route will absolve the airline of having to pay employees the severance they are entitled to. In any case, Kingfisher has not been able to pay employee salaries for up to three months. It has also not passed on the tax deducted at source or TDS from their payrolls to the Income Tax department. The tax authorities subsequently froze the carrier‘s bank accounts. Shares of Kingfisher Airlines plunged over 6 per cent on the Bombay Stock Exchange. Meanwhile, the Directorate General of Civil Aviation (DGCA) is ready with a report which will be submitted to the Civil Aviation Ministry within a day, a government official familiar with the matter said on condition of anonymity. The ministry will decide on the next course of action based on the DGCA report. After a meeting with Kingfisher Airlines‘ chairman Vijay Mallya last week, Director General of Civil Aviation Bharat Bhushan said that the airline‘s situation was ―difficult‖ and that it ―could not go on like this‖. He added that he had not got any assurance that the carrier would be able to fulfil its liabilities to airports and oil marketing companies. Making matters worse, banks have declined to extend working capital to the cash-stricken, debt- laden carrier that has slipped from being the second largest airline by traffic to holding a mere 10 per cent of market share. Nor have lenders reached a consensus to restructure the $1.3 billion debt the airline is saddled with. And with little sign of investors on the horizon that could bring in much-need equity despite, Mallya‘s repeated assurances to the contrary, and dwindling revenues because of flight cutbacks and a shutout from International Air Transport Association‘s (IATA) ticketing platforms, Kingfisher is finding it increasingly hard to pay its bills.

32

A.K. Ganguly, the last of two independent directors to quit the airline‘s board, last week said it needed at least $1 billion to extricate itself from the financial quicksand it is stuck in. In a sign of the desperate situation he finds himself in, Mallya last week submitted what he described as a "holding" plan to the DGCA that entailed flying an abbreviated schedule with just 20 planes - less than a third of its former more than 60-strong fleet - and cancelled all international flights. The airline could still find its ways out of the woods if the government passes a pending bill to allow foreign airlines to pick up an up to 49 per cent stake in domestic carriers. Until then, the airline might have to continue literally flying on a wing and a prayer. http://profit.ndtv.com/news/corporates/article-kingfisher-airlines-to-shut-25-centres-3-500- workers-affected-300541

DOMESTIC OPERATING ENVIRONMENT

•The aviation industry growth has continued in Q2 FY12 with 20% growth in domestic demand over the same quarter (Jul-Sep‘10) last year •Capacity addition was also continued in the industry with 20% capacity enhancement vis-à-vis the same period last year •The load factor in the industry remained stable at 72% in Q2 FY12 versus Q2 FY11 as capacity addition closely matched demand growth •Yields continued to be under pressure in the industry •Crude oil price has continued above the USD100 mark and shown frequent fluctuations between USD 100 -120 during this quarter KFA‘s load factor at 77% continued to be higher than the industry at 72% KFA‘s capacity addition in Q2-FY12 is higher than Q2-FY11 due to unplanned grounding of aircraft in the same period last year

Domestic operations performance highlights: Q2 FY12

•Operating revenue of Rs. 1,145 Cr (5% over Q2 FY11) •9% increase in passenger revenue.

33 •EBITDA loss of Rs. 195 Cr vs. profit of Rs. 108 Cr in Q2 FY11 •Domestic EBITDA margin declined from +9.3% to -15.7%

•EBITDAR loss of Rs. 10 Cr vs. profit of Rs. 289 Cr in Q2 FY11 •Domestic EBITDAR margin declined from 24.7% to -0.8% in Q2 FY12

•Total RASK declined to Rs. 4.24 from Rs. 5.02 in Q2 FY11 (-16%) •Pax RASK decreased by 14% over Q2 FY11 (Rs. 3.56 from Rs. 4.13)

•CASK (EBITDA) increased to Rs. 4.90 from Rs. 4.56 in Q2 FY11 (+8%) •Fuel CASK increased by 48% over Q2 FY11 (Rs. 2.00 from Rs. 1.35) •Ex-fuel EBITDA CASK decreased by 10% over Q2 FY11 (Rs. 2.90 from Rs. 3.21)

INTERNATIONAL OPERATIONS PERFORMANCE HIGHLIGHTS

•Operating revenue of Rs. 383 Cr (+11% over Q2 FY11) •13% increase in passenger revenues with a 3% increase in capacity

•EBITDA loss of Rs. 76 Cr vs. loss of Rs. 53 Cr in Q2 FY11 •EBITDA loss increased by Rs. 23 Cr despite Rs. 63 Cr of additional fuel cost impact in Q2 FY12 as compared to Q2 FY11 •International EBITDA margin dropped from -15.5% to -19.8% in Q2 FY12

•EBITDAR loss of Rs. 12 Cr vs. profit of Rs. 18 Cr in Q2 FY11 •International EBITDAR margin dropped from 5.1% to -3.2% in Q2 FY12

•Total RASK improved to Rs. 2.61 from Rs. 2.42 in Q1 FY11 (+8%) •Pax RASK growth of +9% over Q2 FY11 (Rs. 2.15 from Rs. 1.97) •ATV improved by 11% over same period last year

•CASK (EBITDA) increased to Rs. 3.12 from Rs. 2.79 in Q2 FY11 (12%) •Fuel CASK increased by 34% over Q2 FY 11 (Rs. 1.55 from Rs. 1.16)

34 •Ex-fuel EBITDA CASK decreased by 4% over Q2 FY 11 (Rs. 1.57 from Rs. 1.63)

KINGFISHER AIRLINES LOSES OPERATING LICENSE

Indebted Indian carrier Kingfisher Airlines has lost its operating license after failing to present regulators with a clear funding plan.

The airline was suspended in October due to unpaid debts and salaries, but hoped that a funding plan submitted to the Directorate General of Civil Aviation (DGCA) in December would see its revival.

However, the plan was not backed by details of financing, leading to the expiry of the license at midnight December 31.

Kingfisher is permitted to renew the license within two years, according to DGCA regulations, and the airline claims it is ―confident of securing approval from the DGCA on the restart plan, license approval and reinstatement of its operating permit‖. Doubts still remain as to whether vital funds will be forthcoming in order to facilitate this.

The carrier, owned by liquor tycoon Vijay Mallya, has estimated debts of US$2.5bn, owing money to banks, staff, airports and tax authorities. Kingfisher has been grounded since October and recently saw two-thirds of its 63 aircraft repossessed by creditors.

35 PERSONAL PLANS

1. After two rounds of talks in Mumbai on Monday, Kingfisher CEO Sanjay Aggarwal today sent a letter to the staff saying the March 2012 salary will be paid on or before October 25. "We have urged them to accept our offer and should they agree, they will receive the April 2012 salary on or before October 31 and the May 2012 salary before Diwali," he said in the letter. 2. The employees, however, were little convinced by the new mail. The employees, who held meetings in Delhi, Bangalore, Chennai and Mumbai, rejected the offer. They allege that the management, by posting such mails to individual employees, was "trying to break our unity". 3. The management has asked the employees to respond to its offer by October 26. Kingfisher's 4,000 employees haven't been paid in seven months, triggering the latest strike which has snowballed into a situation that has put a huge question mark on the airline's fate. 4. Civil Aviation Minister Ajit Singh seemed to sound the death knell when he told NDTV on Monday, "It is unrealistic to expect Kingfisher to fly again." The minister also said, "Kingfisher has taken its employees for a ride." 5. However, the airline, which had its licence suspended on Saturday, hopes to fly again. The licence was suspended as the airline failed to address the concerns of aviation regulator Directorate General of Civil Aviation (DGCA) about its operations; the move forced the debt-laden carrier to stop taking bookings. Sources say the airline is prepping the revival plan that the DGCA had sought and aims at submitting it before November 6. 6. Controlled by Vijay Mallya, Kingfisher's fleet has been grounded since the start of the month after a staff protest. 7. Kingfisher owes Rs. 7,500 crore in debt to a consortium of 17 banks, led by the State Bank of India. The lenders together hold around a 23 per cent stake in the airline since March, after the banks converted their Rs. 6,500 crore of recast debt (after a corporate debt restructuring, or CDR, in November 2010) into equity. 8. The company's steep decline has underlined the problems of operating in India's airline sector, where players grappling with rising fuel costs face aggressive pricing caused by

36 overcapacity. Kingfisher's troubles will likely help rivals such as Indigo and SpiceJet by lowering capacity on key routes. 9. The Centre for Asia Pacific Aviation has said a fully funded turnaround for Kingfisher would cost at least $1 billion. 10. Kingfisher's bankers, which have over Rs. 7,500 crore locked in the ailing airline, will soon meet to chart out the future course of action, said PNB Chairman and Managing Director K R Kamath today. http://profit.ndtv.com/news/cheat-sheet/article-kingfisher-airlines-will-it-fly-on-312418

37 FUTURE COURSE OF ACTION

Kingfisher lenders will soon decide on future course of action with regard to the grounded airline as they do not want the company to close down, State Bank of India (SBI) said today.

"The representatives met in Bangalore ... the plan for action the consortium is deciding. We don't want to put a lock on the company's office," the Chairman of SBI, lead lender to Kingfisher, Pratip Chaudhuri said here.

Last week, the meeting between lenders and the Kingfisher management remained inconclusive as bankers were "not impressed" with the revival plan, sources said.

The next meeting will be held in Mumbai soon where lenders are likely to push for better commitment from Kingfisher Airlines (KFA), sources added.

The 17-bank consortium has extended Rs 7,000 crore loans to Kingfisher. SBI alone has an exposure of Rs 1,500 crore, which has not been serviced since January, 2012.

As per the revival plan submitted to Directorate General of Civil Aviation (DGCA) last month, Kingfisher had said it would require about Rs 652 crore over the next 12 months for running its operations. These funds would come from the UB Group's resources as banks were unwilling to fund the cash-strapped airline.

Of the Rs 652 crore that the airline would need to restart operations, Rs 120 crore would be needed to meet salary arrears for its employees.

Kingfisher Airlines CEO is understood to have informed DGCA that the salary dues would be cleared by giving two months' wages and back wages each month from the next month onwards.

In addition, funds would be required to refurbish the aircraft, including their engines. The airline's pilots would also have to undergo refresher training and medical tests before they can start operating flights again.

Kingfisher officials claimed that there were no dues against oil companies, barring interest payments due to HPCL.

38 The airline would have to meet the dues it owe to airport operators, including the Airports Authority of India (AAI) to which it has an outstanding of over Rs 250 crore. http://cdn.financialexpress.com/news/bankers-to-decide-future-course-of-action-on-kingfisher- airlines-soon/1055792/0#sthash.xC34IWyM.dpuf

39 Kingfisher Airlines operating parameters: 3QFY2012

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines P&L results: 3QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines domestic operating parameters: 3QFY2012

40

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines domestic P&L results: 3QFY2012

Source: Kingfisher Airlines

Kingfisher Airlines international operating parameters: 3QFY2012

41

Note: Cost per ASKM calculated at EBITDA cost level Source: Kingfisher Airlines

Kingfisher Airlines international P&L results: 3QFY2012

Source: Kingfisher Airlines

http://centreforaviation.com/analysis/heavy-losses-for-kingfisher-airlines-jet-airways-and-spicejet-in- challenged-indian-aviation-sector-68917

42 CONCLUSION

Besides the obvious expansion and growth in the fleet, the major precipitating factor behind the deal was the chance for Kingfisher Airline to go international. According to government policies an Airline can‘t go international within first five years of its launch. Thus shaking hands with Deccan meant that Kingfisher could ply on international routes much before the anticipated deadlines.

If we analyse the steps taken up by the Kingfisher management post the deal then we might be able to come up with reasons for current status of the airlines.

The premier brand of the airlines Kingfisher focused on the elite customer segment and served them with best in the class services. The services came at a price and this was what restricted the airlines to only the higher strata of the society. Thus the motive behind Kingfisher Red was to launch an airline which had the brand power of Kingfisher and keep the costs within limits of middle class. Had the airlines implemented this model efficiently then the airlines might have gone on to make humongous profits.

The problem arose when Mr Mallya gave the same name to both the brands along with more or less similar services. Now a person who preferred to travel in premier class of Kingfisher reasoned that if he could get same services at a cheaper price then he should switch over to the Kingfisher Red airlines. Rather than moving over to lower cost segment they turned to other niche airlines as traveling in luxury was a status symbol for this customer segment.

Secondly, arming Kingfisher Red with high class services lead to a scenario wherein the costs shot up ultimately leading to increment in the prices of the tickets. Thus it was not able to tap into the market of budget driven customer base segment, effectively. Whole motive of launching a low cost airline was reduced to zilch. Now, Kingfisher Red hung in between low cost airlines and luxury carriers.

Trying to understand the psyche behind raising the bar of the services being provided, we can make a guess that Mr Mallya never really was convinced by the concept of low cost airlines. Instead he tried to promote his product by giving in more at the price of one. He failed to

43 understand that customers were much more interested in reduced prices then extra benefits. This is where he went strategically wrong.

Another move of his that went wrong in this industry was to launch his airlines into international circuits without realizing the profits in domestic arena. This is because building up a successful international circuit is very expensive and sucks up a lot of cash.

Another reason for the airlines to fail was the restructuring of the routes of Air Deccan. Mr Mallya removed the services of Deccan from routes where full time services of Kingfisher were already present as he believed that it would help Kingfisher premier airlines. On the contrary these being cost sensitive routes, people shifted to economical variants of Spicejet and Indigo airlines.

44 Bibliography

Kingfisher Red: What Went Wrong? http://www.mbaskool.com/business-articles/operations/2927-kingfisher-red-what-went-wrong.html

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