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Kingfisher Airline” “Strategies Adopted by Kingfisher Airlines & Causes of Its Failure”

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Kingfisher Airline” “Strategies Adopted by Kingfisher Airlines & Causes of Its Failure” Assignment : Strategy Formulation : “Kingfisher Airline” “Strategies adopted by Kingfisher airlines & causes of its Failure” Submitted by : Japkirat Singh Oberai Submitted to : Dr. Supriti Mishra 13 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 17) 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 government- owned 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 three- course 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.
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