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THE K I NG WI THOUT FI SHES...!!! [CASE ON CRI SI S OF K I NGFI SHER AI RL I NES]
Prof. Bhavik M. Panchasara Marwadi Education Foundation’ s Group of Institutions, RajKot, bhavikpanchasara@gmail.com

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.

Keywords: Aviation industry, Kingfisher Airlines, financial turmoil, financial issues, crisis and debt restructuring

I NTRODUCTI ON: 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 5star 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.

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STARTI NG OF THE CRI SES: F

su suffered a loss of over Rs. 1,000 crore for three ex executive years. By early 2012, the airline

Ever since the airline commenced operations in 2005, the company is reporting the losses. But the situation s became more horrible after acquiring the Air Deccan in 2007. After acquiring the Air Deccan, the company

ac accumulated the losses of over Rs. 7,000 crore with ted ha of its fleet grounded and several members of its half s st staff going on strike. Following table 1 highlights ng lo losses of the company since inception:

Table 1: Net Repor ted L osses and debts s since inception (Rs. I n Cr or es) ception Year L oss Secur ed L oans Unsecur ed L oans M ar -11 -1027.4 5,184.53 1,872.55 M ar -10 -1646.22 4,842.43 3,080.17 M ar -09 -1608.83 2,622.52 3,043.04 M ar -08 -188.14 592.38 342.00 Jun-07 -419.58 716.71 200.00 Jun-06 -340.55 448.16 3.50 M ar -05 -16.79 159.42 125.06

DEBT RESTRUCTURI NG: UCTURI

C SI S TI L L CONTI NUE: CRI

In the situation of loss and tough financial condition, the company went for more loans. Table 1 shows the portion of secured and unsecured loans rtion taken by the company. Due to heavy burden of debt ompany. and interest, in November 2010, the company adopted the way of debt restructuring and under that ay total 18 leading lenders, those have landed total Rs. g 8,000 crores, agreed to cut interest rates and convert greed part of loans to equity. As per the contract, lenders have converted Rs. 650 crores debt into preference d shares which will be converted into equity when the ill company lists the on the Luxembourg Stock s 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 800 crore

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

D AYED SAL ARY: DEL ED

Kingfisher Airline has staff strength of 6,000 an spends 58 crore on salaries a month. According and ds to the first quarter financial results, it has rst 173.66

cr crore under the employees cost head, which has der in increased from 163.40 crore during the same

q quarter last year. Kingfisher Airlines delayed salaries ast o its employees in August 2011, and for four months of ployees in succession from October 2011 to January 2012. ssion K Kingfisher also defaulted on paying the Tax er D Deducted at Source from the employee income to the ta department. tax tment.

converted into preference shares, another

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 erage Rs. 500 crores every year in interest cost.

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FUEL DUES:

denied that it missed the payments. GECAS had filed a complaint with DGCA saying Kingfisher

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:

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

￿ 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.

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 AI RCRAFT L EASE RENTAL DUES: last six months, with daily payments amounting to 0.8 crore. 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 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, SERVI CE TAX:

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Kingfisher paid id

20 crore towards its dues for

o operational by February 20. With this, Kingfisher's al m market share clearly dropped to 11.3%. The ca cancellation of the flights was accompanied by a ion

December 2011 and part of the arrears. 1

BANK ARREARS: ARS:

1 13.5% drop in the stocks of the company on 20 rop F February 2012. The CEO of the airlines, Sanjay

Kingfisher Airlines had not paid some isher bankers (Lenders) as per the Debt Recast Package ers) (DRP) with lending banks. Till the end of Dec 2011, nding the arrears were estimated to be 260 crore to 280 re crore. Lenders hence had told Kingfisher Airlines to clear its dues before they can release any more money efore sought by the Airline. Ravi Nedungadi, chief e financial officer of UB Group however said that the er 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 st consortium of banks in the DRP (Debt Recast f Package) and has an exposure of 1,457.78 crore.

A Agarwal was summoned by the Directorate General o Civil Aviation to explain the disruptions of the of o operations. s. The State Bank of India, which is the lead le lender to Kingfisher airlines said that they would not co consider giving any more loans to Kingfisher unless an until it comes up with a new equity by itself. and l P Political activists also claimed that bailing or helping a private airline would lead to problems within the G Government. By February 27, Kingfisher operated ent. o only above 150 out of its 400 flights and only 28 ve ai aircraft were functional. Reuters reported that if K Kingfisher were to shutdown, it would be the biggest er fa failure in the History of Indian Aviation. It was n an announced that the direct flights to the smaller d ai airports of Jaipur, Thiruvananthapuram, Nagpur and

Thus, by Feb 2012, Kingfisher has been declared NPA by following banks: ing

State Bank of India Bank of Baroda Punjab National Bank b IDBI Central bank of India al Bank of India Corporation Bank ration

al also to Hyderabad's Rajiv Gandhi International A Airport were all shut down and only one/two-stop fl flights from its main hubs of Delhi and Mumbai rom w would operate. erate. In response to a situation as bad as b bankruptcy, Vijay Mallya announced that he had cy, o organized funds to pay all the employees' overdue d sa salaries. With bank accounts frozen and huge debts

THE CRI SI S CONTI NUE:

d it is unknown so as from where he arranged the due, m money. But he apologized to his workers and said

During late February, 2012, Kingfisher g Airlines started to sink into a fresh crisis. Several d flights were cancelled and aircraft were grounded. ancelled The airline shut down most international short-haul ut operations and also temporarily closed bookings. Out of the 64 aircraft, only 22 were known to be rcraft,

th he would pay them immediately. By this time, that ould ki kingfisher had accumulated losses of r 444 crore

d during the third quarter of the fiscal year 2011-12. e

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FROZEN BANK ACCOUNTS: NK

G Government has refused for bailing and all the ent le lenders and bankers have no more trust. The

On March 3, 2012, The Central Board of arch Excise & Customs of India froze many more stoms Kingfisher accounts as it was unable to pay all the ounts dues as per schedule. Kingfisher was meant to pay hedule. 1 crore per working day. Aviation minister Ajit Singh rking warned the airline about the temporary suspension of line the license until the crisis was sorted out. He ntil announced that the rest of the airline's fleet would be t grounded and all flights cancelled until the crisis came to an end. This would be only one step from d. permanently closing the airline. osing

em employees are also not able to tolerate the salary es cr crisis and the slipping market share leads the more d d difficulties. es. Promoter Vijay Malya has to decide the way ah ahead. Whether is it possible to save the company? hether T There are very few alternatives. As per the previous e ne news, Etihad Airways was interested in investing in ihad K Kingfisher by providing equity in exchange for a er st stake in the airline. Also involved in the talks was the he In International Airlines Group, owner of British flag nal ca carrier British Airways and Spanish flag carrier ritish Ib Iberia. But the question is the permission by

I ATA SUSPENSI ON: NSI

G Government. So at present there is very tough ent. si situation for Vijay Malya and for the company. Will

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

ne fiscal year bring any solution for the company? new al L s wait and watch. Let’ it

Q QUESTI ON FOR DI SCUSSI ON: I

1 1.

Is the Problem of Kingfisher Airlines Industry e Specific or Company Specific? ific

2 2.

What is the Impact of High Level of Debt on the t operating performance of company? ating

3 3. 4 4.

Should Government bailout Kingfisher Airlines? ld According to you, what are the possible ways for ording the company to overcome this situation? ompany

T TEACHI NG NOTES I

UNCERTAI NTY AHEAD: TY

1 1.

The purpose of the case is to make the students aware about the situation of financial crisis in re

After analysing the entire scenario, there are strong possibilities of more difficult situation in the lities last month of fiscal year 2011-12. The company is in iscal dilemma of finding help, but from where? 2 2.

any organisation. The issues involved in the case are about the financial turmoil and its effects on the business cial and market share of the company.

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3.

The case would be first given for individual reading for 15 min and then for 15 min the case can be discussed in groups of 4-5 students. 6.

other factors related to the aviation industry in detail. Cross reference can be made taking into account the strategies used by the local, national and

4.

The case can be taught along with the concepts like ways to overcome the crisis and surviving strategies required to save the organisation keeping in mind the possible different options available.

international players to capture the slipping market of the falling organisation.

REFERENCES:

5.

The students can come prepared with topics of prevailing crisis in Indian aviation industry and

http:/ / www.flykingfisher.com/ mediacenter/ press-releases/ kingfisher-airlinesannouncement.aspx http:/ / in.finance.yahoo.com/ news/ kingfisherairlines-q3-loss-widens-033419822.html http:/ / timesofindia.indiatimes.com/ india/ Kingfi sher.../ 12258986.cms http:/ / articles.economictimes.indiatimes.com/ 2 011-12-08/ news/ 30490358_1_pilots-industrialaction-kingfisher airlines

http:/ / profit.ndtv.com/ News/ Article/ aai-warnskingfisher-airlines-to-settle-dues-297284 http:/ / articles.economictimes.indiatimes.com/ 2 010-09-26/ news/ 27585421_1_cash-and-carrymode-bpcl-s chairman-kingfisher-airlines http://timesofindia.indiatimes.com/business/indiabusiness/Kingfisher-may-have-to-weather-pilotstorm-next/articleshow/12214372.cms

Annexur e 1: M ar ket shar e of K ingfisher Air lines as on Januar y 2012 in the domestic Aviation

Air line/Company Jet Airways (Including Jet Lite) Indigo Air India Spice Jet Kingfisher Go Air

% Shar e 28.8% 20.8% 17.1% 16.3% 11.3% 5.8%

Source: http://in.finance.yahoo.com/news/kingfisher-airlines-q3-loss-widens-033419822.html

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Annexur e 2: Pr ice M ovement and Per for mance Char ts of K ingfisher Air lines

Annexur e 3: I ndex Compar ison and Owner ship Patter n of K ingfisher Air lines

Source:http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=532747 Annexur e 4: Compar ative Balance Sheet of K ingfisher Air lines [Rs. I n cr or es] Sour ces Of Funds Total Share Capital Equity Share Capital Share Appl. Money Pref. Share Capital Reserves Net wor th M ar '11 1,050.88 497.78 2.95 553.10 -4,005.02 -2,951.19 M ar '10 362.91 265.91 7.48 97.00 -4,268.84 -3,898.45 M ar '09 362.91 265.91 8.11 97.00 -2,496.36 -2,125.34 M ar '08 135.80 135.80 10.09 0.00 52.99 198.88 Jun '07 135.47 135.47 0.00 0.00 249.23 384.70 Jun '06 98.18 98.18 0.00 0.00 125.95 224.13 M ar ’ 05 16.20 16.20 0.00 0.00 -2.54 13.66

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Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Dep. Net Block Capital WIP Investments Inventories Sundry Debtors Cash & Bank Bal. Total CA Loans & Adv. FDs CA, Loans & Adv. Cur r ent L iabilities Provisions Total CL & Prov. Net Cur r ent Assets Misc. Expenses Total Assets

5,184.53 1,872.55 7,057.08 4,105.89

4,842.43 3,080.17 7,922.60 4,024.15

2,622.52 3,043.04 5,665.56 3,540.22

592.38 342.00 934.38 1,133.26

716.71 200.00 916.71 1,301.41

448.16 3.50 451.66 657.79

159.42 125.06 284.48 298.14

2,254.26 682.37 1,571.89 673.35 0.05 187.65 440.53 88.18 716.36 5,380.19 164.18 6,260.73 4,463.86 62.11 4,525.97 1,734.76 125.84 4,105.89

2,048.14 493.62 1,554.52 980.61 0.05 164.88 322.49 50.91 538.28 4,604.31 155.56 5,298.15 3,908.03 46.77 3,954.80 1,343.35 145.64 4,024.17

1,891.80 316.29 1,575.51 1,630.95 0.05 147.25 229.84 49.41 426.50 3,640.42 122.45 4,189.37 3,814.63 45.55 3,860.18 329.19 4.51 3,540.21

322.33 43.55 278.78 346.25 0.00 48.64 27.16 5.84 81.64 832.49 274.29 1,188.42 687.31 9.52 696.83 491.59 16.64 1,133.26

340.77 33.74 307.03 357.62 0.41 61.62 35.24 422.05 518.91 149.77 395.00 1,063.68 449.15 6.94 456.09 607.59 28.75 1,301.40

247.33 16.40 230.93 286.53 0.41 57.26 13.06 181.17 251.49 232.03 75.31 558.83 434.05 5.93 439.98 118.85 39.08 675.80

55.25 4.52 50.73 153.09 0.45 36.40 8.27 47.08 91.75 47.28 35.85 174.88 108.77 1.07 109.84 65.04 28.83 298.14

Source:http://www.moneycontrol.com/financials/kingfisherairlines/balancesheet/KA02#KA02

Annexur e 5: Compar ative P& L A/c of K ingfisher Air lines [Rs. I n cr or es] I ncome Net Sales Other Income Total I ncome Expenditur e Raw Materials Power & Fuel Cost Employee Cost Other Manu. Exp. Sell. & Admn Exp. 56.69 2,274.03 680.54 1,192.80 997.34 40.89 1,802.99 689.38 1,108.82 996.85 51.19 2,602.62 825.42 1,112.85 1,062.74 43.79 889.30 244.96 408.21 180.39 45.94 979.50 247.72 617.56 146.78 36.73 625.45 163.04 425.48 114.38 5.77 92.98 31.76 104.78 29.13 M ar '11 6,233.38 81.58 6,314.96 M ar '10 5,067.92 -333.30 4,734.62 M ar '09 5,269.17 598.90 5,868.07 M ar '08 1,456.28 113.62 1,569.90 Jun '07 1,800.21 342.10 2,142.31 Jun’ 06 1285.42 59.64 1345.06 M ar ’ 05 305.55 14.73 320.28

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Misc. Exp. Total Expenses PBDI T Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items Tax Reported Net Profit

87.94 5,289.34 1,025.62 2,340.32 -1,314.70 203.02 38.01 -1,555.73 72.99 -455.35 -1,027.40

108.58 4,747.51 -12.89 2,245.59 -2,258.48 162.80 54.49 -2,475.77 31.28 -700.00 -1,647.22

167.55 5,822.37 45.70 2,029.33 -1,983.63 133.20 38.39 -2,155.22 0.00 -546.38 -1,608.83

14.81 1,781.46 -211.56 434.44 -646.00 18.28 18.31 -682.59 -0.97 -494.45 -188.14

25.11 2,062.61 79.70 466.05 -386.35 17.67 26.25 -430.27 14.09 3.40 -419.58

33.78 1398.86 -53.80 250.72 -304.52 13.34 18.94 -336.80 0.00 3.75 -340.55

9.85 274.27 46.01 55.33 -9.32 3.06 5.73 -18.11 -2.74 -1.32 -16.79

Per shar e data (annualised) Shares in issue (lakhs) EPS (Rs) Equity Dividend (%) Book Value (Rs) 4,977.79 -20.64 0.00 -70.46 2,659.09 -61.95 0.00 -150.54 2,659.09 -60.50 0.00 -83.88 1,357.99 -13.85 0.00 13.90 1,354.70 -30.97 0.00 28.40 981.82 -34.69 0.00 22.83 31.06 -54.05 0.00 43.96

Source: http://www.moneycontrol.com/financials/kingfisherairlines/profit-loss/KA02#KA02

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