Kingfisher Case Study

THE KING WITHOUT FISHES

The industry is one of the fastest-growing markets in the world. But nowadays it is in the news due to different reasons. And that is the failure of one of the leading aviation players - Kingfisher Airlines. The airline has been facing financial issues for many years. Until 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 has 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

INTRODUCTION: Kingfisher Airlines is an airline group based in India.

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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 on 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 a 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.

DEBT RESTRUCTURING: 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 taken by the company. Due to the heavy burden of debt and interest, in November 2010, the company adopted the way of debt restructuring and under that total of 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 800 crores converted into preference shares, another.

CRISIS TILL CONTINUE: Debt restructuring also couldn’t change the game. By restructuring, the 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 a staff strength of 6,000 and spends 58 crores on salaries a month. According to 173. 66 to the first quarter financial results, it has increased from crore under the employee's cost head, which has 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. 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.

BAUDDHIK VOLUME 

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 of Nov 2011, winding up a petition of seven creditors was pending before the Bangalore High Court. In the past, Lufthansa Technik & Bharat Petroleum Corporation Limited (BPCL) had also filed a winding-up petition against Kingfisher Airlines. Here are some cases: 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. The situation was later resolved.

BPCL: Bharat Petroleum Corporation in 2009 had filed a case against Kingfisher airlines for non-payment of dues. The high court in an order said that the entire amount of 245 crores had to be paid by Nov 2010 and the airline paid it in installments.

AIRCRAFT LEASE RENTAL DUES: Since 2008, it has been reported that Kingfisher Airlines has been unable to pay the aircraft lease rentals on time.

The Ministry of Finance has given a concession to Kingfisher and instructed them to pay the dues by 31st Mar 2012.  Kingfisher received a notice from the Airports Authority of India in February 2012 regarding accumulated dues of 255. 06 crore. The airline was operating on a cash and carry basis for the last six months, with daily payments amounting to 0. 8 crores.  DVB Aviation Finance Asia Ltd (a lessor from Singapore), sued Kingfisher Airlines for lease rental default. The 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. 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 a petition by Kingfisher Airlines to restrain GECAS from taking any step to deregister and repossess the 04 aircraft in dispute.

BANK ARREARS: Kingfisher Airlines had not paid some bankers (Lenders) as per the Debt Recast Package (DRP) with lending banks. Till the end of Dec 2011, the arrears were estimated to be 260 crores to 280 crores. Lenders hence had told Kingfisher Airlines to clear its dues before they can release any more money sought by the Airline. Ravi Nedungadi, the chief financial officer of UB Group, however, said that the arrears were 180 crores. State Bank of India (SBI) on 5th Jan 2012 declared Kingfisher Airlines an NPA. SBI is the largest creditor and the leader of the consortium of banks in the DRP (Debt Recast Package) and has an exposure of NPA by following banks: State Bank of India Bank of Baroda Punjab National Bank IDBI Central bank of India Corporation Bank.

THE CRISIS CONTINUE: During late February 2012, Kingfisher Airlines started to sink into a fresh crisis. Several flights were canceled and aircraft were grounded. The airline shut down most international short-haul operations and also temporarily closed bookings. Out of the 64 aircraft, only 22 were known to be 1,457. 78 crore. Thus, by Feb 2012, Kingfisher has been declared 13. 5% drop in the stocks of the company on 20 February 2012. The CEO of the airlines, Sanjay Agarwal was summoned by the Directorate General of Civil Aviation to explain the disruptions of the operations. The State Bank of India, which is the lead lender to Kingfisher Airlines said that they would not consider giving any more loans to Kingfisher unless and until it comes up with new equity by itself. Political activists also claimed that bailing or helping a private airline would lead to problems within the Government.

By February 27, Kingfisher operated only above 150 out of its 400 flights and only 28 aircraft were functional. Reuters reported that if Kingfisher were to shut down, it would be the biggest failure in the History of Indian Aviation. It was announced that the direct flights to the smaller airports of Jaipur, Thiruvananthapuram, Nagpur, and also to Hyderabad's Rajiv Gandhi International Airport were all shut down and only one/two-stop flights from its main hubs of Delhi and Mumbai would operate. In response to a situation as bad as bankruptcy, Vijay Mallya announced that he had organized funds to pay all the employees' overdue salaries. Aviation minister Ajit Singh warned the airline about the temporary suspension of the license until the crisis was sorted out. He announced that the rest of the airline's fleet would be grounded and all flights canceled until the crisis came to an end. This would be only one step from permanently closing the airline.

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

UNCERTAINTY AHEAD: After analyzing the entire scenario, there are strong possibilities of a more difficult situation in the last month of the fiscal year 2011-12.

QUESTION FOR DISCUSSION: Government has refused for bailing and all the lenders and bankers have no more trust. The employees are also not able to tolerate the salary crisis and the slipping market share leads the more difficulties. Promoter Vijay Malay has to decide the way ahead. Whether is it possible to save the company? There are very few alternatives. As per the previous news, Etihad Airways was interested in investing in Kingfisher by providing equity in exchange for a stake in the airline. Also involved in the talks was the International Airlines Group, owner of British flag carrier British Airways and Spanish flag carrier Iberia.

Reference

1. http://www.flykingfisher.com/mediacenter/press-releases/kingfisher-airlinesannouncement.aspx
2. http://in.finance.yahoo.com/news/kingfisherairlines-q3-loss-widens-033419822.
3. html http://timesofindia. indiatimes. com/india/Kingfi sher /12258986.cms
4. http://articles.economictimes.ndiatimes.com/2011-12-08/news/30490358_1_pilots-industrialactionkingfisher airlines
5. http://profit.ndtv.com/News/Article/aai-warnskingfisher-airlines-to-settle-dues-297284
6. http://articles.economictimes.indiatimes.com/2010-09-26/news/27585421_1_cash-and-carrymode-bpcl-s chairman-kingfisher-airlines
7. http://timesofindia.indiatimes.com/business/indiabusiness/Kingfisher-may-have-to-weather-pilotstorm-next/articleshow/12214372.cms

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