Crisis of Kingfisher Airlines Essay Example for Free

Crisis of Kingfisher Airlines Essay The Indian air market is estimated to be the ninth largest in the world but with the population size the country has, the Indian government believes it will become the world’s third largest market by 2020. 87 foreign and five Indian airlines fly to and from India to 40 countries. Approximately five million Indians fly every month domestically. Domestic traffic more than doubled between Jul-2006 and July 2011, with growth of 101%. One reason for the growth was the deregulation of Indian domestic aviation in 2003- 2004 followed by international deregulation in 2007-2008 India has three full service airlines Air India, Jet Airways, Kingfisher Airlines and four Low cost carriers: GoAir, IndiGo, JetLite (owned by Jet airways), and SpiceJet. Kingfisher also had a discount version: Kingfisher Red known formerly as Simplifly Deccan and before that Air Deccan. Ironically the Indian aviation despite a market growing at 18 per cent for last 11 months, five out of six Indian airlines are bleeding leading to the failure of one of the leading aviation player Kingfisher Airlines. Kingfisher Airlines, a subsidiary of UB Group (United Breweries Holdings Ltd), founded in May 2005 operates a passenger airline in India. It was the first airline in India to provide premium first class service on domestic routes with all new aircraft. In May 2007, it announced it would acquire a 26% stake in Air Deccan, a low cost carrier (LCC) for 5.5 billion rupees ($135 million). Kingfisher Airlines Limited came to become one of the country’s largest airlines, operating more than 400 flights a day and having a wide network of destinations, with regional and long-haul international services touching almost 60 destinations. At one point the Kingfisher Airlines had the second largest share in Indias 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. As Kingfisher airlines is in the midst of a financial turmoil, the case will aim to understand the various factors which are fuelling the growth / decline and those which are/will be critical for the company’s performance in the near term. Introduction History of the Indian Airline Industry In December 1912, the first domestic air route was opened between Delhi and Karachi by the Indian State Air Services (in collaboration with Imperial Airways of the UK). This marked a new beginning in India. Three years later, Tata Sons started a regular airmail service between Karachi and Madras. At that time, there were a few transport companies operating within and also beyond the frontiers of the country, carrying both air cargo and passengers. Some of these were Tata Airlines, Indian National Airways, Air Service of India, Deccan Airways, Ambica Airways, Bharat Airways and Mistry Airways. The Tata Airlines was converted into a public limited company in the year 1946 and renamed Air India Limited. In 1948 a joint sector company-Air India International was established by the Government of India and Air India headed by J.R.D. Tata. In 1953, the Parliament passed the Air Corporation Act. Air India International and Indian Airlines Corporation came into formal existence and Air India International was nationalized. The Indian Aviation sector was liberalized in commence in 1990 with private sector players being allowed to operate as air taxi operators in India. A number of private players commenced domestic operations like Damania, East-West, Modiluft, Air Sahara and NEPC, entered the industry. However, a decade later none of them have survived. Foreword of Kingfisher Airlines 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 and began operations on 9 May 2005 with a fleet of five A380s, five Airbus A350s aircraft and five Airbus A330s operating its first inaugural flight from Mumbai to Delhi. It seems staggering that an airline a month old could order the world’s biggest plane in an untested market. They went international in 2008, less than four years ago. In May 2009, they became India’s largest airline by passenger numbers. Owned by the Bangalore based United Breweries Group. Kingfisher Airlines, through its parent company United Breweries Group, has a 50% stake in low-cost carrier Kingfisher Red. The UB group is lead by Dr. Vijay Mallya as the Chairman to one of India’s largest conglomerates with diverse interests in brewing, distilling, real estate, engineering, fertilizers, biotechnology, information technology and aviation. Dr. Mallya, was elected by shareholders as Chairman of The UB Group in 1983, at the age of 28 and has been instrumental in growing it into a multinational business conglomerate. Kingfisher is the only Indian and the one of the six in the world to have received the 6 stars rating for its services by the Skytrax operates more than 400 flights a day connecting 72 destinations the world over. Merger of Kingfisher- Air Deccan A wholly owned subsidiary of Deccan Aviation, Air Deccan, was India’s first low cost carrier. It has a vision to enable every Indian to fly thus representing the airline’s simple and no frills approach. With a low pricing strategy, Air Deccan primarily focussed on first time travellers and successfully shifted people from Rail travel to Air travel. Air Deccan airlines merged with Kingfisher Airlines and decided to operate as a single entity from April, 2008 under the title name Kingfisher Aviation. The merger is based on recommendations of Accenture, the global consulting firm. KPMG was asked to do the valuation and the swap ratio was decided accordingly. The merger came through on as Vijay Mallya from Kingfisher airlines bought 26% of the stake in Air Deccan. The unification of the two carriers had to be sanctioned not only by the two panels, but also by the institutional investors, independent directors, and other shareholders. Air Deccan had four independent directors-which included prominent persons like IIM Prof Thiru Naraya, Tennis player Vijay Amritraj, and A K Ganguly, Former MD Nabisco Malaysia. Post merger, KingFisher would operate as a single largest (private) airline in the sub-continent with a combined fleet of 71 aircrafts, connects 70 destinations and operating 550 flights in a day. The combined entity has a market share of 33%. Captain Gopinath continued as the Executive Chairman and Vijay Malay in-charge as the Vice Chairman. To rationalize the fleet structure, Kingfisher was focussed towards the international routes and functioning as a full-service carrier while Air Deccan was allotted the wider domestic reach and operated as a low cost carrier. As both the carriers operated the Airbus, the operational synergies integrated not only the management and staff of the airlines but also the engineering, inventory management and ground handling services, maintenance and overhaul sectors. These efforts brought about an increased savings in costs by 4-5% (INR. 300 crores)* Further, by devising a more optimal routing strategy it could help in rationalizing the fares. Before the merger Air Deccan recorded a net loss of Rs 213.17 crores on revenue of Rs 437.82 crores for 2006-07. The company had also raised Rs 400 crores through an IPO in May 2006. The merger will create a more competitive business in scale and scope to emerge as market leader.