Kingfisher Case Study

EISSN 2277-4955 THE KING WITHOUT FISHES CASE ON CRISIS OF KINGFISHER AIRLINES Prof. Bhavik M. Panchasara cut upwadi Education launchings Group of Institutions, RajKot, emailprotected com ABSTRACT Indian Aviation Industry is angiotensin-converting enzyme of the fastest growing markets in the world. merely nowadays it is in the word collect to different reason. And that is the failure of one of the preeminent melody musician Kingfisher airways. The air duct has been facing pecuniary issues for many years. Till December 2011 Kingfisher Airlines had the foster largest sh atomic number 18 in Indias domestic air travel market.However due to the fearful pecuniary crisis confront by the flight path, it has the fifth largest market shargon currently. up to now the company have no funds to digest the salaries to the employees and is facing some(prenominal) other issues like burn down dues aircraft lease rental dues, service evaluate dues and bank arrears. This case outl ines the pecuniary turmoil of the Kingfisher in detail. Keywords Aviation industry, Kingfisher Airlines, financial turmoil, financial issues, crisis and debt restructuring INTRODUCTION Kingfisher Airlines is an respiratory tract group based in India.Its transfer 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 linked Breweries Group. Kingfisher Airlines, through its p atomic number 18nt company United Breweries Group, has a 50% stake in low-cost common carrier Kingfisher Red. The airline started commercial operations in 9 May 2005 with a go of four new Airbus A320-200s operating a flight from Mumbai to Delhi. It started its foreign 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 appropriate in Indias domestic air tr avel market. However due to the severe financial crisis reckond by the airline, it has the fifth largest market share currently, however above Go Air. Kingfisher Airlines is one of the only seven airlines ingredient outed 5star rating by Skytrax along with chinaware Pacific, Qatar Airship canal, Asiana Airlines, Malaysia Airlines, Singapore Airlines, and Hainan Airlines. Kingfisher ope pass judgment 250 daily flights with regional and long-haul inter subject services.In May 2009, Kingfisher Airlines carried more than than than 1 million passengers, giving it the highest market share among airlines in India. Kingfisher in any case owns the Skytrax award for Indias best airline of the year 2011. BAUDDHIK VOLUME 3, no. -1, JAN-APRIL-2012 84 EISSN 2277-4955 starting signal OF THE CRISES Ever since the airline commenced operations in 2005, the company is reporting the losses. But the location became more horrible later on acquiring the Air Deccan in 2007. After acquiring the Air Deccan, the company suffered a loss of everyplace Rs. 1,000 crore for three executive years. By early 2012, the airline accumulate the losses of over Rs. ,000 crore with half of its bakshish grounded and some(prenominal) members of its staff going on strike. Following table 1 highlights losses of the company since inception slacken 1 nett Reported Losses and debts since inception (Rs. In Crores) grade Loss Secured Loans Unsecured Loans Mar-11 -1027. 4 5,184. 53 1,872. 55 Mar-10 -1646. 22 4,842. 43 3,080. 17 Mar-09 -1608. 83 2,622. 52 3,043. 04 Mar-08 -188. 14 592. 38 342. 00 Jun-07 -419. 58 716. 71 200. 00 Jun-06 -340. 55 448. 16 3. 50 Mar-05 -16. 79 159. 42 125. 06 DEBT RESTRUCTURING In the office staff 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 heavy burden of debt and avocation, in November 2010, the company adopted the way of debt restructuring and und er that total 18 leading lenders, those have landed total Rs. 8,000 crores, agreed to cut interest numbers and convert part of loans to loveliness. As per the contract, lenders have converted Rs. 650 crores debt into preference shares which bequeath be converted into equity when the company lists the on the Luxembourg memory 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 converted into preference shares, some other CRISIS TILL CONTINUE Debt restructuring as well as couldnt 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 spare-time activity give wayment problems.DELAYED SALARY Kingfisher Airline has st aff strength of 6,000 and spends 58 crore on salaries a month. According 173. 66 to the first quarter financial results, it has increase from crore under the employees cost head, which has 163. 40 crore during the same quarter last year. Kingfisher Airlines slow up 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 cite from the employee income to the tax department. debt has been converted into reformable 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 3, none -1, JAN-APRIL-2012 85 EISSN 2277-4955 FUEL DUES In the past several years, Kingfisher airlines had trouble paying their fuel bills. Due non-payment, several Kingfishers vendors had filed winding up demand with the High Court. As on Nov 2011, winding up petition of seven creditors w as pending before the Bangalore High Court. In the past Lufthansa Technik & Bharat oil companionship 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 almost 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 run express 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 primary(prenominal)tenance and overhaul expenses. Here are the some major issues wi th ? GECAS In Nov 2008, GE Commercial Aviation work threatened to repossess 04 contract planes in lieu of default. Kingfisher Airlines initially BAUDDHIK On 9 December 2011, S. K. Goel, chairman, Central jump on of Excise and Customs (CBEC) proclaimed 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 pay has given a concession to Kingfisher and instructed them to pay the dues by 31st Mar 2012. In Jan 2012, return TAX 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 priming for the last six months, with daily payments amounting to 0. 8 crore. AAI REPORTS 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 Ki ngfisher 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 desire repossession of the planes. In Jan 2009, The Karnataka High Court rejected petition by Kingfisher Airlines to go on 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. VOLUME 3, NO. -1, JAN-APRIL-2012 87EISSN 2277-4955 Kingfisher paid 20 crore towards its dues for operational by February 20. With this, Kingfishers market share surpassly omitped to 11. 3%. The cancellation of the flights was accompanied by a BANK ARREARS Kingfisher Airlines had not paid some bankers (Lenders) as per the Debt Recast parcel (DRP) with lending banks. Till the end of Dec 2011, the arrears were estimated to be 260 crore to 280 crore. Lenders hence had told Kingfisher Ai rlines to clear its dues before they can release any more money desire by the Airline. Ravi Nedungadi, chief financial officer of UB Group however said that the arrears were 180 crore. realm camber of India (SBI) on 5th Jan 2012 declared Kingfisher Airlines a NPA. SBI is largest creditor and the attraction 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 Bank of India Corporation Bank THE CRISIS CONTINUE During late February, 2012, Kingfisher Airlines started to sink into a alert crisis. Several flights were cancelled and aircraft were grounded. The airline close 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 a new equity by itself. Political activists also claimed that bailing or helping a private airline would lead to problems in spite of appearance the giving medication.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 shutdown, it would be the biggest failure in the History of Indian Aviation. It was announce that the direct flights to the little airports of Jaipur, Thiruvananthapuram, Nagpur and also to Hyderabads 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 office staff a s bad as bankruptcy, Vijay Mallya announced that he had organise funds to pay all the employees overdue salaries.With bank accounts frozen and Brobdingnagian debts due, it is unknown so as from where he arranged the money. But he apologized to his workers and said that he would pay them immediately. By this time, kingfisher had accumulated losses of 444 crore during the ternion quarter of the fiscal year 2011-12. December 2011 and part of the arrears. BAUDDHIK VOLUME 3, NO. -1, JAN-APRIL-2012 88 EISSN 2277-4955 FROZEN BANK ACCOUNTS On work 3, 2012, The Central Board of Excise & Customs of India froze many more Kingfisher accounts as it was unable to pay all the dues as per schedule. Kingfisher was meant to pay 1 crore per working day.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 airlines fleet would be grounded and all flights cancelled until the crisis came to an e nd. This would be only one step from permanently closing the airline. IATA SUSPENSION On March 7, 2012 IATA suspended ticket gross 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 usurp Kingfishers business by around 30%. Kingfisher claimed that frozen bank accounts was the main cause of being unable to pay the IATA, and the airline started making substitution 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 analysing the entire scenario, there are severe possibilities of more difficult situation in the last month of fiscal year 2011-12.The company is in dilemma of finding help, but f rom where? 2. article of belief NOTES 1. The purpose of the case is to make the students aware about the situation of financial crisis in any organisation. The issues pertain in the case are about the financial turmoil and its effects on the business and market share of the company. 3. 4. 2. 1. Is the Problem of Kingfisher Airlines Industry Specific or Company Specific? What is the have-to doe with of High Level of Debt on the operating performance of company? Should Government bailout Kingfisher Airlines? According to you, what are the potential ways for the company to overcome this situation?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 move market share leads the more difficulties. Promoter Vijay Malya has to decide the way ahead. Whether is it possible to save the company? There are very few alternatives. As per the previous intelligence inf ormation, 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.But the question is the permission by Government. So at present there is very tough situation for Vijay Malya and for the company. Will new fiscal year bring any beginning for the company? Lets wait and watch. BAUDDHIK VOLUME 3, NO. -1, JAN-APRIL-2012 89 EISSN 2277-4955 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. 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. 5.The students can come prepared with topics of rule crisis in Indian aviation industry and REFERENCES 6. other fa ctors related to the aviation industry in detail. Cross reference can be make taking into account the strategies used by the local, market of the falling organisation. national and international players to capture the slipping 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. ndiatimes. 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 Annexure 1 marketplace share of Kingfisher Airlines as on January 2012 in the domestic Aviation Airline/Company outpouring Airways (Including Jet Lite) Indigo Air India Spice Jet Kingfisher Go Air Share 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 BAUDDHIK VOLUME 3, NO. -1, JAN-APRIL-2012 90 EISSN 2277-4955 Annexure 2 Price Movement and Performance Charts of Kingfisher Airlines Annexure 3 list Comparison and Ownership Pattern of Kingfisher Airlines Sourcehttp//www. bseindia. com/bseplus/StockReach/AdvanceStockReach. aspx? scripcode=532747 Annexure 4 Comparative offset Sheet of Kingfisher Airlines Rs. In crores Sources Of Funds tote up Share Capital integrity Share Capital Share Appl.Money Pref. Share Capital Reserves light up worth Mar 11 1,050. 88 497. 78 2. 95 553. 10 -4,005. 02 -2,951. 19 Mar 10 362. 91 265. 91 7. 48 97. 00 -4,268. 84 -3,898. 45 Mar 09 362. 91 265. 91 8. 11 97. 00 -2,496. 36 -2,125. 34 Mar 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 Mar05 16. 20 16. 20 0. 00 0. 00 -2. 54 13. 66 BAUDDHIK VOLUME 3, NO. -1, JAN-APRIL-2012 85 EISSN 2277-4955 Secured Loans Unsecured Loans enumerate Debt Total Liabilities Application Of Funds Gross Block Less Accum.Dep. simoleons Block Capital WIP Investments Inventories Sundry Debtors Cash & Bank Bal. Total CA Loans & Adv. FDs CA, Loans & Adv. Current Liabilities Provisions Total CL & Prov. Net Current Assets Misc. Expenses Total Assets 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. 5 229. 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. 8 35. 85 174. 88 108. 77 1. 07 109. 84 65. 04 28. 83 298. 14 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 Sourcehttp//www. moneycontrol. com/financials/kingfisherairlines/balancesheet/KA02KA02 Annexure 5 Comparative P A/c of Kingfisher Airlines Rs. In crores Income Net Sales Other Income Total Income Expenditure Raw Materials Power & evoke 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 Mar 11 6,233. 38 81. 58 6,314. 96 Mar 10 5,067. 92 -333. 30 4,734. 62 Mar 09 5,269. 17 598. 90 5,868. 07 Mar 08 1,456. 28 113. 62 1,569. 90 Jun 07 1,800. 21 342. 10 2,142. 31 Jun06 1285. 42 59. 64 1345. 06 Mar05 305. 55 14. 73 320. 28 BAUDDHIK VOLUME 3, NO. 1, JAN-APRIL-2012 86 EISSN 2277-4955 Misc. Exp. Total Expenses PBDIT Interest PBDT Depreciation Other Written Off pull ahead Before Tax Extra-ordinary items Tax Reported Net Profit Shares in issue (lakhs) EPS (Rs) Equity Dividend (%) Book Value (Rs) Per share data (annualised) 4,977. 79 -20. 64 0. 00 -70. 46 2,659. 09 -61. 95 0. 00 -150. 54 2,65 9. 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 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