R V COLLEGE OF ENGINEERING, Bangalore
“This is a world-class experience, all at an affordable price. We are not a low-cost carrier and
we do not intend to be one.”
A case-study report for ‘Principles of Management’
Pourush J (1RV10TE035)
Pratheek Manjunath (1RV10TE036)
Suraj S Kattige (1RV10TE056)
SEMESTER, TELECOMMUNICATION ENGINEERING
INDIAN AVIATION SECTOR
BEGINNING OF KINGFISHER AIRLINES
2.THE CRISIS OF KFA
REASONS FOR THE SLUMP
5 FORCES MODEL
FUTURE – BLEAK!
BOOM IN THE INDIAN AVIATION SECTOR
After the Indian aviation sector underwent liberalisation in late nineties, it has seen a flurry of
private service airlines entering the industry. The aviation sector in India holds immense
potential for growth; more so because it receives great impetus from the booming tourism
industry driven by higher disposable incomes and favourable demographics.The Indian aviation
sector was exposed to intense competition with the advent of a low-cost airline –Air Deccan
back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet, Indigo,
Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result,
the sector which was completely dominated by full-service airlines till a decade ago is now
dominated by low-cost airlines.
Last year’s stats peg the number of people passing through Indian Airports at 150 million! By
2020 traffic at Indian airports is expected to reach 450 million, making it the third-largest
aviation market in the world.
ENTER- KINGFISHER AIRLINES
Kingfisher Airlines was set up by the flamboyant beer baron Dr. Vijay Mallya. It started
operations in 2005, with its major hub in Bengaluru and secondary hubs in Delhi and Mumbai.
Though originally conceived as a low cost model, he was quick to morph it into a stylish full-
fledged carrier. Hoping to pose as a competitor to the 12 year old market leader-Jet Airways,
Kingfisher rapidly expanded its fleet and served 34 destinations. It had raked in INR 13.5 billion.
In 2010, the company placed an order for 50 wide body aircrafts (including the A380 and A350)
for planned international expansion. Until December 2011, KFA managed to retain the ‘5 star’
airline tag held the 2nd
largest share in India’s domestic market.
TIMELINE OF THE KFA CRISIS
2007: Things were going as planned. KFA had carried 17.5 million passengers in its diverse
41-aircraft fleet, on 255 scheduled flights. But the losses had stacked to INR 4 billion.
KFA decided to buy 46% of Air Deccan, with the intention of monopolising the low cost market.
2008: KFA was annually carrying 10.9 million people with its 77-aircraft fleet, flying 412
daily domestic flights. Finally became India’s largest airline. This year, they got their
international license and for the first time, flew from Bangalore to London.
Their revenue increased to $55 billion, but so did the losses, $16 billion.
2009: KFA continued to run profitably with a healthy market share of 22.9%. Anticipating a
dip in the travel segment, KFA shrunk its fleet to 68 aircrafts and 366 destinations. This didn’t
help lower their losses which stood at INR17 billion. On the contrary, by March 2010, their
revenue fell by INR 5 billion to INR 50 billion.
2010:The clouds over KFA grew dark. Jet re-established its #1 position with a 25.5% market
share, leaving KFA at 19%. By this time, IndiGo had established its hold over the Low cost
segment. Struggling to cope with competition and increasing taxes, KFA further reduced its
network. The airline reported that their losses lowered to INR 10 billion. But however, this claim
was later found to be invalid.
2011: For the first time, KFA declared that is was having some serious cash flow. It blamed
rising fuel costs and taxes. Oil companies refused to supply Aviation Turbine Fuel on credit
basis. Delayed salaries caused dozens of pilots and hundreds of crew to leave KFA for other
airlines. Finance companies estimated that KFA needed $159 million in equity in order to
restructure their debt. But KFA’s top brass believed that the situation was under control, but it
eventually slipped out of their hands. Income fell to INR 4 billion, but losses remained at INR 5
2012: The most turbulent time for KFA had arrived. By January, the largest creditor of cash-
strapped KFA- State Bank of India- had declared it as a Non-Performing Asset. KFA owed SBI a
staggering INR 15 billion. Job cuts and strikes by angry unpaid employees made news.
The Man himself, Mr. Mallya declared the the company was in dire need of funds in order to
The aircraft lessors roped back their assets. KFA grounded many flights due to operational safety
reasons arising out of poor maintenance. Arrears due to airports accumulated. All their bank
accounts were frozen. DGCA revoked the air worthiness certificate and operating licence. IATA
suspended KFA from their clearing house.
These series of blows pushed KFA into the books of history.
THE KFA CRISIS
1. DELAYED SALARY: Kingfisher Airlines had staff strength of 6,000 and spent 58
crores on salaries a month. Accordingto the first quarter financial results, it has 173.66
crores under the employees cost head, which hasincreased from 163.40 crores during the
samequarter last year. Kingfisher Airlines delayed salariesof its employees in August
2011, and for four monthsin succession from October 2011 to January 2012.Kingfisher
also defaulted on paying the TaxDeducted at Source from the employee income to the
Income Tax Dept.
2. FUEL DUES:In the past several years, Kingfisher airlineshad trouble paying their fuel
bills. Due non-payment,several Kingfisher's vendors had filed winding uppetition with
the High Court. As on Nov 2011,winding up petition of seven creditors was
pendingbefore the Bangalore High Court. In the pastLufthansa Technik& Bharat
Petroleum CorporationLimited (BPCL) had also filed winding up petitionagainst
Kingfisher Airlines. Here are some cases:
HPCL: In Jul 2011, Hindustan PetroleumCorporation Limited (HPCL) stopped the fuel
(ATF) supplies for about two hours to Kingfisherairlines owing to the non-payment of
dues.Situation was later resolved.
BPCL: Bharat Petroleum Corporation in 2009had filed a case against Kingfisher
airlines fornon-payment of dues. High court in an order saidthat the entire amount 245
crores had to be paidby Nov 2010 and the airline paid it ininstalments.
3. AAI REPORTS:Kingfisher received a notice from theAirports Authority of India on
February 2012regarding accumulated dues of 255.06 crores. Theairline was operating on
a cash and carry basis for the last six months, with payments amounting to 1 crore each
4. AIRCRAFT LEASE RENTAL DUES: Since 2008, it had been reported that Kingfisher
Airlines was been unable to pay theaircraft lease rentals on time. Due to that, Kingfisher
Airlines has grounded 15 out of 66 aircraftin its fleet as it was unable to meet the
maintenanceand overhaul expenses. An example :
GECAS: In Nov 2008, GE Commercial Aviation Services threatened to repossess 04
leased planes in lieu of default. Kingfisher Airlines initiallydenied that it missed the
payments. GECAS had filed a complaint with DGCA saying Kingfisherhad defaulted on
rentals for four A320 aircraft,and sought repossession of the planes. In Jan2009, The
Karnataka High Court rejectedpetition by Kingfisher Airlines to restrainGECAS from
taking any step to deregister andrepossess the 04 aircraft in dispute. As a
result,Kingfisher had to return the A320 aircraft toGECAS.
5. BANK ARREARS:Kingfisher Airlines had not paid somebankers (Lenders) as per the
Debt Recast Package(DRP) with lending banks. Till the end of Dec 2011,the arrears were
estimated to be 260 crore to 280crore. Lenders hence had told Kingfisher Airlines toclear
its dues before they can release any more moneysought by the Airline. Ravi Nedungadi,
chieffinancial officer of UB Group however said that thearrears were 180 crore. State
Bank of India (SBI) on5th Jan 2012 declared Kingfisher Airlines a NPA.
SBI is largest creditor and the leader of theconsortium of banks in the DRP and has an
exposure of 1,457.78 crore.Thus, by Feb 2012, Kingfisher has been declared
NPA by following banks:State Bank of India, Bank of Baroda, Punjab National Bank,
IDBI, Central bank of India, Bank of India and Corporation Bank.
What went wrong?
1. Failed low cost model- KFA didn’t anticipate the market behaviour well
enough. Being a 5 star airline, there was no need to jump into the LCC
portfolio. Blindly purchasing Air Deccan cannot guarantee profits. It
continued operating Kingfisher Red and Kingfisher Class on identical
2. Government’s role – Laborious procedure to buy aircrafts. Civil Aviation
ministry goes all out to protect Air India. Increased ATF and airport taxes.
Depreciation in the India rupee value.
3. Competition- with IndiGo, SpiceJet and GoAir dominating the low cost
segment, KFA’s business model wasn’t robust enough to take on 5
competitors. It lost the niche it had created for itself in 2006.
4. Aircrafts – Aircrafts are the most important assets of any Airline. KFA had
dry leased many aircrafts. It entered into deals with Airbus for wide-bodies
like the A340-500, A380-800 and the A350-900 when there was absolutely
no need. Poor decision making skills created a diversified fleet. This in turn
led to increasing maintenance & spares and Pilot & Crew training. The
lessor to withdraw their aircrafts and file suits against KFA all around the
5. Lacked long-term strategy: no long term CEO or MD. Aped the network of
rivals. Shifted international operations from Bangalore to Mumbai.
These were the 4 major reasons for the crumble of Sid Mallya’s 18th
Brand image set by the good-will of
Fleet of new aircraft
Bangalore’s first airline
Unmatched in-flight service
5* rating by Skytrax
High Attrition at top brass
Services were expensive
Expanded in an unplanned manner,
before break-even period
Under-penetrated domestic market
Expanding leisure and business travel
Untapped Air-cargo sector
Existing operators – Jet , Air India
Fuel price hike
Infrastructure cost increase
PORTER’S 5 FORCES MODEL
1. Threat from new Entrants- Virgin Atlantic, Emirates, Air Asia
2. Threat from existing players- Jet Airways, Air India, Air Deccan
3. Threat from substitute modes- High speed trains, multi axel buses
4. Bargaining power of suppliers – Airports, Aircraft manufacturers, Ground and
maintenance service providers, oil companies
5. Bargaining power of consumers – Changing Passenger demography, exposure to global
brands, increasing awareness, higher disposable income
1. KFA is bankrupt and has an accumulating debt of over INR 23.28 billion. It
owes Banks, Airports, Oil companies, Aircraft lessors and crew.
2. Frozen Bank Accounts
3. DGCA confiscated Air Worthiness certificate
4. International Air Transport Association suspended KFA
5. Highest cost of ATF is in India - $1,700 per tonne or Rs 62.64/litre
6. Government not interested in bailing out KFA
7. KFA missed the bus as Etihad recently invested in JET Airways
Hopes for revival
1. After Government of India modified FDI policy to allow 49%
stake by foreign investors, KFA must sleep on the idea of an
international airline like Emirates or British Airways investing in
2. UB group helps liquidate some cash for restarting operations.
1. Start with Red-eye flights between Bangalore and another
metro. Non-peak-hour airport utilization costs are cheap.
2. Then move to Air freight which is less competitive.
3. Invest on only 1 type of Aircraft ( IndiGo’s model )
4. Sign code-share agreements and become a member of an
airline alliance ( Star or One World) to boost business.