Case 14

AsiaCase.comthe Asian Business Case Centre
KINGFISHER AIRLINES–ACQUISITION OF AIR
DECCAN: INDIA’SFIRSTLOW-COST CARRIER
Mahmud Hossain and D. G. Allampalli
Publication No:ABCC-2009-004
Print copy version: 12 Nov 2009
Associate Professor Mahmud Hossain and D G Allampalli prepared this case based on public sources. As the case
is not intended to illustrate either effective or ineffective practices or policies, the information presented reflects the
authors’interpretationofeventsandservesmerelytoprovideopportunitiesforclassroom discussions.
COPYRIGHT © 2009 Nanyang Technological University, Singapore. All rights reserved. Not to be reproduced,
stored, transmitted or altered in any way without the written consent of Nanyang Technological University.
For copies, please write to The Asian Business Case Centre, Nanyang Business School, Nanyang Technological
University, Nanyang Avenue, Singapore 639798
Phone: +65-6790-4864/5706, Fax: +65-6791-6207, E-mail: asiacasecentre@ntu.edu.sg
In 2005, Vijay Mallya, Chairman of United Breweries Holdings Limited, founded Kingfisher Airlines
(Kingfisher), a premium Full-Service Carrier (FSC) aiming to be a market leader by 2010. Two
incumbents, Air Sahara, a FSC and Air Deccan, a Low-Cost Carrier (LCC)offered low fares and
were giving Kingfisher tough competition. By 2006, as some FSCs and most LCCs incurred losses,
the Indian aviation industry was headed for consolidation.
InMarch2007,AirDeccan,India’sfirstLCCpromotedbyCaptainG.R.Gopinath,whichoffered
low fares for early birds, had garnered more than 20 percent market share and was looking for
strategicinvestors.AsAirDeccan’sfaresandcompetitionhadhurtallFSCsincludingKingfisher,
Mallya was looking for opportunities to acquire it. With negative earnings before interest, taxes,
depreciation, amortisation and aircraft rentals, and no financial or stock-market comparables to
value the loss-making LCC, Mallya came up with an offer of Rs. 5,500 million for a 26 percent
stake in May 2007. As Kingfisher and Air Deccan inherited different business models, brands,
management andleadership styles, and organisational culture, industry analysts and aviation experts
weredividedonthevaluationandofferofKingfisher,andthealignmentofthetwofounders’
leadership style and vision.
AuthorizedforuseonlybyMudrahirRahamaninFinancialCaseAnalysisatUniversityofDhakafromMar01,2014toOct31,2014.
Useoutsidetheseparametersisacopyrightviolation.

ABCC-2009-004
AsiaCase.com
the Asian Business Case Centre
KINGFISHER BUYS STAKE IN AIR DECCAN
At end-May 2007, Vijay Mallya, Chairman of UB
Holdings Limited (UBH) agreed to buy a 26 percent
stake in Deccan Aviation Limited, Bangalore (DAL)
from theownersofIndia’sfirstLCC,AirDeccan.
Mallya made an open offer to acquire an additional
20 percent stake from the open market. The new
stake would make UBH the largest shareholder in
DAL. Further, the combined 32 percent market share
of UBH-promoted Kingfisher and Air Deccan would
enable it to surpass the 31 percent share held by Jet
Airways and Air Sahara, and become the market
leader. David Huttner, a Belgium-based international
aviation analyst, commented:
Common shareholding in itself is not
likely to change much. We have the
same capacity chasing the same market,
just under bigger umbrellas, therefore,
its hard to see fares rising in the short
term.They need to put together a
coordinated and well thought out strategy
as to how they will allocate their assets,
improve efficiencies and lower their
costs, all the while enhancing revenue.1
UNITED BREWERIES HOLDINGS LIMITED
Mallya began his career with Hoechst (nowAventis),
an American corporation and worked in the United
States and United Kingdom before joining his father
at the Bangalore-based United Breweries Limited in
1980. Three years later, after the demise of his father,
he took over chairmanship of UBH, a group of
companies with core business interests in liquor and
spirits, which had diversified into pharmaceuticals,
paints, agrochemicals, polymers and food products.
Withintwodecades,UBH’sspiritsbusinessbecame
the fifth largest beverage alcohol group after Diageo,
Pernod Richard,Allied Domecq Spirits and Wine Ltd,
and Bacardi by sales. Further, its spirits business
had seven millionaire brands and 36 percent share in
the Indian beer market, and its flagship brand
‘Kingfisher’wassoldin32countries.2
1 Mallya buys 26 pc in Deccan for Rs 550 crore. (2007, May 31). Hindustan Times, India.
2 VijayMallya:beyondthe“liquorbaron.”Sify Finance. Retrieved 31 March 2008 from http://sify.com/finance/
fullstory.php?id=13221490
3 Leahy, J. (2007, October 26). Vijay Mallya FT.Com.
4 ibid.
5 A millionaire brand: Beverages that accounts for sale of one million cases or more. (SWC adds 6 millionaire brands to UB Group.)
(2005, Mar 26). The Financial Express, India.
Founder to Brand Icon
At the age of 28, Mallya took over the family business.
His lavish lifestyle brought him into the corporate
limelight at an early age. On corporate India then, he
said:
But of course India in those days,
particularly, corporate India was far more
conservative. So obviously my lifestyle
attracted a lot of attention and [my career]
began with a lot of adverse comments,
that my lifestyle would drive UB down the
tube.3
In 1992, Mallya decided to deploy his youth and
popularitytoboostUBGroup’sbrandsandcoined
the“KingofGoodTimes”sloganforthecompany’s
beer. However, good times arrived for Mallya outside
India when he made a US$66 million profit after buying
and selling the UK-headquartered Berger Paints which
he spent on fast cars, yachts and maintaining his
40-odd international homes. On his transformation
from chairman of the UB Group to its brand icon, he
said:
My own lifestyle got intertwined with the
brand personality and so without really
planning it that way I became almost my
ownbrandambassadorandthat’sjust
thewayit’skeptondeveloping.4
By 2006, UB Group had grown into a Rs 6.82 billion
business conglomerate and the liquor business had
created 15 millionaire brands.5
KINGFISHER AIRLINES LIMITED
Startup
In 2005, UBH decided to enter the aviation industry,
byleveraging on its unique strengths acquired through
the spirits and beer business over the past two
decades.Thesewereunderstanding theevolvingIndian
consumer, creating premium products, building brand
equity and market leadership while operating in a

ABCC-2009-004
AsiaCase.com
regulated market (see Exhibit 1), and exploiting the
growth potential offered bythe Indian aviation industry.
On 9 May 2005, UB Group set up Kingfisher as a
100-percent owned subsidiary (see Exhibit 2). The
management of Kingfisher hoped to provide superior
experience in air travel to its customers by being
ahead of the competition in product and service
offerings. It deployed brand new aircraft and chose a
five element product concept: highest seat pitch,
personalized entertainment, hot meals, home delivery
of tickets and valet service at the airport (see Exhibit
3).6
Further, it considered the travellers on Kingfisher
not as passengers or customers but asserted that
theywereits“guests”.
To reduce boredom on the ground and onboard, the
carrier provided X-box games in its lounge and
installed state-of-the-art in-flight entertainment
systems including video-on-demand, live television7
and WiFi services, raising the bar for rival carriers.
Further,should a guest spill coffee or tea on their attire,
the carrier would gift a brand new white Arrow shirt.8
With excellent service and punctuality, the carrier won
the hearts of corporate travellers as well as market
share from its competitor, Jet Airways. Kingfisher
began with four flights per dayand spread its domestic
network to 104 flights per day to 16 cities by inducting
17 aircraft in one year. Also, it set the world record
for fastest aircraft induction in the year 2005-06.9
Organic Growth: To expand domestic routes and enter
international routes, Kingfisher decided to increase
its fleet and placed orders for many wide-bodiedA340-
500s,A330s, andA350s, and became the first carrier
to sign-up for A380 type aircraft in April 2007. Mallya
said,“KingfisherAirlinesneedsmorewide-bodiesfor
2009-10,partlybecauseofdelayintheA380”.10
Also,
he was very optimistic that the Ministry of CivilAviation
(MCA) would waive the five-year operations eligibility
rule to grant Kingfisher the rights to fly international
routes before May 2010.11
By 2007, the carrier expanded its route network to
34 cities and its fleet to 34 aircraft, while doubling
the frequency to 208 flights per day.Also, it introduced
Kingfisher first to increase yield and also explored
the opportunities to acquire existing airlines. From
2005 to 2007, the market share of Kingfisher increased
from two percent to 13 percent and the market share
of its competitor, Jet Airways, dropped from 45
percent to 22.7 percent.12
By providing safe and true
value air travel, Kingfisher hoped to attain market
leadership by 2010 (see Exhibit 4).13
Although
Kingfisher was not required to report its financials
publicly, its management occasionally shared
financial data during corporate presentations. For
financialyear2006,thecarrier’slossbeforetaxwas
Rs 1,908 million (see Exhibit 5).
Although Kingfisher experienced high traffic on the
metrpolitan city routes like Bangalore, Mumbai, New
Delhi, Kolkata and Chennai, congested airport
infrastructure in these state capitals limited its organic
growth. With airport modernization in these cities set
to be completed14
between 2008 and 2010, and tough
competition from a large number of new entrants and
LCCsofferinglowfares,thecarrier’sfuturegrowthin
the domestic market depended on the ways it
increased its market share.15
Inorganic Growth: In 2005-2006, the clouds of
consolidation began to appear due to a large number
of new entrants, creation of excess capacity due to a
large number of new aircraft, fierce competition and
unrealistic pricing by LCCs which led to industry-wide
losses and created opportunities for mergers and
acquisitions. Both Kingfisher and Jet Airways were
exploring potential markets to expand their
operations. In late 2005, they bid for the acquisition
of Air Sahara, whose valuation by Ernst & Young
caused a furor in the market. In response, Mallya
said:
We will put in an indicative offer, which
will show the price valuation range that
6 UB Group Presentation. (2006, September). Retrieved 27 May 2008 from http://www.theubgroup.com/finance-presentations.aspx
7 Emirates and JetBlue were the other carriers to provide such in-flight services
8 Mehra, P. (2007). Flying colours. Businessworld, India.
9 United Breweries Holdings Limited. (2005-2006). Annual Report.
10 Ionides, N. (2007, June 12-18). Kingfisher makes swoop for additional widebodies, Flight International.
11 ibid.
12 Mehra, P. (2007). Flying colours. Businessworld, India.
13 UB Group Presentation. (2006, September). Retrieved 27 May 2008 from http://www.theubgroup.com/finance-presentations.aspx
14 2008–Bangaluru&Hyderabad;2010–NewDelhi,Kolkata,Mumbai&Chennai;and2012–NaviMumbai14Allirajan,M.(16Nov
2007). Flight or Fancy. Businessworld, India.
15 Allirajan, M. (2007, November 16). Flight or Fancy. Businessworld, India.

ABCC-2009-004
AsiaCase.com
we are willing to offer before the deadline
expires. However, the US$750 million -
US$1 billion initial estimates are way too
high in relation to earnings.16
In October 2005, Mallya conducted an independent
due diligence of Air Sahara and stated that he had
offered“substantiallyless”thanwhatAirSahara
expected for the sale of its 100-percent stake.17
Upon
scrutinizing the bids, the management of Air Sahara
foundthatKingfisher’sUS$600millionofferwasspread
overthreeinstallmentswhileJetAirways’offerwas
allincashbutslightlylowerthanKingfisherAirlines’
at US$500 million. As such, Kingfisher lost the
opportunity to acquire Air Sahara and was on the
lookout for new airlines to acquire or fly on
international routes (see Exhibit 6).
DECCAN AVIATION LIMITED
In December 2006, Mallya and Captain G. R.
Gopinath, Chief Executive Officer (CEO) of DAL met
in Mumbai to explore the possibility of a merger
betweenKingfisherandAirDeccan,India’sfirstLCC
set up in August 2003. Air Deccan began scheduled
flights with a single ATR turbroprop aircraft to fly
passengers from Bangalore to Hubli, an industrial town
in Karnataka. It envisioned the provision of a cost-
effective and commercially successful alternative to
the traditional ways for domestic travel used by the
Indian mass consumer market.
Business Model: Low-Cost Carrier
The management of Air Deccan emulated the LCC
modelsfromthewesttocreatea“no-frills,low-cost”
business model for India. Some of the elements
consideredinAirDeccan’sstrategywereofferinglow
fares on new routes to stimulate demand from
untapped markets, and reducing costs by higher
aircraft utilisation and standardisation in its fleet.
From mid-2005 to early 2007, Air Deccan offered a
large number (10,000 to 200,000) of low-fare tickets
in the price range of Rs.1, Rs.2, Rs.3, Rs.5, Rs.6,Rs.
499 (inclusive of taxes) and Rs. 999 (inclusive of
taxes)tocelebratethecarrier’sanniversaries,
Christmas, and events likeAir Deccan attaining 21.2
percent market share in June 2006, when it became
India’ssecondlargestairline.18
It used Internet
services and other unconventionalsales channels such
as Call Centre, SMS and GPRS technologies to
distribute air tickets.
To better serve the metropolitan and regional air travel
markets of India, the management of Air Deccan
adopted a two-type aircraft fleet strategy:
- 11 Airbus A320 jets for the trunk routes connecting
the six largest cities of India.
- 18 ATR turboprops to serve the regional cities.
It noticed high demand for point-to-point travel from
small towns/cities to urban cities and feed traffic to
metropolitan cities which were hubs. Creating this
connectivity enabled Air Deccan to create new
markets and expand the size of the aviation market
by attracting several first-time air travelers. It believed
thatATR turboprops were best suited for such routes.
Of 29 such aircraft, 26 were on operating lease19
in
March 2006 (see Exhibit 7).
Operations and Performance
Tapping into the demand generated by low fares,Air
Deccan grew its operations. The routes flown by the
carrier grew from 14 routes in 12 airports in 2004 to
85 routes in 52 airports by late November 2005.
During the same period, the passenger load factor
(ratio of the number of available seats to the number
of passengers flown) improved from 62.6 percent in
March 2004 to 76.4 percent in March 2005. From
April to November 2005, the number of passengers
flown reached nearly 16 million and the load factor
remainedaround73percent.AirDeccan’sincome
rose from Rs. 314.18 million in 2004 to Rs. 2,669.46
million in 2005, and for the first eight months of 2005,
its income touched Rs. 4,458.98 million (see Exhibit
8).20
Despite the sales growth, Air Deccan incurred net
losses (after all adjustments) during FY2004, FY2005
and the first eight months of 2005 amounting to
Rs. 117.10 million (March 31, 2004), Rs. 352.32
million (March 31, 2005) and Rs. 1,179.36 million
(eight months ended Nov 30, 2005), respectively.21
Its net worth had turned negative to Rs. 123.73 million
16 Mallyatoputin‘indicateoffer’forAirSaharastake.(2005,October30)Business Line, India. Retrieved July 27, 2006, from http:/
/www.thehindubusinessline.com/bline/blnri/2005/10/30/stories/2005103001960100.htm
17 Mallya offers less than US$750 million for Air Sahara. (2005, November 30). The Financial Express, India.
18 Air Deccan. (2005-2006). Media Releases.
19 A type of ownership when in an airline leases an aircraft from its owner in exchange for rental payment
20 Deccan Aviation Limited. (2006, April 28). IPO Prospectus, .pp8-9.
21 ibid.

ABCC-2009-004
AsiaCase.com
by March 2005 and further increased to Rs. 1,141.48
million by November 2005. The carrier met part of the
losses by increasing its share capital which rose from
Rs. 161.99 million to Rs. 462.57 million and the
increased loss of Rs. 1,017.75 million was funded
using a mix of secured loans, unsecured loans and
current liabilities (see Exhibit 8).
The management of Air Deccan attributed its poor
performance tonon-availabilityof aviationinfrastructure
at key airports in cities which provided efficient point-
to-point connectivity, traffic density and parking space
to maximise passenger yield. Further, the losses were
partly attributed to delays in the allotment of aircraft
parking lots in Mumbai where its competitors had
more aircraft parking lots and were able to mount
more flights. Commenting on the fare tactics adopted
by some dominant incumbents, Gopinath recollected:
You know what Jet, Sahara and Indian
Airlines did in those days? If I [Air
Deccan] had one flight at 1000 hrs, they
had 10 flights a day. They would put a
flight at 0930 hrs and slash the fare below
mine and increase it on all the other
flights.That’sthereasonwehadto
expand the way we expanded.22
With no hangars at these key airports, Air Deccan
expanded on low-density traffic routes and suffered
poor turnaround of aircraft. Furthermore, several bird
hits to aircraft, resulting in reduced availabilityof such
aircraft and cost of repairing blades and engines, as
well as lower fares contributed to the losses.
Financing Growth: Private Equity and IPO
As internal cash generation was insufficient to fund
its expansion and growth,Air Deccan was dependent
on injection of external capital for financing operations
and growth. By 2004, the management raised Rs.
1,840 million (US$40 million) by placing private equity
with ICICI Ventures (India) and Capital International
(USA)23
to fund the purchase of 60 aircraft (30 ATRs
and 30 AB320s) over the next five years using a mix
of buying and leasing.24
Next, it raised capital from
the market through an initial public offering (IPO) by
offering 24,546,000 equity shares of Rs. 10 each
through the book-building process in the price band
of Rs. 150 to Rs. 175 and hoped to raise Rs. 3,800
million or Rs. 4,440 million, respectively. It hoped to
deploy these funds to set up a training centre (Rs.
656.69 million), hangar and maintenance facility (Rs.
400.20 million), infrastructure at airports
(Rs. 170.83 million), market development initiatives
(Rs. 452.20 million) and debt payment (Rs. 1,327.50
million).25
OntheAirDeccanIPO,ananalystsaid,“Theloss-
making company would breakeven only after two
years. So the investors were a bit bearish since the
first day of the issue. The carnage in the market
aggravatedtheirfears.”26
Also, some analysts felt that
the leading merchant bankers such as ABN Amro,
JP Morgan and State Bank of India (SBI), who were
involved in the preliminary discussions, were dropped
in the management of the final issue because these
merchant bankers did not agree to the valuations
proposed by the management.27
Another analyst, said:
SinceAirDeccanisn’tmakinganyprofit
yet,aP/Ecomparisonisn’tpossible.Air
Deccan’sissuesizeisRs430crore28
at
the higher end of the price band for 25%
of the post-issue equity - the valuation
of the company works out to Rs 1,718
crore. The other listed players in the
aviation business - Jet Airways and
SpiceJet–commandvaluationsof
Rs 8,281 crore and Rs 1,315 crore
respectively. While JetAirways is a larger
airline with a fleet of over 50 aircraft,
SpiceJet has a fleet of less than 10
aircraft.29
In an interview with an online portal for aviation
industry, Gopinath responded:
22 Bhargava, A. (25 September 2006). Captain Gopi Defends Himself. Businessworld, India.
23 Mahalingam, T.V., & Mitra, K. (2007, June 3). On a wing and a prayer. Business Today, India.
24 Air Deccan inks US$40 million with ICICI Ventures. (2004,December 15). The Financial Express, India.
25 Deccan Aviation Limited. (2006, April 28). IPO Prospectus, pp.30.
26 Air Deccan extends IPO, cuts price. (2006, May 24). Rediff.com. Retrieved 4 June 2008 from http://in.rediff.com/money/2006/
may/24deccan.htm
27 Dalal, S. (2006, May 28). Succinct Analysis. Indian Express, India. Retrieved 8 June 2008 from http://www.indianexpress.com/
sunday/story/5315.html
28 Crore–Tenmillionrupeesmakeacrore
29 Vijay, P.N. (2006, May15). Your Money IPO Update. Retrieved 8 June 2008 from http://www.askpnvijay.com/IssueMtrArticlesPdf/
Deccan%20final%20report.pdf

ABCC-2009-004
AsiaCase.com
Many times, the bullishness or
bearishness of a stock market is not the
true reflection of the condition of a
country’seconomyoracompany.What
I mean is that when the market is on an
upswing, stock prices gallop, and a
company’svaluegoesup.Andthe
conversehappenswhenitcrashes.…As
far as our own valuation is concerned,
we had wanted the issue price to be
Rs 150-175 but because the market
crashed, we lowered the allotment price
to Rs 148. In my view, this may not be
the true value for my company or for any
airline.30
AsAirDeccan’sIPOfailedtoevokeinvestorresponse
and achieve full subscription before the closing date
of 23 May 2006, the management extended the
deadline and also pared the lower price-band by four
rupees. It hoped the extension would provide
opportunities for investors whose finances were
locked up in the stock market. Thus, Air Deccan just
managed to raise the targeted amount.
By June 2006, Air Deccan losses had touched
Rs. 3,400 million for the last 15 months of operations
and it faced a tight cash-flow situation. In October
2006, Air Deccan sought US$100 million (approx:
Rs. 4,500 million) funding from Southwest Trading
Limited (funded by two European Banks: Investec
bank, UK and HSH Nord Bank AG, Germany) to pay
for the 96 aircraft order which would be completed by
2013 (see Exhibit 9).31
As debt would create
additional burden on the cash flow of the carrier, the
managementchosea‘uniquefinancialstructuring’
route. The disbursement of US$30 million of the
US$100 million, helped the carrier to show a modest
profit of Rs. 96.40 million on sales of Rs.6,370 million
for the second quarter of 2006-2007 compared to a
loss of Rs. 429.4 million in the previous quarter.32
Describing the achievement, Gopinath commented:
One way to look at it is that we have a
long way to go as we need to make
absolute profits (operating profits). But
then we have started turning around
now….IftheairlineisabletomakeRs
4,900 per ticket at 80 percent seat factor,
it can turn profitable straightaway.
However, it manages to make Rs 4,400
perticketnow.…Wehavetofindaway
to make an extra Rs. 400-500 per ticket
and we could sail through. Three years
ago, only about 13 million passengers
flew and today it has gone up to 30 million
with Air Deccan alone flying 8 million
passengers.33
CommentingonIndia’sdomesticairtravelmarket
potential,hesaid,“Weneedtolookatthebigpicture.
We need to make 150 million-200 million middle class
tomakeflyingtheirpartoflifestyleorworkculture.”34
Analysing the Q2 2006-07 performance and future
growth in fleet, Mohan Kumar, Chief Financial Officer,
said:
Our second quarter [Q2 of 2006-2007]
revenues have increased by 19 percent.
This has been possible mainly on
account of being able to control our
costs. Our cost per seat km is Rs 3.18,
which is among the lowest in the country.
Our average yield per passenger is Rs
2,615 this quarter compared with Rs
2,512 in the quarter ended December
2005 despite a significant increase in
seat capacity.35
During the quarter,Air Deccan inducted fourA-320s.
It has added 24 new routes, 38 new flights and six
new destinations including three monopoly sectors
to its network. The airline carried 1,645,362
passengers and launched its eighth aircraft base at
Ahmedabad in November. It had on order 81 new
aircraft to be delivered over the next six years.36
However,Air Deccan could not sustain its performance
in the third quarter of 2006-2007 when it incurred a
loss of Rs 2,130 million on sales of Rs.4,574.5 million.
The airline clarified that the modest profit of the second
quarter of 2006-2007 was due to the structured
funding, and cited rising costs, including fuel, for the
huge loss in the third quarter of 2006-07.37
Also, the
30 Gopinath, G. (2006, July 4). Our IPO got caught in a tsunami. Retrieved 4 June 2008 from http://www.airlines.org.in/airline/air-
deccan/page/4/
31 Deccan Aviation in deal with 2 European Banks. (2006, October 14). Business Line, India.
32 Deccan Aviation Q2 net profit at Rs. 9.6 crore. (2007, January 27). Business Line, India.
33 ibid.
34 ibid.
35 ibid.
36 ibid.
37 Dey,S.&Jha,U.(2007,May31).SBIextendsdeadlineforAirDeccan’sloanrepayment.The Economic Times, India.

ABCC-2009-004
AsiaCase.com
carrier needed funds to repay the State Bank of India
(SBI) the two tranches of Rs. 1,000 million it borrowed
by providing its cash flow as collateral before June
2007. The management revealed that although SBI
extended the original payment deadline, the bank did
not indicate any period for such extension and the
time-frame for the repayment of the Rs.1,000 million
loan.38
Valuation
In order to shore up depleted finances and meet Air
Deccan’scashflowneeds,itsmanagementdecided
todivestpartofthepromoters’22.13percentstake39
to a strategic investor. In early 2007, it appointed
Edelweiss Capital, a Mumbai-based investment
banker to advise the company on the deal.40
In mid-
2006, though Mallya had evinced interest to invest in
Air Deccan, Gopinath was reluctant to sell the entire
stake in the carrier which he had built with passion.
The Target
Mallya felt that Air Deccan was an ideal target for
Kingfisher. Compared toAir Sahara, he observed that
AirDeccan’sfleet,engines,brakes,avionicsand
rotables41
including the vendor for maintenance,
Lufthansa Technik, were common to Kingfisher.
Drawing parallels with KLM-Air France and Qantas-
JetStar, Mallya felt that the combined carrier would
be able to mount 537 flights per day, connect to 69
destinations and be a market leader.42
Further he had
seen the total passenger traffic in India grow from
15.68 million in 2003-04 to 25.20 million in 2005-06
at a compound annual growth rate (CAGR) of around
20 percent but the domestic passenger traffic had
grown at a higher CAGR of 22 percent.43
However, the Indian airline industry performance was
mixed. In line with the rise in passenger traffic, the
operating performance of private scheduled carriers
(PSC) was better than the national scheduled carriers
(Indian Airlines and Air India), which incurred a
combined loss of Rs.3.63 billion in 2005-06 (see
Exhibit 10). The PSC made profits in 2003-04 and
2004-05 but incurred a loss in 2005-06 due to
overcapacity, overcrowded market and competition
from the budget carriers, and their lower fares. The
total operating revenue of all scheduled carriers
declined from Rs. 274.3 billion to Rs. 198.9 billion
and then rose to Rs. 255 billion during 2003-04, 2004-
05 and 2005-06, respectively.
Industry consolidation became necessary to attain
operational scale and economies for the domestic
carriers. Further, analysts felt that acquiring Air
Deccan would enable Kingfisher to launch
international flights in 2008 because it completed the
‘five-years-in-operation’requirementforflyingon
international routes. However, in 2007, industryexperts
hoped that the Ministry of Civil Aviation
would relax the eligibility to three years.44
During this
period,India’sgrossdomesticproductgrewbetween
6 to 8 percent and it was likely to sustain the same
pace of growth in the future and thereby boost the
demand for domestic air travel.
The Deal and Valuation
After the IPO of Air Deccan in May 2006, the
shareholding was widely held with promoters owning
22 percent (Gopinath - 11 percent, and the rest by
Captain K. J. Samuel and Vishnu Raval). The
remaining 78 percent was held by the public including
four bulk owners who held between 7.5 to 13.5 percent
stakes and were waiting for a right price to cash out.45
In the last week of May 2007, Mallya sprang a surprise
and made another offer forAir Deccan at Rs. 155 per
share for a 26 percent stake but assured continued
involvementofGopinathinthecarrier’smanagement.
Further,Mallya’sofferwashigherthantheIPOlower-
bandpriceaswellastheclosestcontender’s,
Reliance-Anil Dhirubhai Ambani Group, which
apparently had offered Rs. 140 per share. From
Mallya’snewoffer,GopinathfeltthattheAirDeccan
brandanditsLCCmodelwouldcontinue.Mallya’s
bid at Rs. 155 per share put the stake valuation at
Rs. 5,500 million.
38 Dey,S.&Jha,U.(2007,May31).SBIextendsdeadlineforAirDeccan’sloanrepayment.The Economic Times, India.
39 Public–33percent,UK-basedInvestecbank–1.96percentandCorporateInvestors–45percent)
40 Anil eyes 26 percent in Air Deccan, leads race. (2007,April 19). Retrieved 3 April 2008 from http://annonline.in/bizimages/
newsdet.aspx?q=3089&q1=4/20/2007
41 Component or inventory item that can be repeatedly and economically restored to a fully serviceable condition. (Source:
BusinessDictionary.Com. Retrieved 24 April 2009 from http://www.businessdictionary.com/definition/rotable.html)
42 Bhargava, A. (2007, June 18). Sultan of the skies. Businessworld, India.
43 Air Transport Statistics. (2005-2006). Director General for Civil Aviation, India. Retrieved 12 January 2009 from http://dgca.nic.in/
reports/stat-ind.htm
44 Mahalingam, T.V. & Mitra, K. (2007, June 3). On a wing and a prayer. Business Today, India.
45 ibid.

ABCC-2009-004
AsiaCase.com
Keeping in mind the concerns and expectations of
the two leaders, Edelweiss Capital prepared a revised
proposal after the duo negotiated the share price
(Rs.160 versus Rs. 155) and number of directors (4
versus 3) and closed the deal. An agreement was
prepared, both the parties signed and Rs. 1,500
million was deposited by Kingfisher in an escrow
account.46
To complete the acquisition, DAL would need to issue
35.20 million new equity shares to the UB Group at
Rs. 155 per share (a premium of Rs. 8.80 over the
closingpriceofDAL’sshareat146.20).47
Gopinath
clarifiedthattherewasnosaleofpromoter’sholdings:
The entire Rs. 550 crores will come
throughpreferentialshares…Therehas
been no sale of individual shares. None
of us have sold shares. We (Air Deccan)
will continue to be an independent identity
and pursue our low-cost business model.
Our combined market share will go up
to33percent–AirDeccan22percent
and Kingfisher 11 percent.48
Although industry analysts welcomed the
consolidation, investment bankers were divided over
the price paid by Mallya. Covering the event, Rediff,
an online portal reported the response of an
investment banker:
This is a crazy valuation. Mallya has paid
substantial premium to Air Deccan for
no reason. Kingfisher Airlines, which is
making Rs. 500 million a month, has
joined hands with Air Deccan which is
making huge losses.49
However, Ravi Nedungadi, Chief Financial Officer of
UB Group defended the arrangement and said:
It is a good deal. We are paying the right
price for Air Deccan. It would make better
sense to pay Rs. 5,500 million for Air
Deccan, which has 23 percent market
share rather than acquiring Air Sahara
with a market share of less than 8
percent.50
Another business analyst, reporting for the business
segment of a weekly magazine, observed that the
valuation of airlines in India was tricky as they were
valued high despite negative earnings before interest,
taxes, depreciation, amortisation and aircraft rentals
(EBITDAR). As most airlines were making losses,
the EBITDAR was negative and valuation techniques
failed to estimate the true value of the carrier. For
example, the valuation of Air Sahara by Jet Airways,
in which Mallya also participated, was found to be
excessively high and Jet Airways needed to
renegotiate the agreed enterprise value. In the case
of Air Deccan, a business analyst estimated that the
enterprise value was Rs. 21,150 million (on the basis
of Rs. 5,500 million for 26 percent stake) as against
the current market capitalization, a proxy for
enterprise value, which was Rs. 14,540 million.51
ACQUISITION AND MERGER
As soon as UB Group bought 26 percent equity in
DAL, the management of Kingfisher took control of
Air Deccan. While Gopinath was made the Executive
Chairman of DAL, Mallya became its Vice-Chairman.
The Boards of DAL and UB appointed KPMG as
consultants and Dalal & Shah as chartered
accountants to develop the merger structure for the
twocarriers.ThecontinuationofAirDeccan’sChief
Operating Officer, Warwick Brady, was dependent on
the terms offered by the new management. Already
rumours abounded that Brady would leave the airline
andAir Deccan had appointed Spencer Stuart to hire
a CEO for the carrier. Moving forward, the two
management set up an integration team and
deliberated upon the issues that the two airlines would
face in aligning their mission and vision.
Brands
The Board of DAL rechristened Air Deccan as
“Deccan”anditscorporatetagline‘Simplifly’became
‘SimpliflyDeccan.’DeccanoperatedasaLCCbut
its logo was replaced by the red Kingfisher image.
Brand management experts felt that it was brand
extensionwithoutthename‘Kingfisher’andwondered
how it would drive sales and improve the profitability
47 26% makes Mallya Air Deccan co-pilot. (2007, June 1). The Financial Express, India.
48 ibid.
49 Sanjai, P. R. (2007, June 1). Did Mallya pay more for Deccan pie? Rediff.Com. Retrieved 12 March 2008 from http://inhome.rediff.com/
//money/2007/jun/01deccan.htm
50 ibid.
51 Kaul, P. Prasad, A. (2007, July 5). When the clouds clear? Outlook, Business, India.

ABCC-2009-004
AsiaCase.com
of Deccan.52
They also pondered on the issue of what
Kingfisher had bought: a brand or business?
Several first-time flyers from the new cities which Air
Deccan flew had made Gopinath synonymous with
lower fares and air travel.53
Some industry experts
backed Gopinath as a brand ambassador for the low-
cost airline industry and Deccan. They were not sure
whether Deccan would become a drag and Kingfisher
a driver or vice-versa.Also, they noted that the value
attrributes of the two carriers were different and
wondered how these two companies could build both
brands in the future. Although these decisions
impacted future brand building and marketing plans,
theintegrationteam’sprimarytaskwastotapthe
synergies and achieve cost savings.
Operations
The team realised that streamlining the routes and
operations of both carriers was not easy, due to
infrastructure bottlenecks on the metro routes that
provided high traffic density and load factors. Firstly,
the team needed to strike a balance between the
metro and regional routes or profitable high traffic
density routes versus the low traffic density regional
routes.Secondly,whileKingfisher’simmediate
priorities were profitable route operations and growth,
the priority for Deccan was cost control and to raise
revenues to improve yield.
Deccan’sstrategywastounlockvaluefortheIPO
investors by setting up maintenance, repair and
overhaul organisation and eventually, spawning these
into new businesses. While Gopinath focused on
domestic network growth and low fares, Mallya was
keen to mount international flights.As Deccan began
operationsin2003,itwasabouttoreachthe‘five-
years-in-operation’conditiontoflyoverseas,which
meant that Deccan would have to remain standalone.
The team also had to deal with aircraft orders placed
by Deccan and Kingfisher which included AB320s
and A380s.
Synergies
To tap the anticipated synergies, the integration team
conducted a review of operations, manpower and
back-office processes, Maintenance, Repair and
Overhaul (MRO), purchasing and Frequent Flyer
Programme (FFP), and sales and marketing. They
estimated that for the first year alone, the cost
synergies would be Rs. 3,000 million.54
The team
believed that there was a good operational fit and fleet
alignment between the two carriers. Gopinath stated:
We both have Airbuses, we both have
ATRs, the combined fleet will be now 71
aircraft. So, negotiating with any vendor,
any supplier globally, is going to give us
a tremendous leverage in bringing down
our acquisition costs, in bringing down
our contract costs and bringing down the
costs for both airlines tremendously.55
In addition, there was potential for sharing common
costs for security, ground handling, engineering, and
inventoryof spare engines and other materials among
the two carriers.
Business Model
The team noted that the management of both
companies had the option of merging the two carriers
under one brand or running them as separate carriers
with independent brands, which industry experts
calledthe‘hybridmodel.’
For example, after the merger of Air Sahara with Jet
Airways, the LCC was renamed as JetLite, and the
same group ran both the LCC and FSC, emulating
the successful hybrid model of Qantas and JetStar.
Jet Airways separated certain aspects of marketing
and customer service, and tapped synergies between
the two airlines in the area of back-office operations,
purchasing and FFPs.
Although, globally, value-based carrier (VBC)
operations by large network airlines had failed, the
team needed to customize and recommend to the
management of Kingfisher and Air Deccan a new
hybrid model.56
Despite the business fit, Gopinath was not optimistic
that the merger of the two carriers would work. He
felt that the high cost FSC and low-cost LCC model
52 Bhat, S. (2007, December 25-31). Deccan Plateau for Kingfisher. Businessworld, India.
53 Mahalingam, T. V & Mitra, K. (2007, June 3). Business Today, India.
55 ItoldMallyaamergerwon’twork:Gopinath.(2007,June1).Moneycontrol.Com. Retrieved on 5 June 2008 from http://
news.moneycontrol.com/india/newsarticle/news_print.php?autono=284431&sr_no=0
56 Mahalingam, T. V & Mitra, K. (2007, June 3 ). On A Wing and A Prayer. Business Today, India.

ABCC-2009-004
AsiaCase.com
could not coexist, as employees of Kingfisher stayed
infive-starhotelswhileAirDeccan’s employees
stayed in guest houses.Air Deccan also did not offer
cars to air hostesses. Due to these differences,
Gopinath did not believe in the merger of the two
airlines.57
Management and Culture
To the general public, both Mallya and Gopinath
seemed to be in control of the management. The team
felt that senior industry executives were not sure who
was in control.Atop executive of a rival airline stated:
After having burned so much money, and
gamblingAirDeccan’sfutureexpansion
for cash upfront, it will be extremely
surprising if someone lets Gopinath
retain a say in the management of the
airline.58
The team learnt that depending on the way the deal
was structured, the holdings of Gopinath and his
associate would go down from 22 percent to 16
percent.59
At the same time, however, it found out
from Gopinath that he could muster support of 35
percent of the shares through his associates. In a
response to Fortune magazine, Mallya explained:
Withmajoritystake,that’spretty
inevitable,isn’tit?Thereisnoquestion
ofcutpricescontinuinginIndia–
everyone wants to raise fares. Deccan
is widely regarded as a market spoiler,
and that will stop.60
Further, the team saw that the differences in business
focus between Mallya and Gopinath were made known
to the public when the two leaders openly shared
their goals. While Gopinath focused on network
growth, load factors and lower cost, Mallya focused
on revenue management:
Earlier the focus was more on increase
in the volumes being synonymous with
profits. We are now giving serious
attention to revenue management. The
results are already showing. The financial
collection of Air Deccan have jumped
from Rs. 40 to 45 million per day to Rs.
50 to 60 million per day. 61
As LCCs and VBCs accounted for over 80 percent of
narrow-bodied aircraft orders fromAirbus and Boeing,
Gary Kingshott, the CEO of JetLite felt they would
capture a significant share of the domestic market.62
FUTURE OUTLOOK
Despite the infrastructural and operational challenges,
the senior management teams of Deccan and
Kingfisher were convinced that a speedyconsolidation
in the aviation industry would lead to profitable growth.
The hitherto highly fragmented Indian aviation market
had become an oligopoly with three dominant players:
Kingfisher-Deccan, JetAirways-Sahara andAir India-
Indian.
The integration team was optimistic that turning
profitable to ride on the air traffic boom of the country
wouldalignthetwoleaders’vision,buildawin-win
partnership and cement their differences. Byforegoing
due diligence, closing the deal promptly and paying
a substantial premium to the stock price, Mallya had
won the trust of Gopinath although he did not believe
in low-fare operations (see Exhibit 11). Commenting
on the expectations from the merger, Mallya
elaborated:
Istilldon’tbelieveinthelow-costmodel
because there is nothing low cost about
operatinganairlineinIndia.WhatIdon’t
believe in is the low-fare model and the
high costs associated with operating in
India. But two things are happening here.
With synergy between Deccan and
Kingfisher, a lot of our joint costs will
come down dramatically. So, we can offer
the cheapest fares to most expensive
57 ItoldMallyaamergerwon’twork:Gopinath.(2007,June1).Moneycontrol.Com. Retrieved 6 may 2008 from http://
new.moneycontrol.com/india/newsarticle/news_print.php?autono=284431&sr_no=0
58 Mahalingam, T. V & Mitra, K. (2007, June 3). On A Wing and A Prayer. Business Today, India.
59 Bhargava, A. (2007, June 11). Gone for 550 crore. Businessworld, India.
60 Elliot, J. (2007, June 25). Fortune.
61 Bhargava, A. (2007, June 11). Gone for 550 crore. Businessworld, India.
62 Ibid.

ABCC-2009-004
AsiaCase.com
fares…Two,thiswillconsolidatethe
industry, which will end this bloodbath of
airfares, which is due to overcapacity in
the market.63
Accounting and tax analysts noticed that Kingfisher
had carried forward a loss of Rs. 12,000 million (as of
January 2008) and Deccan had accumulated losses
of Rs. 8,000 million (as of January 2008) and that it
would be advantageous to keep the two carriers
separate to set off the loss against future profits.64
Going forward, there were many challenging tasks
onthehandsoftheteam:toprovethatMallya’s
valuation of Air Deccan was justified, realise the
synergies identified by the two leaders, and balance
the strong brands and leadership styles of the two
leaders.
63 Bhargava, A. (18 June 2007). Sultan of the skies. Businessworld, India.
64 Kingfisher to wet lease 4 new Airbus to Air India. (12 January 2008). The Financial Express, India.

ABCC-2009-004
AsiaCase.com
Source: UB Group Finance Presentations. (September 2006). Retrieved 27 May 2008 from http://
www.theubgroup.com/finance_presentations.aspx
•UBGroup,havingachieveddominanceinitscorebeveragebusiness,waslookingtoleverageitsunique
strengths in
a) Understanding the needs of the evolving Indian consumer
b) Creating premium products at true value
c) Operating in a highly regulated environment
d) Leveraging brand equity
•Aviationoffersextraordinarygrowthpotential
•Successbasedonthreecorestrengths
a) Ability to tightly manage cost
b) Ability to manage scale up
c) Ability to deliver a unique experience while remaining competitive
•UBGroupiscommittedtothesuccessofKFAthroughfinancial,management,brandandmarketing
support
EXHIBIT 1

ABCC-2009-004
AsiaCase.com
THE UB GROUP AND AVIATION
EXHIBIT 2

ABCC-2009-004
AsiaCase.com
EXHIBIT 4
KINGFISHERAIRLINES–MISSION&VISION
UB GROUP STRUCTURE
EXHIBIT 3
CONCEPT OF KINGFISHER AIRLINES
•SuperiorExperience–
•Highestseatpitch
•Personalizedin-flightaudio&video
•Hotmeals
•Homedeliveryoftickets
•Valetserviceattheairport
•StandardAircrafttyperesultinginhighaircraftutilization
•AllBrandnewaircraftoperatedbyInternationalclasscabincrew
Source: UB Group Finance Presentation. (September 2006). Retrieved 27 May 2008 from http://
VISION:
•The KingfisherAirline family will consistently delvier a safe, value based and enjoyable travel experience to
all our guests
VALUE:
•Safety, Service, Happiness, Teamwork and Accountability
MISSION:
•Be the most successful Full Service, True Value airlline operating in India
•Createafollowingof‘fans’andnotjustloyalists.
•Drive‘Addiction’toKingfisherClassandKingfisherfirst.
•To be the Market Leader by 2010.

ABCC-2009-004
AsiaCase.com
EXHIBIT 5
KFA-INCOME STATEMENT (FY2005-2006)
FINANCIALS - UNAUDITED - FY06
Revenue Statement - Major Items
Rs. Mio Rs, Mio
Income 5,845.00
Fuel Cost 2,356.00
Total Operating Cost 6,806.00
Other Cost 760.00
EBIDTA (1,721.00)
PBT (1,908.00)
EXHIBIT 6
KFA–INTERNATIONAL ROUTE STRATEGY
International traffic expected to grow between 18-20% per annum. Current Governemt policy requiring 5 years
of domestic operations prior to flying overseas likely to be reduced.
AsacontingencyplanKFAhasworkedout“damp”leasearrangementwithforeigncarrierstooperateKFA
aircraftoninternationalsectors.India–US–Indianonstopflightspresentthemostuniqueopportunityand
reduced competition. KFA will concentrate mainly on this opportunity and has ordered specific aircrafy types
to undertake this mission.
KFAwill commence nonstop flights withAirbusA340-500 between Bangalore and San Francisco and Bombay
and New York in Q1 2008. KFA will commence nonstop flights with Airbus A330-200 between Bombay and
London and Bombay and Hong Kong in Q1 2008.All KFAaircraft will be configured in a class 3 layout, offering
Super First Class, Ultra Business Class and Kingfisher Class.
Source: UB Group Finance Presentation. (September 2006). Retrieved 27 May 2008 from http://www.theubgroup.com/
finance_presentations.aspx

ABCC-2009-004
AsiaCase.com
EXHIBIT 8
AIRDECCAN–BALANCESHEET&INCOMESTATEMENT FROM 2001 TO 2005
Source: Deccan Aviation Limited. (18 April 2006). IPO Prospectus, pp.57.
Source: Deccan Aviation Limited. (18 April 2006). IPO Prospectus, pp.7-9
Rs. in million
EXHIBIT 7
PROFILE OF AIR DECCAN FLEET (MARCH 2006)
Aircraft Type No. of Passenger Seats Model No. of Aircraft Average Age
(years)
ATR 48 42-320 5 12
48 42-500 9 8.56
72 72-500 4 3
Airbus 180 A320-200 11 3

ABCC-2009-004
AsiaCase.com
EXHIBIT 8
AIRDECCAN–BALANCESHEET&INCOMESTATEMENT FROM 2001 TO 2005
(CONTINUED)
Source: Deccan Aviation Limited. (2 April 2006). IPO Prospectus, pp.7-9
Rs. in million

ABCC-2009-004
AsiaCase.com
Source: Deccan Aviation Limited. (18 April 2006). IPO Prospectus, pp.61.
EXHIBIT 9
PROFILE OF AIR DECCAN NEW FLEET (2007-2013)

ABCC-2009-004
AsiaCase.com
Year Passenger Growth rates in Operating Operating
Carried1
Passenger Traffic (%)2
Revenues3
Result4
Domestic International NSC PSC NSC PSC
2003-04 15,677,000 12.4 6.9 112.9 161.4 0.12 4.5
2004-05 19,445,000 24.0 18.6 134.5 64.5 (1.40) 8.9
2005-06 25,205,000 29.6 22.9 155.8 99.3 (3.63) (2.0)
1 Passengers flown - Table 4.7 of respective years
2 Growthratesinpercentage–Table4.2ofrespectiveyears
3 Operatingrevenuesinbillionrupees–Table4.23ofrespectiveyears
4 Operatingresultinbillionrupees–Table4.23ofrespectiveyears
Sources: Financial Results of Scheduled Carriers. (2003-04; 2004-05; & 2005-06). Directorate General of Civil
Aviation, India. Retrieved 12 January 2009 from http://dgca.nic.in/reports/stat-ind.htm
EXHIBIT 10
GROWTH AND PERFORMANCE OF SCHEDULED DOMESTIC CARRIERS
EXHIBIT 11
CONCEPT OF KINGFISHER AIRLINES
WHY FULL SERVICE & NOT LOW COST ?
•Over60%ofvariablecostsarecommonforanyairline.Thisincludes
•Fuel–37%
•Mainetenance–10%
•LandingandParkingCharges–7% 60 %
•LeaseRentals–6%
•Cost such as salaries of Pilots, Engineers etc, are standard and do nto differ between LCC and a full
service carrier
•In India , there is no cost differential to jusitfy low pricing as in an LCC

Case 14

Recommended

Recommended

More Related Content

What's hot

What's hot (17)

Similar to Case 14

Similar to Case 14 (20)

Recently uploaded

Recently uploaded (20)

Case 14