Strategic Mistakes That Led To The Fai lure Of Kingf isher

Air l ines

APSM - 08

Probal Basu ( 15MMMMM01676 ) Col Sanjay Kochhar ( S15MMMMM01841 )

Debasis Ranjit Mitra ( S15MMMMM01843 ) Aditya Sar ( S15MMMMM01598 )

Sourav Kumar Giri ( S15MMMMM01591 ) Sambhu Das ( S15MMMMM01864 )

INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

CONTENTS

v Industry Overview

§ Indian Aviation History § Market Challenges § Bottlenecks Faced by the Industry § Industry Structure

v Introduction to UB Group

v Introduction to Kingfisher Airlines

v Awards & Recognitions

v SWOT Analysis

v Industry Analysis Based on Porters Five Forces

v Identification of Crisis & Reasons for Failure

§ Operational Reasons for Failure § Main Financial Challenges

v Identificaiton & Analysis of Strategic Risks

§ Unrealistic Market Analysis § Unrelated Business Diversification § Merger with Air Deccan § Diversified Aircrafts

v Critical Mistakes in Decision Making & Strategy

v Conclusion

Since independence from 1953 the Govt of India created two state owned national carriers – Air India and Indian Airlines (For domestic travel). Both these airlines retained monopoly over civil aviation in India till 1992.Post liberalization the Govt. responded to the new economic policy and allowed operation of AIR TAXI services initially and then operation of scheduled air services from 1994. Initial operators were Damania, EastWest, Jet, Sahara, Modiluft and NEPC. The provision of new airlines creating additional capacity helped address latent demand of the growing Indian population and by March 1994, they accounted for 24% market share . But the only two survivors of the first phase of liberalization were JET and SAHARA The steady growth of economy after liberalization was at a compounded annual growth rate of 6% and it increased the size of the economy and hence demanded for both leisure and business travel. Thus in 2003 there were entry of more private airlines but most preferred to take the Low cost operations using the low fares. India is the 9th largest aviation market in the world with a size of US$16 billion and is poised to be the 3rd biggest by 2020. Civil aviation is experiencing a new era of expansion by factors like low cost carriers, modern airports, foreign direct investments and cutting edge information technology interventions and growing emphasis on regional connectivity. Air Deccan was the first company to tap the middle class segment with its low fares inspired by the “low cost “ airline model pioneered by Southwest Airlines in the United States. Starting in August 2003 with turboprop aircraft they connected small towns to large cities .Air Deccan soon expanded to Airbus A320 and offered single class point to point service, no meals or water, sold tickets only through the internet and its call center, had limited staff and outsourced as many operations as possible . Other players to follow Air Deccan were Spicejet and Indigo. The last to enter the market was Kingfisher, Paramount and GoAir. Foreign equity up to 100% allowed in airport development. FDI up to 49% allowed in domestic airlines by foreign carriers

INDIAN AVIATION HISTORY

The aviation airline industry saw a steady growth in passenger demand but were faced and threatened by several speed bumps. The infrastructure required to cater this growing demand was not in place and Govt did little in terms of opening new airports in smaller cities. Airport landing and navigation charges at Indian airports were 50% higher than international benchmarks and the highest in the world. Higher charges also did not translate to superior infrastructure. Increased air traffic resulted in congestion in air and on ground. Overnight parking bays on the ground were scarce. The main suppliers of Aviation Turbine Fuel (ATF) to airlines in India were three public sector oil companies that dominated the Indian petroleum sector. While the prices of most of their household products like kerosene, diesel, petrol and cooking gas were controlled and subsidized, ATF was sold at international market prices plus transportation and marketing cost. Most state govts taxed ATF at a higher rate (as much as 34% ) as they saw aviation as a luxury industry. ATF prices in India were approximately 51% higher than international benchmark. To address this increasing cost of fuel the airlines from May 2006 started adding fuel surcharge to the price of tickets. By June 2008, the surcharge had risen to Rs 2250 for travel of less than 750 kms and Rs 2900 for more than 750 kms.

MARKET CHALLENGES

BOTTLENECKS FACED BY THE INDUSTRY POST 2003

The aviation sector can be represented in terms of regulatory interfaces by the following structure (arrows denote interfaces) :

INDUSTRY STRUCTURE

§ Founded - 1857

§ Chairman - Dr. Vijay Mallya

§ Headquarters - Richmond Road, Bengaluru

§ Products

• Breweries, Alcoholic Beverage • UB Global (Trading Company) • Aviation • Chemicals & Fertilizers

§ Subsidiaries

• United Breweries Ltd • United Spirits Ltd • Kingfisher Airlines • Mangalore Chemicals & Fertilizers Ltd • UB Global ( Trading Company ) • UBICS, Inc

INTRODUCTION TO UB GROUP

VISION: “The Kingfisher Airlines family will consistently deliver a safe, value based and enjoyable travel experience to all our guests.” Kingfisher Airlines Limited was an airline group based in India, Mumbai. Kingfisher Airlines, through its parent company United Breweries Group, had a 50% stake in low-cost carrier Kingfisher Red. Until December 2011, Kingfisher Airlines had the second largest share in India's domestic air travel market. However, the airline had been facing financial issues for many years, and due to a severe financial crisis faced by the airline at the beginning of 2012, this share dropped to the lowest in the market in April 2012. The airline had shut down its operations and locked out its employees for several days when on 20 October 2012 the Directorate General of Civil Aviation (DGCA) suspended its flight certificate. In February 2013, the Indian Government announced the withdrawal of both domestic and international flight entitlements allocated to the airline.

• Kingfisher Airlines has received numerous awards for innovation,

customer responsiveness and was voted the Best New Airline of the Year within months of its launch.

• The airline was awarded NDTV Profit Business Leadership Award for Aviation by NDTV.

• The company was given Economic Times Avaya Award 2006 for Excellence in customer responsiveness by the highly acclaimed business daily, Economic Times.

INTRODUCTION TO KINGFISHER AIRLINES

AWARDS & RECOGNITIONS

• Business World rated the airline amongst India’s most respected companies.

• Kingfisher Airlines was acknowledged as The Best Airline and India’s Favorite Carrier in a survey conducted by IMB for The Times of India.

• The company was named as Best New Domestic Airline for Excellent

Services and Cuisine by Pacific Area Travel Writers Association (PATWA) the biggest travel writers organization, representing members from 70 countries across the globe, that conducts independent annual surveys across various industries related with Travel and Tourism in order to select the best in each category.

• Voted as Best New Airline of the Year by the Centre for Asia Pacific Aviation (CAPA) Award in the Asia–Pacific and Middle East region.

• The airline was acknowledged as 'India's only 5 Star airline' and

Skytrax certified ‘6th airline in the world’.

• Kingfisher was rated as Asia Pacific's 'Top Airline Brand' in a survey conducted by TNS on 'Asia Pacific's Top 1,000 Brands' for 2008.

SWOT ANALYSIS

INDUSTRY ANALYSIS PORTERS FIVE FORCES

MODEL

1. Maintenance, Landing and Navigation Cost : Kingfisher Airline’s

cost of maintenance than Jet was about 2% higher in 2011 and 3% higher in 2012.

**MONEYCONTROL-ANNUALREPORT-JETPAGE29/KSA592. High Overhead Costs : In 2012, Kingfisher Airlines had 5,696 people

working for them vis-à-vis 13177 employees by Jet as on 31st March 2012. The % was much higher than other airlines.

FY#2012 FY#2011 FY#2012 FY#2011TOTAL#REVENUE 5,824,00.00# 649,560.00 1,706,704.00 1,470,606.00EMPLOYEE#COST 66,950.00 67,600.00 159,949.00 133,969.00

% 11.50% 10.41% 9.37% 9.11%

Employee#Cost#Vs#Revenue

JET : MONEY CONTROL Annual Report 2011-12/ Page 35, KFA : Annual Report 2011-12 / Page 49.

OPERATIONAL REASONS FOR FAILURE

3. High Cost of VAS : KFA’s cost for value added services were much more than other airlines. While they focused less on scheduling, connectivity, cleanliness and low price, the basic needs of Indian Customers.

1. Bank Dues:

2. Fuel Dues : FUELEXPENSES KINGFISHER JETAIRWAYS

YEAR 2012 2011 2012 2011REVENUE 582,400.00 649,560.00 1,547,739.00 1,303,300.00FUELEXPENSES 294,590.00 227,400.00 409,226.00 436,670.00

% 50.58% 35.01% 26.44% 33.50%**SOURCE:ANNUALREPORT:Page63Jet,Page21,KFA

MAIN FINANCIAL CHALLENGES

Also for Kingfisher Airlines fuel payments in 2012 was 31.78% of their total expenditure and was 28.37% in 2011. The biggest issue with India is that not only is our oil very expensive, the Govt. also taxes ATF very heavily. In India, ATF forms anywhere between 40-50% of the cost, whereas it is 25-30% for airlines in the US, Europe, and even S.E. Asia. Most state govts taxed ATF at a higher rate (as much as 34%) as they saw aviation as a luxury industry. ATF prices in India were approximately 51% higher than international benchmark.

3. Delayed Salary : KFA delayed salaries in Aug 2011 and at a Point

when salaries to employees were due for more than 4-5 months(Oct’11-Jan’12), Engineers refused to sign the ‘Tech Log’, which is mandatory to certify that aircraft is fit to fly before every flight. When this was brought to the attention of DGCA, they cancelled the KFA license.

4. Aircraft Rental Dues : Since 2008, KFA was unable to pay Aircraft

rentals on time. Due to that 16 out of 66 Aircrafts had to be grounded. 5. Airport Dues : AAI sent notice to KFA in Feb 2012 regarding

accumulated dues of 255.06 Crs. The airline was operating on cash & carry for the last 6 months with daily payment amounting 0.8 cores.

6. Service Tax Dues : On 9th Dec 2011, Central Board of Excise and Customs announced that they would take legal action against Kingfisher for not paying service tax. On 10th Jan 2012, KFA had service tax arrears of 70 cores.

1. Unrealistic Market Analysis:

§ Failure to understand and comprehend potential opportunities. Dr. Vijay Mallya, the well-known liquor baron’s lack of understanding the airline business. “Luxury sells” is the biggest mistake in understanding of Indian Aviation Airlines. Both history and data of the industry proves that the consumers have always been price conscious. The first mistake, is lack of understanding of consumer requirement and basing a decision that luxury sells in Airline Industry.

§ Post liberalization the growth witnessed in the industry has predominately been the middle class segment as travelling became more affordable. The mid size companies spreading across regions, travelling in mid / economy class became very important. Business/Frist class travel was only limited to CXO levels of companies. Hence the positioning of the brand was in sharp contrast with the market dynamics.

§ Mr. Mallya & UB Group, highly successful in the liquor business

could not comprehend in customer preferences within two industries. Customers might buy expensive alcohol but not airline tickets since the total cash flow is higher. Travelling is more of a necessity than a luxury item.

STRATEGIC RISKS

2. Unrelated Business Diversification :

§ Unrelated diversification involved entering into entirely new industry that lacks any important similarities with the firm’s existing industry or industries, and is often accomplished through a merger or acquisition. We have tried to understand unrelated business diversification through the fourth strategy in Ansoff’s matrix i.e. diversification.

§ The matrix illustrates, in particular, that the element of risk increases the further the strategy moves away from known quantities - the existing product and the existing market. Thus, product development (requiring, in effect, a new product) and market extension (a new market) typically involve a greater risk than `penetration' (existing product and existing market); and diversification (new product and new market) generally carries the greatest risk of all.

§ While Ansoff are usually followed with the same technical,

financial, and merchandising resources, which are used for the original product line, diversification usually requires new skills, new techniques, and new facilities. As a result it almost invariably leads to physical and organizational changes in the structure of the business which represent a distinct break with past business experience.

§ The key to successful unrelated business diversification is

identifying an industry with strong profit potential where firm has internal competencies that helps to gain competitive advantage.

Clearly in the case of Kingfisher airlines, UB Group was into production and manufacturing of liquor. Neither they had prior experience of running an airline nor they had expertise in handling customer experiences. Hence, the idea to diversify into Airline industry was nothing short of adventure.

3. Merger With Air Deccan :

§ To have access to low cost/ cheaper market segment.

§ To have access to International flying rights.

§ Now Kingfisher Airline faced a dichotomy of acquiring a low

cost airline and having established itself as a five star airline. The sudden change in the business strategy created confusion in the minds of the consumers. Airlines passengers having got used to premium services offered by King Fisher Airlines such as in-flight entertainment, gourmet cuisine, personalized assistance during check-in, access to Kingfisher Lounge at the key airports, complementary gifts were the value added services offered then. Suddenly with acquisition of Air Deccan, there was introduction of King Fisher Red in 2008, which added to customer’s dilemma. From treatment of five star and value added services, it had suddenly transformed to a no frill airline.

§ As per a Business Today article, it became the largest Indian

airline with 27.5% market share, and domestic travel increased by 30%, however it didn’t make profits. Despite the fact that its main rival – Jet Airways – continuously showed profitable quarters.

§ KFA showed growth in numbers while having lost the strategy.

With the merger, it lost its brand image of a premium business class airline. It expanded with the speed of a jet without building a base and resolving the post merger challenges. This set the course for a bumpy ride.

4. Diversified Aircrafts : Diversified Aircrafts with different Capacities vis-à-vis standardized aircraft of other Airline companies.

INDIGO /AllEconomy

InService Passenger

AirbusA320-200

96 180

KFAAircraft Total Orders Passengers

AirbusA319-100 3 - 144AirbusA320-200 21 67 180

AirbusA321-200 8 151-199

AirbusA380-800 5

AirbusA380-800 5

ATR42-500 2 48

ATR72-500 25 66-72

TOTAL 64 -77

FirstGenerationCompanies(ClosedPromoterGroups)

Ineventofcrisis,tendencyofpromotertoprotectindividualwealth&asset

CRITICAL MISTAKES IN DECISION MAKING &

STRATEGY

Handling of crisis by First Generation companies (Closed promoter groups) in comparison with more structured and professionally managed organizations. In first generation companies, which are closed promoter groups whenever there is a crisis, the tendency of the promoter is always to protect individual wealth and asset. The business decisions are the promoters as personal failures take more personal and failure of business models and hence most of the times they tend to ignore it. Decision making process and handling of crisis by First Generation companies (closed promoter group) in comparison with more structured and professionally managed organizations.

Closed promoter group (First generation companies)

Traditionally Structured and Professionally managed companies

• Business decisions are more personalized.

• Business decisions are more professional and well thought through and structured.

• The promoter in consultation with closed set of advisory takes all strategic decisions.

• There is little experience in handling crisis as the professionals have little say in decision making and strategy and they are taken more like employees rather than stakeholders in the process.

• Whenever there is a crisis, the tendency of the promoter is to protect individual wealth and assets first and then the interest of the brand / company and otherstakeholderscomein.

• Since business decisions are more personal in nature, hence failures are seen to be taken as personal failures and in most cases they tend to ignore it and flow with the tide .

• All strategic decisions are taken after research and analysis by top management (seasoned professionals) and then put forward to the board for approval

• Professionals have experience of handling crisis through past assignments and hence add value in finding out solutions.

• Whenever there is crisis, senior management is asked to own up responsibility and figure out ways to mitigate the risk , but the image of the corporate / brand is supreme and hencethey are made liable to protect interest of all stakeholders .

• Business decisions are more practical and based on market feedback and any success/failure is compensated with equal reward or penalties.

The King Fisher Airline’s financial crisis refers to a series of events that led to the crisis from where it was impossible to recover. The following two slides will reveal data, which is Self-contradicting. The first slide shows % market share and the second slide shows profit & loss for the following years. Strategies that worked for the Airlines :

• Merger and acquisition of Air Deccan with the objective of gaining market share and having access / license for international routes. The objective was successful as by 2008 Kingfisher had the highest market share.

• The management wanted to have a proposition for all segment of customers, who they were successful post the merger.

Strategies that worked against the Airlines :

• Post acquisition the operational expenses went higher.

• Varied models of aircrafts led to higher maintenance cost, operational cost and overhead cost.

• With the offering of three different classes of travel i.e. Kingfisher

First for Premium business class, Kingfisher Class for Premium economy, Kingfisher Red for low cost.

• All these propositions diluted the image of the brand, which eventually led to decline in market share .The operating losses increased every year, and so did the debts.

While Kingfisher was successful in gaining market share post merger which is clearly evident from data available in Exhibit 1 (market share), Exhibit 2 (P&L) points out to the failure in controlling costs , the rising debts and the accumulated losses which went beyond control by the year 2011. Success or failures of strategies depend to a larger extent on the strategic intent also. While market share could be a great indicator of market leadership, it could also be misleading if you cannot control costs and increase profit margins. Hence market share at the cost of profitability is a futile attempt and will eventually lead to business failures.

YEARS 2012 2011 2010 2009 2008 2007 2006 2005INDIAN1AIRLINES 17.90% 17.20% 17.20% 17.50% 22.70% 24.20% 21.00% 28.00%

JET1AIRWAYS 17.90% 14.00% 29.80% 34.00% 35.00%AIR1SAHARA1/1JET1NIGHT 7.50% 7.40% 8.10% 9.00% 12.00%KING1FISHER 14.50% 1O.6% 8.00% 6.00%AIR1DECCAN1/1KF1RED 14.60% 18.60% 19.00% 11.00%SPICE1JET 17.10% 16.10% 13.00% 12.40% 10.30% 8.10% 6.00% 5.00%INDIGO 21.90% 20.00% 14.90% 13.90% 10.30% 5.00% B BGO1AIR 7.50% 6.00% 5.50% 4.70% 4.70% 4.70% 2.00% BOTHERS B B 1.00% 2.00% 1.20% 1.50% 1.00% 3.00%TOTAL 100% 100.00% 100% 100% 100% 100.00% 100% 100%

MARKET1SHARE

29.30% 26.50% 26.10%

6.40% 14.20% 22.70% 23.90%

Mar$'13 Mar$'12 Mar$'11 Mar$'10 Mar$'09 Mar$'08 Jun$'07 Jun$'06 Mar$'05 Mar$'04

12$mths 12$mths 12$mths 12$mths 12$mths 9$mths 12$mths 15$mths 12$mths 12$mths

Total$

Income683.46 5,823.91 6,314.96 4,734.62 5,868.07 1,569.90 2,142.31 1,345.06 320.28 67.36

Total$

Expenses3,309.65 7,651.81 5,289.34 4,747.51 5,822.37 1,781.46 2,062.61 1,398.86 274.27 60.53

Reported$

Net$ProfitH4,301.12 H2,328.01 H1,027.40 H1,647.22 H1,608.83 H188.14 H419.58 H340.55 H16.79 0.56

EXHIBITH1

KFA

Mar$'13 Mar$'12 Mar$'11 Mar$'10 Mar$'09 Mar$'08 Jun$'07 Jun$'06 Mar$'05 Mar$'04

12$mths 12$mths 12$mths 12$mths 12$mths 9$mths 12$mths 15$mths 12$mths 12$mths

Total$

Income16,991.48 17,509.71 15,477.39 13,033.09 10,688.39 12,014.90 9,448.34 7,373.39 6,060.47 4,379.57

Total$

Expenses18,786.54 15,949.66 13,369.66 10,267.73 8,329.85 10,969.32 8,056.00 6,020.66 4,262.09 2,876.62

Reported$

Net$ProfitH3,667.85 H485.5 H1,236.10 9.69 H467.64 H402.34 H253.06 27.94 452.04 391.99

EXHIBITH2

JET

The failure of Kingfisher Airlines is a clear example of poor leadership and management, which resulted in a company with high potential to sink due to its inability to adapt its business with the external environment and change the business culture to suit the demands. Poor vision followed by wrong decisions led to the company collapsing. The fact that they were ill equipped to manage this crisis resulted in its employees and stakeholders paying dearly. The reasons for the failure can be summed up as under:- • Putting personal image/ preferences over the interest of organization and

all stakeholders. • Failure to understand the Aviation industry and thinking that the success

of one can easily be replicated in the other.

CONCLUSION

• Failure to understand and estimate the changing trends, consumer preferences and cost curtailing to improve profitability.

• Expanding beyond the core competencies and getting into denial of risk

when things start going wrong. • Failure to communicate priorities in a clear, concise and compelling

manner.

The Kingfisher Airline case serves as a lesson for all future and current players in the Aviation Industry and has exposed the loopholes existing in the current system. References :- • India Today, Kingfisher in trouble: Vijay Mallya refuses to accept his business model

is to be blamed for crisis, 19 November 2011, Retrieved on 04 December 2011. • "Kingfisher Airlines Fleet", Flykingfisher.com, 15 August 2010, Retrieved on 30

August 2010. • "Kingfisher buys control of Air Deccan", Times of India, 1 June 2007, Retrieved on

20 August 2012. • "Vijay Mallya grounds low-cost carrier Kingfisher Red", NDTV, 28 September 2011,

Retrieved on 28 September 2011. • "Achievements and Awards", Flykingfisher.com, Retrieved 30 August 2010. • "Kingfisher Fails to Renew License Causing Withdrawal of Flights", India Internal

Flights.com. • Govt suspends Kingfisher Airlines' licence | Reuters, In.reuters.com. Retrieved on 23

December 2013. • Kinghfisher Airline Financial, Money control .com