Kingfisher Debt Crisis Case Study

Year : 2012 Industry : Aviation Industry

Abstract: Kingfisher Airlines, which redefined air travel

in India, hit financial turbulence in late 2011 due to
mounting debt and a shortfall in expected revenue.
Despite restructuring the debt with the help of creditors,
the airline found it difficult to extricate itself out of its
troubles. The case tracks the transformation in the Indian
aviation sector as well as the ups and downs of
Kingfisher Airlines. It provides information on the
complex debt restructuring exercise at Kingfisher
Airlines.
Pedagogical Objectives:

Comprehend the concept of capital structure and theories of capital structure

Discuss short-term financing and the challenges of managing liquidity
Understand the predicament of lenders (banks and financial institutions) in countries like India
Understand the debt restructuring process and the challenges of making it successful
Analyze the changing regulatory environment, tax structure, and tariff with regard to the airline industry in emerging economies

Keywords : Air Deccan, Air travel, Aviation Fuel, Aviation Industry, Capital, Cash-trapped, Centre for Asia Pacific Aviation, Compulsorily Convertible Preference Shares,
controlling stake, corporate debentures, coupon rate, Cumulative Redeemable Preference Shares, Debt Restructuring , De-merger, Depreciation, Downturn, Equity Shares,
Financial Crisis, Financial Health, Foreign Direct Investment, Funded Interest Term Loan, Indian Airlines, International Air Transport Association, Jet lite, King Fisher Airlines,
Kingfisher Red, Low Cost Carrier, Merger, Net Loss, Networth, Oil Prices, Optionally Convertible Debentures, paid up share capital, preferential shares, Private public
participation, Promoter loans, Redeemable Non-Cumulative Preference Shares, Spicejet, United Breweries Holding Limited, Working Capital, Working Capital Term Loan
Contents :
Kingfisher Airlines
Indian Aviation Industry
Kingfisher in Financial Trouble

http://www.ibscdc.org/Case_Studies/Finance,%20Accounting%20and
%20Control/Finance/FCF0021.htm
Introduction:Kingfisher Airlines, a leading Indian private airline , faced a serious financial crisis in November 2011. The airline, which had not made a profit since its inception,
went through debt restructuring once in March 2011 in the form of a bailout package from a consortium of 13 banks that included State Bank of India and ICICI Bank. Even after
the debt restructuring and infusing of fresh capital in the form of an additional debt of Rs. 12.12 billion from the consortium of banks, the airline found itself unable to overcome
the problem and reported a net loss of Rs. 7322.10 million during the first six months of the FY 2012. For FY 2011, the airline had accumulated losses of 102.74 billion and more
than fifty percent of its net worth had been eroded. The cash-strapped and bleeding airline cancelled 175 flights out of the 418 allotted for the Winter Schedule, which included
four international flights to Bangkok. According to the Center for Asia-Pacific Aviation (CAPA) chief executive, Kapil Kaul (Kaul), the airline urgently required capital infusion of
$400 million, including an immediate $200 million to maintain its daily operations...

Kingfisher Airlines Kingfisher Airlines, a subsidiary of The United Breweries Group (UB Group), was established in 2003. Through its parent company, the airline had a 50
percent stake in low-cost carrier Kingfisher Red. The airline began its domestic operations on May 9, 2005, with a fleet of four new Airbus A320-200s. At the launch of the
airline, Dr.Vijaya Mallya (Mallya), Chairman of The UB Group, said, We are committed to achieving our ambition of making Kingfisher Airlines Indias largest private airline
both in capacity and market share by 2010...
Indian Aviation Industry The Indian aviation industry was primarily a government-owned industry till the mid-1980s. The first air service in India was started by Tata Airlines
in 1912 as an air mail service. Later in October 1932, Indian National Airways in 1933 and Air Services of India in 1937 ventured into scheduled passenger traffic. At the time
of independence, there were nine air transport companies operating in India, carrying both passengers and air cargo...
Kingfisher in Financial Trouble Soon after the merger, Mallya gradually phased out Air Deccans ageing aircraft ATR42s and A329s and replaced them with an entire new
fleet of aircraft of the Airbus 320 family, Airbus 330, and ATR 72 for which it had placed orders earlier. Earlier in November 2005, the airlines had placed an order for 20

ATR72-500 aircraft, valued at US $ 350 million and 30 Airbus 320s valued at US $ 1.9 billion . It had also placed orders for five A330-200 aircraft, five A380 aircraft, and
A350-800s aircraft, valued at over $3 billion...

The 'Funliner' Experience

KFA modeled its strategy on the strategies of
JetBlue Airways , in providing value added air
travel services at economical prices. KFA
purchased brand new A320 aircraft powered; the
cockpit was a paperless environment. The
airline called its aircraft 'Kingfisher Funliners' to
represent the fun-filled experience it wished to
provide to its customers.
All the aircraft had in-flight entertainment
systems and well designed interiors. There was
only one class, i.e., the Kingfisher Class, rather
than the economy class and business class
bifurcation of other airlines.
"We are going to have a single class which will combine the experience of business class with
economy, said Ajit Bhagchandani, General Manager of KFA. Having a single class freed up
more space and legroom for passengers when compared to normal economy class seats. KFA
was also the only airline in India to address its passengers as 'guests'.

KFA's Pricing
Mallya made it clear that KFA would not be
positioned as a low cost carrier as passengers
would attribute the features of low cost carriers
like low quality of service, delayed flight
timings, etc., to KFA as well.
Hence, the airline was called a budget airline
and not an LCC. Fares were above those of
LCCs but lower than the economy class fares of

Jet, Sahara, and IA. KFA also allowed multiple

fare options and auctioning of tickets on all
traffic routes...

Kfa's Promotional Strategy

As part of its promotional strategy, the marketing team of KFA showcased the airlines as 'the
new flying experience'. Advertisement hoardings at airports depicted the stylish interiors of the
'Funliners', which conveyed a youthful, fun-filled, and world-class image. INOX multiplexes in
Mumbai publicized KFA's special offers for a month. KFA was the official travel airline for the
cast and crew of 'Mangal Pandey' and gave a red carpet welcome to all the guests who attended
the premiere of the film...

Reservation and Support Services

KFA's customers could book their air tickets either online at the KFA website
(www.flykingfisher.com), at any KFA office, or through an approved travel agent. KFA also
offered a facility for home delivery of tickets on demand. In December 2005, KFA launched its
SMS service called 'King Mobile' to keep its guests updated about flight schedules and flight
status through instant mobile alerts...
http://www.icmrindia.org/casestudies/catalogue/Marketing/Kingfisher%20Airlines
%20Funliner%20Experience%203.htm

People
Prior to its launch, KFA signed a 'nonpoaching alliance' with Air Deccan under
which both airlines agreed not to hire
each other's employees. However, most
of KFA's crew came from Jet and Sahara.
KFA's flight attendants also called 'flying
models' were selected through a national
level model contest. The attire of KFA's
cabin crew was designed by noted
fashion designer Manoviraj Khosla.
KFA also stressed the fact that its
employees had to be capable enough to
meet the airlines' high service

standards...

KFA's Expansion Plans

During KFA's launch function in May 2005, Mallya mentioned that the airline would
add at least one aircraft to its fleet every month till the end of 2005. KFA started off
with four A320's and had nine aircraft by the end of December 2005. In June 2005,
KFA placed an order worth US$ 5 billion at the Paris Air Show, for five new A380
aircraft, five A350-800 aircraft, and five A330-200 aircraft. KFA was the first Indian
carrier to place an order for A380s.

Will the good times last?

The proposed buyout of Sahara by Jet Airways and the price war among all the
airlines was an indication of the competition building up in the Indian aviation
sector. With regard to the increased competition, Mallya said, "Sure there will be a
bloodbath ... in so-called low-cost airlines who seek to convert the railway
passenger into airline passenger. We are positioned extremely differently. He also
said that KFA targeted the growing middle class segment that was net savvy, young
and upwardly mobile, with a propensity to spend.

Exhibit
Exhibit
Exhibit
Exhibit
Exhibit

I: Brief Note on the UB Group

II: Market Share of Major Airlines in India (As On January 2006)
III: List of Airlines That Were Planning to Start Operations (As of April 2006)
IV: Comparision of Fares of Various Airlines

From bang to bust: The

Kingfisher story
He owned Indias biggest liquor company, a private jet, an Airbus and many other riches.
Then in 2005, Vijay Mallya launched Kingfisher, an airline to match his style and
flamboyance. Khushboo Narayan, Johnson T A and Shaji Vikraman tell the story of how
Kingfisher went from bang to bust.
494

148

Google +6

Written by Khushboo Narayan , Johnson T A , Shaji Vikraman | Updated: March 14, 2016 2:50 pm

Sometime in 2006, the Mumbai-based IDBI Bank got a proposal from Kingfisher Airlines, seeking funds to acquire
aircraft. Vijay Mallya had launched the airline the previous year, in May 2005, on his sons birthday and he had been
cruising. He had bought Shaw Wallace, one of the oldest liquor manufacturers in India, for Rs 1,300 crore from the
Chhabria family after the death his arch rival, Manu Chhabria, in 2002. He had topped that by striking a deal with
the British beer maker Scottish and Newcastle, which had bought a 37.5 per cent stake in Mallyas United Breweries
Ltd for Rs 940 crore.
Also Read | I hope that I return one day India has given me everything: Vijay Mallya
That was also the time most Indian business houses, riding on easy liquidity and buoyant growth, were getting into
infrastructure projects building airports, ports, power plants, roads and acquiring mines. However, when the
Kingfisher proposal came up at a meeting of the credit committee of the IDBI in those go-go days, not many were
convinced about financing the aircraft acquisition plan. They had their reasons: The highly competitive airline
industry was known to be a capital guzzler and this, after all, was a fledgling airline. There was another reason too.
Much earlier, as a development financial institution, IDBI had encountered lending problems while dealing with
Mallya after his acquisition of Mangalore Chemicals and Fertilisers. So the committee chose not to approve the
proposal.

But a few years later, in 2009, the bank provided a loan of Rs 900 crore to Kingfisher, a decision that has come to
hurt top officials of the bank, who are now being put on the wringer by the Central Bureau of Investigation (CBI) and
other agencies with Mallya being declared a wilful defaulter.
So how did it all go so horribly wrong for Mallya? Even before Kingfisher could be launched, the aviation industry
had started bleeding. Crude oil prices were high, with fuel costs often making up half the operating costs of airlines.
But Mallya announced his would be a premium, world-class airline. He personally hired his airhostesses and Yana
Gupta, a Bollywood actor, performed in a video that showed safety instructions before take-off.
The service standards and comfort provided by the airline in the initial years attracted many passengers, marking it
out from other full-service airlines in the business then. Mallya, by now unstoppable, moved to acquire a bleeding
Air Deccan in 2007 (the deal was completed in 2008), with the groups cash cow and holding company, United
Breweries Limited, paying Rs 550 crore to buy a 26 per cent stake in the low-cost carrier promoted by Captain G R
Gopinath. Many say it was this decision that led to the grounding of Kingfisher Airline years later.
At its peak, Kingfisher Airlines was the second largest airline in India in terms of the number of passengers it
carried. The Deccan acquisition was ostensibly to allow the airline to fly internationally (airline rules in India say
carriers can go abroad only after they complete five years of operation and have 20 aircraft). In September 2008,
three years after Kingfisher first took to the skies, the airline launched its Bengaluru-London flight.

But as oil prices started to climb (an average

of $72.68 a dollar between 2005 and 2010) and the company struggled to run a business that included a fullservice airline and a low-cost carrier, its finances floundered and its debt burden and losses surged. By the end of
March 2008, Kingfishers debt had mounted to Rs 934 crore. A year later, it had multiplied to Rs 5,665 crore. Its net
losses widened from Rs 188 crore in 2007-08 to Rs 1,608 crore the following financial year.
That acquisition of Air Deccan marked the end of Kingfisher Airlines, says a person who worked closely with
Mallya during that phase and who did not want to be named. At that time, there was excess capacity (more supply
of seats than demand) in the aviation sector and Air Deccan was lowering ticket prices to Re 1, Rs 400 and so on,
and that was not viable. Besides, fuel prices and sales tax and other levies had dragged down all aviation
companies in the country.
So Kingfisher was not alone to ride the rough skies. As crude prices soared towards $140 a barrel, the global
aviation industry too was facing a crisis. In 2008, the International Air Transport Association (IATA), the global
aviation industry body, estimated losses of $5.2 billion. For airlines in India, the hit was much harsher with taxes

and levies topping oil prices. If that wasnt bad enough, the global financial crisis struck, growth started sliding and
the aviation script went haywire.
By 2009-10, Kingfisher Airlines had accumulated a debt of over Rs 7,000 crore. It continued to pile up losses and
had already turned net-worth negative the previous financial year. That was also the year Kingfisher Airlines turned
into a non-performing asset or a bad loan for banks. In November 2010, banks for the first time restructured
Kingfishers debt. The consortium of lenders led by State Bank of India converted Rs 1,355 crore of debt into equity
at a 61.6 per cent premium to the market price of the Kingfisher Airlines stock. Besides, the bankers stretched the
period of repayment of loans to nine years with a two-year moratorium, cut the interest rates, and sanctioned a
fresh loan.
However, a breather on loan repayment wasnt enough to revive Kingfisher Airlines, which continued to bleed with
every passing year. The flamboyance of its promoter, who was then a Rajya Sabha MP, attracted it even more
attention, enough to prompt questions in Parliament on the airlines bad loans.
In reply to one such question in 2011, Namo Narain Meena, former minister of state of finance, said Kingfisher
Airlines had pledged its brand to banks for an estimated Rs 4,100 crore. Meena also said Mallya had given a
personal guarantee of Rs 248.97 crore while United Breweries Holdings has provided a corporate guarantee of Rs
1,601.43 crore.
In addition, Kingfisher has provided a pooled collateral security of Rs 5,238.59 crore, which includes Kingfisher
House in Mumbai, Kingfisher Villa in Goa, and hypothecation of helicopters. Besides, the pledged securities include
ground support and other equipment (Rs 101.58 crore), computers (Rs 22.43 crore), office equipment (Rs 13.39
crore), furniture and fixtures (Rs 33.35 crore) and an aircraft (Rs 107.77 crore), Meena had said. In short, Mallya
had pledged all of Kingfishers movable assets.

But that didnt stop Mallya from drawing huge salaries from Kingfisher Rs 33.46 crore each in 2011 and 2012,
according to some reports.The official spokesperson of Mallya declined to comment for this story.
In 2012, Kingfisher Airlines was grounded, leaving its employees with unpaid salaries. The company had allegedly
not deposited its employees provident fund to the government and had run losses in excess of Rs 4,000 crore in
2012-13. Its accumulated losses ran into Rs 16,023 crore, while its net worth fell to a negative Rs 12,919 crore at
the end of March 2013.
In April 2015, Mumbai International Airport Private Limited (MIAL) sold Mallyas personal aircraft (its registration
number, VT-VJM, matches his initials) for Rs 22 lakh to recover airport dues of the grounded airline.
As trouble mounted, Kingfisher Airlines was chased by the service tax department over non-payment of service tax
of over Rs 115 crore. The department seized eight aircraft and helicopters of the company, including Mallyas prized
Airbus A319, which it now plans to auction. On March 7 this year, the service tax department moved the Bombay
High Court, asking for impounding of Mallyas passport and seeking his presence in the ongoing court case. The
airlines had also defaulted on crediting over Rs 372 crore of Income Tax deducted at source from employees.

In February 2013, the airlines flying permits were withdrawn. But Mallya didnt give up. Although KFAs licence has
expired on December 31, 2012, under civil aviation regulations, KFA has a period of 24 months to reinstate the
same. A revival plan has been submitted to the DGCA which is under consideration. Further, discussions are in
progress with some prospective investors for restarting the airline operations, Mallya said in the 2012-13 annual
report of UB Group (Holdings) Ltd, the holding company for Kingfisher Airlines.
Earlier, in 2012, in a letter to Central Board of Direct Taxes Chairman Laxman Das, Mallya sought time to pay the
companys Income Tax dues while hoping new government policies would help revive Kingfisher.
The Income Tax authorities attached all our bank accounts and our main IATA collection account, with the result
that we are completely crippled and have been unable to make any payments to any party including salaries to
8000+ employees, Mallya said in the March 9, 2012, letter to the CBDT chief.
The letter went on to say: The Government of India (is) reportedly taking several policy initiatives to help the
stressed aviation sector. This will help the industry and also Kingfisher Airlines. We are in active discussion with
serious investors and are confident that we can introduce fresh equity and recapitalise Kingfisher Airlines in the
near future.

He never thought Kingfisher would shut for good. He kept thinking it could be revived. I have seen him try really
hard to get the airline going. In the end, Kingfisher was run very badly and as a result, it became a mess, says a
close aide of Mallya.
In 2013, when a consortium of 14 banks led by the SBI approached UBHL for payment of what was then an
outstanding of Rs 6,493 crore in loans to Kingfisher Airlines, Mallya wrote back saying a significant amount would be
settled when British alcoholic beverages giant Diageo Plc buys stake worth nearly Rs 5,000 crore from UBHL and
others in the Diageo-Mallya owned United Spirits Limited (USL).
USL is a company he loved because his father had set it up and he never thought he would have to leave USL,
says the Mallya aide.
In July 2013, UBHL and Kingfisher Finvest India sold USL stake then worth around Rs 2,400 crore to Diageo, but in
December that year, a division bench of the Karnataka High Court annulled the deal on a plea by the consortium of
banks that the sale of UBHL stake in USL to Diageo was contrary to agreements between Kingfisher Airlines and its
creditors where UBHL is the guarantor.
The matter is now before the Supreme Court, and Diageo, Mallyas companies and their lenders agreed in
November 2015 for the dozens of petitions in the matter to be heard in April 2016. The Supreme Court has assigned
April 6, 2016, as the tentative date for this matter.
United Bank of India was the first lender to declare Kingfisher and Mallya a wilful defaulter in May 2014. The same
year, the SBI too issued a notice to tag Kingfisher Airlines, Mallya and United Breweries Holdings as wilful
defaulters. The SBI notice of August 19 has alleged diversion of funds by Kingfisher Airlines to UB Group of
companies and other firms. Mallya has challenged the decision of United Bank and the SBI in various courts. In
February, Punjab National Bank, another lender, declared Mallya and Kingfisher a wilful defaulter.

According to a senior bank official, who did not want to be named, banks have conducted over 500 hearings with
top Kingfisher company officials on loan recovery but very little came of these meetings.
The Kingfisher case is an example of collective failure of the system. The banks should have declared it an NPA
much earlier. Why did the RBI even clear the restructuring of Kingfisher? Even now, the way banks are going after
Mallya, they will not be able to recover any money. A criminal case or money laundering investigation will only focus
on prosecution, not on recovery of money. Do you think Mallya will not contest the case? So in all this, how will
banks recover their money? Instead, banks should look at one-time settlement of dues, says K C Chakravarty,
former deputy governor of the Reserve Bank of India.
The SBI on Thursday denied allegations that banks have been slow in moving against Kingfisher Airlines. We
reaffirm that our bank moved very promptly on taking the appropriate legal steps required to protect banks interest
and public money, SBI said in a statement.
Mallya is currently fighting at least 27 cases in various courts. Of these, at least 22 are related to loan default by
Kingfisher Airlines an amount that stood at Rs 9,091.40 crore at the end of November 2015, according to Union
Finance Minister Arun Jaitley, who spoke in Parliament on Thursday.
Besides, the CBI is investigating Kingfisher for defaulting on the Rs 900 crore loan that IDBI Bank gave Kingfisher
Airlines in 2009. Last week, the Enforcement Directorate also registered a money laundering case against Mallya
and a few IDBI Bank officials. An email sent to IDBI Bank went unanswered.
Meanwhile, Mallyas troubles have only been growing. In February this year, the board of United Spirits Limited (the
company his father set up) asked him to resign as chairman after an internal probe alleged financial irregularities.
The man himself, meanwhile, is supposed to be in London after signing a Rs 515 crore sweetheart deal with United
Spirits and marking attendance in the Rajya Sabha on Monday.
On March 11, he tweeted, News reports (say) that I must declare my assets. Does that mean that Banks did not
know my assets or look at my Parliamentary disclosures?

http://indianexpress.com/article/india/india-news-india/sunday-story-once-upon-atime-there-was-a-king-vijay-mallya/

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