Background:
Kingfisher airlines started out as a UB group subsidy, a USD 2 billion diversified conglomerate, which holds more than 60 companies under it which are associated with major industries. The United Breweries group owned the kingfisher airlines. Kingfisher airlines had then commenced its commercial operations in the year 2005 on the 9th of May. Operating with a fleet of four new Airbus A320-200’s, kingfisher airlines had its first travel from Mumbai to Delhi. Subsequently the airliner had even commenced its international maneuvers on the 3rd of September 2008, by interlinking Bangalore and London. However it faced a worsening economic scenario since 2008. The mighty airlines in the present day scenario is facing many bankruptcy problems, pushing the airline to ground many of its destinations and aircrafts.
Introduction:
It was the year 2006, when kingfisher airlines got listed in the stock exchange after it had been setup in the year 2003. The present day situation for KFA is that it has a staggering Rs.8200 Crore debt and the money to pay for fuel, salaries and airport fees etc. is running out. Due to this KFA has lost all its hopes and has pleaded the government to give them a total bailout but according to market analysts, the actual flaws in KFA’s business plans and the functioning are due to the endless woes of it , which is the major root problem of the airline. So my research question for the current commentary would be “Will kingfisher airlines be able to recover from the present debt crisis using the current financial strategies?”
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Syllabus area covered:
SWOT analysis
Current Ratio Analysis
GPM and NPM ratios – Analysis of the balance sheet
Findings:
When Deccan Aviation’s Captain G.R Gopinath was looking forward to selling off his airline, then is when Vijay Mallya who kept denying that he couldn’t even think of buying an airline whose business model is so different than that of his had suddenly put in his bid and apparently clinched the deal. It was an interesting deal because KFA had got the license to fly immediately and got immediate listing as soon as it purchased Deccan Aviation but it was not all good, along with the goodies they had even acquired the losses incurred by the airline.
The promoter group of the airline that is the UB Group had an experienced set of officials to run its business which majorly includes Vijay Mallya himself. The Airliner’s second problem was that its chairman was acting like an absentee landlord and was concentrating on his other business. The third mistake that Kingfisher Airlines had made was that they could have first consolidated its domestic operations and then got into international flying as then the competition increases a lot and only those with enormous money resources survive.
SWOT Analysis:
Strengths
Weaknesses
Strong brand image
Financial support from the promoter that is the UB group.
First Indian carrier that started out with a whole new fleet of planes. Quality service and innovation
Financial issues due to heavy debt borrowing
The laying off of employees has caused a bad image.
The maintenance costs were very high at ground and airline level. The company still has not met its breakeven.
The ticket pricing was very high, not in the affordable range of the commoners unlike its competitors which are priced economically.
Opportunities
Threats
Poor service of air India and problems of strikes in jet airways. Growth in air travel, the number of passengers has increased. Route Rationalization: cutting down business in unprofitable sectors and services to cities.1 Debt Recast: Kingfisher Airlines must ask the banks to reduce the interest rates of the loans and possibly find a local investor to invest some money in their business2. Low cost carriers obtaining the larger market share.
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Fuel costs also have increased subsequently.
Economic slowdown
Infrastructure constraints
Banks will aver on severe security before giving in any more loans which they need for their operational costs. Some banks may even go up to the extent of calling in all their debt. The airline’s promoter funds will be tapped, which will put pressure on the finances of the UB group
Current Ratio Analysis:
It can be defined as the company’s ability to meet its short term maturing obligations. The current ratio is calculated using this formula: Current Assets/Current Liabilities. For the year 2012 (as of march 31st) = 16188.35/84428.04 = 0.19 (all values in million INR) For the year 2011 (as of march 31st) = 29738.26/55255.85 = 0.54 (all values in million INR) 3 http://www.marketing91.com/swot-kingfisher-airlines/
4 http://m.outlookindia.com/story.aspx?sid=4&aid=279017
It can be seen that the current ratio has decreased from the year 2011 to 2012 which indicates a threat to the company as the debt to assets has significantly increased and has not yet been repaid in the right model to improve and come out of the debt crisis.
Following is a graph that shows the plotting based on the balance sheet3. We can see that the current ratio is less than 1:1 for both the years which indicates that the short term debts of the business are much greater than its liquid assets, which could spell disaster for its survival if creditors demand payment. Which is the case for kingfisher airlines as there crisis has been increasing and increasing as there are no sources for revenue that can be used to pay out even a part of the debt. If the company’s current ratio falls below 1, it implies that the company has a negative working capital, it is then required for the business to take a closer look at the business and there are no liquidity issues.
If the ratio is drastically below 1 it implies that the company has inventories that can be converted into cash and this involves to be seriously concerned into the working which when neglected can lead to a financial crisis like in the case of Kingfisher Airlines. When observed in the financial values the income from operations has increased drastically from march 31st 2011 to march 31st 2012 which can be accounted to the loss in operations and trade. If we observe the employee costs also have been cut down on a large note due to the laying off of the employees and staff members. The aircraft lease rental has been subsidized as the fleet of Kingfisher airlines has decreased.
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If we compare the quarters between December 31st 2011 and march 31st 2012, we can see that the aircraft fuel expenses are more or less the same, which shows a loophole as to why is there still such high fuel expenses even though the operations and fleet have been reduced or more close to being closed. The losses between the same periods have almost increased more than double the times. Hence we see the net losses of the company to increase from (44.426.95) to (115,152.60) lacs which shows the growing debt crisis of Kingfisher Airlines.
Price Movement and Performance Charts of Kingfisher Airlines
Index Comparison and Ownership Pattern of Kingfisher Airlines
Source:http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scrip
code=532747
From the above graphs, it can be clearly seen of what the past, present and future trend of Kingfisher Airlines is going to look like in the respective areas mentioned above.
GPM (Gross profit margin)
For the year 2011
-4.8%
For the year 2012
38.2%
It can be seen that the gross profit has been depreciating at an exponential rate which shows that there is absolutely no scope of business for kingfisher airlines, as its functioning and sales have gone down on a drastic rate, thus leading to its mounting losses. NPM (Net Profit Margin)
For the year 2011
21.1%
For the year 2012
382.01%
When we calculate the net profit for the company we can observe the change in it from the year 2011 and 2012 there is difference of about 360% which shows the enormity of the debt that kingfisher airlines is heading towards. The company’s market share has also shrunk a lot due to the onboard crisis. Below is the pictorial representation of the difference in the market share of kingfisher airlines between the financial year 2011 and 2012.
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FOR THE YEAR 2011
FOR THE YEAR 2012
Analysis:
It can be seen that Kingfisher Airlines has gone for public issue before it obtained Deccan Airlines so a part of the money might have been raised from /the money gained out of it. The UB group was the promoter of the company so it had the maximum stake in the Airlines but lately due to the debt crisis its stake is being diluted in order to issue them to other public who can invest money and might raise some capital for the business, doing so it is raising financial pressure on the UB Group. The Going concern status of kingfisher airlines has already been lost which might pose a threat for investors investing in the company which might lead to very bleak chances of survival.
Problems:
Fuel dues:
Kingfisher Airlines had been a nonpayer of fuel bills which lead to many problems for the airliner. HPCL (Hindustan Petroleum Corporation Limited) had abridged the supplies of fuel for the airliner in lieu of non-payment of overdue fuel bills. Delayed Salary: Kingfisher Airlines had not paid salaries to its employees from October 2011 to January 2012, which had caused employee dissatisfaction. It had also been noted that the tax cut from the employee’s income at the source was also defaulted while paying to the tax department. There was a delay in the aircraft lease rentals which has to be paid to GE Commercial Aviation Services, which later lead to repossession of four A320 aircrafts.
Airport Authority of India had slammed notices on kingfisher for a due on bills which amounted to about 255.06 crore INR. This had happened because the airliner was working on a cash and carry basis with a daily expense of 0.8 crore INR. Kingfisher Airlines had even service tax arrears which invited the possibility of legal action against the airliner. Kingfisher Airlines was declared as a Non Performing Asset (NPA) by the banks that had lent money for the airliner to carry out its business. Later, KFA suffered more problems such as erosion of net worth, frozen bank accounts, much of its fleet being grounded and suspension of ticket sales by International Air Transport Association (IATA).
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Kingfisher Airlines share price from Sep-2010 to Sep-2011
Measures Taken:
Revenue Inventiveness
One world alliance membership would allow KFA to have incoming inland passenger growth. Co-branded Credit Cards – Kingfisher Airlines had issues the King Club ICICI co-brand card as ICICI bank is one of its major lenders. Kingfisher Express: DTD (Door to Door) Cargo express services to capture the under penetrated air-cargo delivery service. Cost Reduction inventiveness
Streamlining distribution channels.
Renegotiating vendor agreements – airport and fuel discounts, operating leases at a discount. Control over discretionary spend – reduction in rentals, cost of transport, local conveyance and communication. Optimize space. Operational efficiency: saving on fuel consumption.
Equity infusion
Debt Re-schedulement
Capitalization of its expenses which would lead to the increase in the net income, reduce the stockholder equity and total assets will upsurge for the same amount of expenses.
Strategies for Kingfisher to come out from its Debt Crisis: Rescheduling and restructuring of loans- the unsecured loans must be converted into equity share capital then Kingfisher Airlines can avoid the finance cost of the unsecured portion but the promoter’s (UB Group) holding will drastically decrease and even the secured loans can be paid in almost the same manner. Thus the banks will have to increase the period of repayment and decrease the rate of interest on the loans which might help KFA’s operations and possibly the loans might be cleared. There must be efficient strategies to increase the turnover of the company which includes the change in pricing strategy and making it competitive to its co-airlines.
Fuel subsidies from the government – KFA must convince the government to give them fuel subsidies by which they can run their airlines and then slowly repay back all its debts. FDI ( Foreign Direct Investment) – there is a larger chance of KFA getting merged with some international airline if the FDI limit is increased which will thus lead to the acquisition of Kingfisher Airlines by an international carrier but will be relieved of its debts and would not then effect the promoter group.
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Conclusion:
The present condition of Kingfisher Airlines can be due to a series of reasons but ultimately it was a rise and all of a giant domestic carrier for India. There are very few chances for the company to bail out from its current situation. The hope of an international merger with Kingfisher might give a ray of hope to the survival of the airlines. If the current debt crisis is not put on hold and keeps increasing, there would be only one door open for Kingfisher Airlines that is to sell out everything to repay all its debts to banks and lenders thus leading to the ultimate collapse of Kingfisher Airlines.
