THE RISE AND FALL OF KINGFISHER AIRLINES

We are committed to achieving our ambition of making Kingfisher Airlines, India's largest
private airline both in capacity and market share. The Airline ushered in a new era of luxury in
India's domestic aviation sector with its brand new aircraft with stylish red interiors, and smartly
dressed crew and ground staff Kingfisher was the first Indian airline to have in-flight
entertainment (IFE) systems on every seat with guests being able to watch live TV in-flight" said
Dr.Mallya At the launch of the airline The company mission also mentioned that the Kingfisher
Airlines family will consistently deliver a safe, value-based and enjoyable travel experience to all
our guests" was a statement made enthusiastically by Mr. Vijay Mallya at the me launch of the
airline in 2005, which was acclaimed as a luxury airliner by many.

Little would have he expected the kind of rough weather the airline was to face just a in three
years, falling from a peak of highest market shares 26% in 2009 to a low of 6.5% in 2011 and
grounding of all the aircrafts and suspension of license in four years. It was difficult to believe
that airline will he grounded for the very same reasons safety and value-based service.

Grounding of Kingfisher was not an isolated event. Several Airlines started after deregulation of
the airline industry as a part of governments liberalisation policies under economic reforms
initiated in 1991, had been grounded (see exhibit 1), raising doubts whether necessary care had
been taken in opening the airline sector. After all, starting an airline requires huge investment
and closure of it does lead to wastage of precious national resources and high costs to the
passenger and the country.

Background of the Company

Established in 2003, Kingfisher Airlines Limited wat an airline group based in India. it was
promoted by the Bengaluru based United Breweries Group. Mr. Vijay Mallya, Chairman of the
Group had considerable experience in managing one of the largest breweries businesses in India
and had managed several acquisitions successfully (exhibit 2). The airline started commercial
operations in 9 May 2005 with a fleet of four new Airbus A320-200s operating flights from
Mumbai to Delhi. It visualized starting its international operations soon
The company also owned two subsidiaries namely Northway Aviation and Vitae India Spirits.
Northway Aviation was engaged in the business of financing pre-delivery payments and aircraft
acquisition. By 2008 Kingfisher Airlines achieved the status of the only five-star airline in the
Indian skies and was known for providing world class in-flight services to its passengers.

The Take Off

The promoter of the airline was known for quality and style. At the age of 28 he took over the
reins of his family business. His lavish lifestyle brought him in corporate limelight at an early age.
He used his popularity to boost UB Groups brand and coined the "King of all times" slogan for
his beer. His international foray of buying and selling Berger Paints U.K. and using the money on
fast cars, yachts and maintaining 40 odd international homes transformed him from Chairman
UB Group to its brand icon "My own lifestyle got intertwined with brand personality and so
without really planning in that way I became almost my brand ambassador of and that's just the
way it's kept on developing" he once said.

The slogan helped him create a brand image of Kingfisher airlines right away. When Kingfisher
Airlines began is operations, there was no other airline that come close to it in quality. The
Indian Airline was nowhere to be quoted as a class-apart passenger carrier, so only Jet airways
was dominant players in the Indian aviation industry. other players did not matter as they were
catering to a low-cost market.

Kingfisher hoped to provide superior experience in air travel and be ahead of competition in
product and service offerings, with brand new aircrafts and a 5-element product concept: high
seat pitch, personalized entertainment, hot meals, home delivery of tickets and valet service.
treating travellers not as passengers but as "guests". With this approach, starting with 4 flights a
day between Bangalore and Delhi, it grew to 104 flights a day connecting 16 cities by inducting
17 aircraft ins single year and setting a world record of fastest aircraft induction in 2005-06. By
the year 2006, the Airline became an airline synonym with five-star air travel and was becoming
famous among business travellers. In December 2006 Kingfisher Announced that it would
provide live in-flight entertainment which was first in its class by partnering with DTH pioneer
Dish TV India Limited.

Kingfisher’s income for the year ending on 30th June 2006 was INR 3.05 billion but this
amount couldn't overshadow losses amounting to INR 3.4 Bn.

Aircrafts:
Aircraft are one of the most important assets of any airliner. Choosing and inducting the same
requires major decision-making skills. Kingfisher Airlines started with an Airbus A-320 aircraft
and continued using aircraft of the same line. Kingfisher did not enquire about any aircraft of its
own. All the aircraft of kingfisher Airlines were dry leased. In dry base, the lessor (who owns the
aircraft) gives the aircraft to the lessee (Kingfisher in this case) for a period of a minimum of two
years without insurance, crew, ground staff, supporting equipment, maintenance, etc. the
aircraft's charges thus become operational cost, which plays a crucial role in cash flow
calculations. Also, since the company did not buy the plane, it could not command any
bargaining power over Booing or Airbus.

Kingfisher’s vision and mission:

The vision and mission of a company play a vital role in the functioning and performance of any
company. Kingfisher described its mission and vision in the following way:

In the line with the above, to expand domestic routes and enter international routes, kingfisher
decided to increase its fleet and placed orders for many wide-bodied A340-500s and A350s. it
become the first carrier to sign up A380 type of aircraft in 2007. Although the airline
experienced high traffic on metropolitan city routes like Bangalore, Mumbai, new Delhi,
Chennai, Kolkata, congested airport infrastructure in these cities limited its organic growth.

Moreover, the competition was becoming intense in the Indian aviation industry with 5 carriers
fighting one on one. IndiGo, SpiceJet or GoAir were not new entrants in the industry. They were
almost as old as Kingfisher Airlines. However, they had restructured themselves with time and
had retained their LCC business model and had not introduced business class in their is in so
many years of Operations.

Another problem that Kingfisher was facing was that it could not stat international flights
without having 5 years’ experience in domestic operation. Jet Airways, owned by an NRI Mr.
Naresh Goyal, did not have any such restriction and go straightaway go international as the
government adopted open sky policy for airlines. Mr. Mallya was optimistic that the Ministry of
Civil Aviation may waive this condition. But growth could not wait for the same. By 2007
Kingfisher expanded its route network to 34 cities while doubling its frequency to 208 flights.
Besides it also introduced Kingfisher First to increase its yield. The market share had increased
to 13% in 2007 from 2% in 2005, while Jet Airways share had dropped from 45% to 22.7%.
However, all the efforts of increasing market share were adding to company's losses.

The income for period ending 30th June 2007 increased to INR 16.2 billion but Losses also
accumulated to INR 4.19 billion. Things were pretty much on right and that track and were
almost going as per plan. Kingfisher had carried 17.5 million passengers with a fleet of 41
aircrafts and a schedule of 255 flights.

With airport modernization in metro cities set to be completed between 2008 and 2010, and
tough competition from a large number of new entrants and LCCs offering low fares, the
carrier's future growth depended on the ways it increased its market share. The company
therefore was looking for inorganic growth to increase its market share. It was not Unexpected
because Mr. Mallya had successfully managed several acquisitions. The promoter of Jet Airways
Mr. Naresh Goyal on the other hand had vast experience in Airline’s business, but no experience
in managing acquisitions. At that point there were two options available, both of low-cost
carriers: one Sahara India and the other Air Deccan. Although Sahara India was established in
1991 and had 15 years standing in the field, but was fast losing market share (which had come
down to a low 8%) and was also making losses.

Air Deccan was established in 2003 and grow fast capturing 22% market share by 2005. Air
Deccan was working on somewhat different model providing Extremely low fare based services,
it sold few tickets even for one rupee. Towards this the airline was using several cost cutting
measures. It had frill free flights without any complimentary service, in which even water was
not free, unlike Kingfisher which distinguished itself with variety of free services as described
earlier The crew of Air Deccan including pilots stayed in low cost accommodation much as guest
houses, unlike Kingfisher whose staff stayed in big hotels.

However the airline growth plans were frustrated by cash problems. Its IPO to raise equity for
buying new aircrafts did not click as expected. Air deccan was therefore also looking for a
partner to fund expansion and kingfisher was looking for a partner to increase market share
(which had been a major focus of its vision). Sahara was in negotiation with jet airways, which
was more established although it was making losses. Air deccan was thus a better choice of
kingfisher. Kingfisher therefore made an offer of rs.5550 million, at a share price of 155rs.,
which surprised many industry expert in the aviation industry. The deal also included vice
chairmanship to Mr. Gopinath who was owner of air deccan. Apart from 26% share from the
owners, kingfishers also acquired 20% shares from public and took management control of the
company. Later in June 2007, the two companies decided to merge and air deccan being
rechristened as kingfisher red. Some industry experts felt that the move was also expected to
help kingfisher enter into international foray as air deccan was to complete five years of
operations in 2008 that was required for the purpose of international operation license.

The acquisition hick-ups:

The growth path however was not as smooth as expected. The managerial headaches were
increasing with the task of post-merger integration. There was duplicity of tasks after the Air
Deccan acquisitions, as Kingfisher Airlines operated two different aircraft, Airbus and ATRs (of
air Deccan) This caused additional headaches of maintaining different sizes and shapes of
aircrafts, which required different decision-making skills and financial burden. for example,
Kingfisher required double the number of personnel. If it would have relied only on Airbus then
it could have easily reduced its operational costs. The airline was able to sort out the airport
space issue by sharing the extra departure space of Indian Airlines terminals.

Now Kingfisher was carrying 10.0 billion passengers annually with a fleet of 77 aircraft,
operating 412 domestic flights daily, The Combined share of Kingfisher and Air Deccan
surpassed Jet Airways and Indian. The period ending 31st March 2008 generated a gross income
of INR 14.4 billion and losses dramatically were reduced to INR 1.9 billion but this does not
include the aftermath of the merger of Deccan. Since was a streamlined and well-planned year
by Kingfisher, that year proved to be, profit-wise, the best year right from inception till date.

The marketing issues however continued to plague the company. As Kingfisher Airlines decided
to introduce Kingfisher Red, it automatically entered into price war in domestic market against
all other carriers, especially the LCCs Since Air Deccan was offering some tickets for a meagre
one-rupee Kingfisher had to continue such kind of marketing campaigns. But the problem was
that Kingfisher almost trashed all the marketing strategies of Air Deccan, thinking of reducing
operational costs but here came the deviation. Airline business has extremely long gestation
periods. For Kingfisher, Air Deccan totally new business and benefits of low-cost Kingfisher red
could flow only after been in the market much before kingfisher airlines so it should bring
kingfisher airlines financial statement into green very soon.
Some business fliers which were earlier loyal to Kingfisher Airlines used all their frequent flier miles,
bought free tickets, gave the same to their family to enjoy and they never returned back to
Kingfisher. For them, King Fisher Airlines became a compromised airline and they started returning
to Jet Airways, which is also a cash step but has a sustainable business model. As soon as king Fisher
realised that they had committed a mistake. By changing the business model of air d, can it increase
prices of Kingfisher red and bought the same on par with the other airline at this point of time, king
Fisher red had become a lost opportunity and even the management was confused. If it would call it
a normal carrier or a low-cost one.

High up in the sky: foray into international operations:

The year 2008-09 was quite historic for Kingfisher airlines in March 2009 a little over 3 years,
kingfisher Airlines became the largest passenger airline of the world. Second, the most populous
nation, with 26.7% domestic market share. The airline also finally got permit to operate on.
International route on September two thousand and eight king fisher flew overseas from
Bangalore to London for the first time.

Kingfisher was now offering 3 classes of travel to passengers. Kingfisher first: premium business
class, which was truly best in class. Kingfisher class: premium economy or the basic economy of
flagship Carrier, Kingfisher and kingfisher red: low fare Basic class or in other word, the new name of
air Deacon. financial statement for year ending 31st March 2009 was consolidated the statement of
both Kingfisher airline and Air Deacon, hence now the income increased many folds to inr 53 billion,
but so did the losses which increase to INR 16.1 billion Kingfisher airline continued. It's run off being
the nation. The largest passenger Carrier in the year 2010 also a healthy market share of 26.7% with
11 million passengers flying with it. The Fleet although got reduced to 68 aircraft from 77 aircraft's
domestic flights for air got reduced to 366, but international air operations increase significantly to
12 flights daily. During the year, kingfisher won numerous accolades from agencies around the globe
and continued being rated as India's only 5 star airline by Skytrax for 3 years in a row. However, it
had been 4 years since birth of kingfisher, airline and shareholders were still waiting to receive first
dividend from the company but the company continued its run of losses and reported marginally
increased losses of finer sixteen point five billion and gross income shrunk to einer fifty point nine
billion for a year ending 31st march 2010.

The dark clouds: loss of market share:

The dark clouds over Kingfisher airline were getting darker and dance with no ray of sunshine. Jet
Airways a (much stable and sustainable Carrier was also badly affected financially due to its
acquisition of Sahara airways) surpassed Kingfisher airline to become country's largest passenger
airline, as it reported a market share of 25.5% whereas for kingfisher it came down to 19.8% despite
increase in flights and matching complimentary services. On the rise was another players IndiGo
promoted by another NRI from USA, as it reported a good 90% seats being filled and was gaining
market share rapidly. Kingfisher's domestic daily operation was same 366 flights daily, but it's
international operation increased to 28 flights daily, the airline reported an increase gross income inr
63.6 billion and reduce losses of inr 10.2 billion for the year ending 31st March 2011.
Turbulence at high altitude: exit from low fare business:

Kingfisher airlines for the very first time declared in September 2011 that it is having some serious
cash flow problem. It blamed the same to rising fuel cost, dozens of pilots left Kingfisher for rival
airlines during 2011. Kingfisher dues kept on piling up and it was goodwill of united breweries group
that the lessors allowed the same, the amount eventually piled up so much that the lessors filed suit
against Kingfisher airlines across globe and force Kingfisher to ground majority of aircrafts.

Faced with financial problem, the kingfisher decided to exit the low cost. Kingfisher red business. The
business standard reported. King Fisher has run up a debt of ₹6000 cr. accumulated losses of 5000
cr. and pays out an interest of Rupee's 1300 cr. more than its market capitalization of ₹,1232 cr as on
Wednesday's price. Of Rupee's 24.70, an equity share on national stock exchange, faced with limited
options when the markets are not really Conducive to raising equity capital, mallya, and CMD of
2005 founded firm is trying to negotiate with whatever little space he has left. That is, sweat more
equity from what has been invested. The aim is to push-up revenue from fine-tuning operations.
Shed some realty assets, sale and lease back around 10 A320 aircraft. Thus reducing the cash out
flow Reconfigure It's Fleet to drive it more revenue. Swap some high cost rupee loan into low cost
forex loan and try to purchase Aviation turbine fuel from global players in an effort to reduce the
sales tax burden imposed by various states in India.
“We are getting out of kingfisher red, which is our low cost service offering,” Mallya said;….we are
reconfiguring our airbus fleet so that they will be dual class. The number of first-class seats maybe
reduced from the current levels in order to fit in a larger number of economy seats which will go up
by 10%...

Regarding future course, the Business Standard reported:

"The company, he (Mr. Mallya) said, would be offering füll service on all its Airbus aircraft. The aim:
more seats, higher occupancy and hopefully higher ticket values, he said after an eventful annual
general meeting of Kingfisher Airlines. The company flies a total of 66 aircraft, 39 of which are from
Airbus, while the rest is of ATR, the turboprops which connect Tier-II towns in India. A majority of
the Kingfisher Red class of service is on these turbo-props. All ATR aircraft of Kingfisher Airlines will
continue to operate in a single configuration as a Kingfisher Class full-service product. All advance
reservations made by guests in the Kingfisher Red class of service would be fully honoured, said the
company's officials This is so, because the reconfiguration will take about four months to complete
According to the officials, the load factors in Kingfisher First have been 50 per cent on an average "As
such, the capacity is being reduced on the existing dual class Airbus aircraft and introduced on
existing single-class Airbus aircraft Kingfisher will, therefore, offer the Kingfisher First service on all
its Airbus routes albeit with an overall reduction in capacity," a source said:

Why the phase-out? Officials said "Kingfisher Class (full service economy class of service), over the
past six months has generated higher yields and seat factors than the no-frills Kingfisher Red class of
service. Following the re-configuration of all Airbus aircraft, the number of economy seats across the
Airbus fleet will increase by approximately 10 per cent and this capacity will be offered across the
board as a Kingfisher Class full service product," he said. Industry analysts are sceptical about this
move by Kingfisher Airlines to exit the low cost model "Getting into the full service offering across all
routes is a challenge, notes one among them.

Creditors warned the firm that if it failed to raise almost USD 159 Million in equity then they will not
be able to restructure its debt. Kingfisher's top brass believed that they would continue being the
way they have till now but the problems were bound to get really out of hands. For the very first
time Mr. Mallya himself declared that the airline was in dire need of funds in order to maintain
operations the income for year ending 31st March 2012 stood at approx. INR 54.9 Billion, which was
lowest since 2007 and the losses increased sharply to INR 23.3 Billion.

The Grounding of Airline: Suspension of Operating License

The beginning of year 2012 marked the most turbulent period of all for Kingfisher Airlines On 5th
January 2012 State Bank of India (largest creditor of cash strapped Kingfisher Airlines) declared
Kingfisher Airlines as a non-performing asset SBI's exposure to Kingfisher was staggering over NR14.5
Billion On 18th February the airline became headline of almost all newspapers when it grounded
most of its aircrafts and declared that it is operating mere 28 aircrafts with a curtailed schedule of
175 daily flights. Things now looked out of hands of the management of Kingfisher and it declared
2000 job cuts along with longer work hours. It seemed like Kingfisher assumed to be a manufacturer
and not a service provider, where each employee is a jewel for the firm.

The company was finding it difficult to pay staff salary from March 2012. There were frequent
cancellations of flights due to oil marketing companies' refusal to give fuel, pilots' shortage and staff
agitation etc. The number of pilots left the company. The consortium of banks led by SBI also
declined to further issue more debt to Kingfisher until and unless Kingfisher itself raised some funds
through fresh equity, Kingfisher Airline's all accounts stand frozen by the Tax Authorities due to non-
payment of dues. Also The International Air Transport Association (IATA) suspended Kingfisher from
its International Clearing House dealing a fresh blow to the ailing carrier as it seeks funds to stay
aloft The condition was worsening with everyday passing in June-Sept.2012.

By October the situation reached a flash point. A lockout was declared on Oct. 1, 2012 due to
sudden strike by some engineers with some pilot also joining it (because they were also not getting
their salary paid), leading to frequent cancellation of flights. The DGCA and the Minister were
concerned about safety of passengers as engineers were not giving "airworthiness" certificate. The
situation got worsened when spouse of an employee committed suicide on Oct. 4, 2012, allegedly
due to non-payment of salary.

On October 20, 2012, the DGCA suspended the operating license of Kingfisher Airline, citing the
latter's inability to provide any reasonable revival plan. The suspension of license came as the airline
had declared lockout on October 1, 2012 up to October 18, which was further extended to October
23. The airline which had departure rate of 2930 flights per week last winter, thus, came to
standstill.

The civil aviation minister fully hacked the action of DGCA. The suspension had come a day after the
airline had sought more time to reply to show cause notice sent by DGCA on the revival plan. The
DGCA was not satisfied with the reply of the airline as the latter had not come out with the solution
to its industrial unrest problem. The show cause notice had asked plans to restart the operations and
pay salary to employees and had also said that the airline risked the suspension of license as it had
failed to establish a safe, efficient and reliable service. The regulator had rejected the passenger
carrier winter schedule of flight departure

The suspension of operating license was a shock to the employees, we only wanted our salary, not
the closure of the airline, which is source to our livelihood", a senior staffer said. Not only the
Minister of Civil Aviation but even the leader of JD(U) and convener of NDA was very upset and
slammed Mr. Vijay Mallya.

The Financial Crisis:

It was not only the salary of the 3000 odd ground staff, engineers and pilots which was not being
paid, the other payments like fuel and airport charges were getting in default. Indeed as early as July
2011 the oil companies refused supply of aviation fuel on credit. By October the Airport Authority
refused permission of using hangers at 2 airports. The consortium of banks, which had very warmly
taken Kingfisher as a valued client just a few years back, were refusing further credit unless the
company infused fresh equity, which was not easy as the share prices were also declining with
number of flights. The only way was if the owner put some new equity personally. But the owners
were non-committal on putting the family jewel to save the airline. The only other hope was the
favourable deal of owner UB Group equity to Diego of UK, which was keen to acquire part of UB
Group business.

Etihad Airways Offer:

On December 10%, the new buzz was that Etihad Airways, the national carrier of United Arab
Emirates (UAE) is like to acquire 48% stake in Kingfisher and take over the management control of
Kingfisher. This would partly release the pressure on the owner Mr. Mallya. However one was not
sure on the date what will finally happen in view of the statement of the Minister of Civil Aviation
that "The airline has been saying for a long time they have a fool proof plan, but we have not
received any such plan yet. It is DGCA who will decide the future of kingfisher, if a satisfactory plan is
received.”

Exhibit 1
 Acquisition by UB Group
Vijay Mallya's venture.

1 1978 Vijay Mallya got involved with UB group co. Carew Phipson under his father Vittal
Mallya. The group was a diversified entity with the bear, spirit, food, and
trading business
2 1983 At 28 takes over as UB group chairman after his father's death.
3 1985 Along with Manu chhabaria bids for Shaw Wallace from its foreign promoter.
Gets entangled in FERA loses deal.
4 1988 Effects leveraged buyout of Berger Paints. Divested in 1996.
5 1989 Acquires loss, making Mangalore chemicals and fertilizers. And turns it around.
6 1991 Start pruning diversified portfolios. First, sell dippy’s and later kissan to HLL 1994.
7 1994 Takes Kishore chhabaria younger brother of Manu as a partner in Herbertson.
gets enmeshed in board room battle over control. buys out Kishore. For
₹,134 cr. in 2005.
8 1997 Enters the U.S. craft brewing industry with the buyout of Mendocino brewing.
9 2001 To pre-empt competition from MNCs like SABMiller, acquires associates interasia
GMR breweries.
10 2002 Buys 85% stake in triumph distillers & vintners owning, Gilby’s green label
whisky.
11 2004 Wins a long-running case against Manu chhabaria regarding Shaw Wallace.
12 2005 Acquires shaw Wallace for $300 Mn from chhabarias. Launches Kingfisher
Airlines.
13 2006 Start scouting for international acquisition spirit and wine industry.
Launches bid for champagne Taittinger but withdraws in the face of opposition.
14 2007 Acquires Scottish distiller whyte and mackey for $1.2 bn and buys controlling
interest in air Deccan and takes ownership interest in spykar F1 team along with
Dutch tycoon Michael mol.
15 2008 Enters into discussion with viageo plc. To sell stake but talks fails. Mallya
successfully bids for Bangalore IPL team.
16 2009 Dutch brewer Heineken becomes Mallya’s partner in beer business after buying
out Scottish and new cattle.
17 2010 Kingfisher airlines losses widen. Mallya seeks debt recast.
18 2011 Sells 42.5% stake in F1 team to Sahara India.
19 2012 Mallya restart talks with Diego as KFA operations are hit banks refuse further
debt recast.
Source: “Winning some, losing many”, times business, Nov. 16, 2012.