GLOBAL CAPITAL MARKETSINDIAN AVIATION SECTOR AND A CASE STUDY ON KINGFISHER AIRLINES

PROFESSOR-MR.AMOGH GOTHOSKAR

INTRODUCTION The Indian Aviation Industry has been going through a turbulent

phase over the past several years facing multiple headwinds – high oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth.

Over the near term the challenges facing the airline operators are related to high debt burden and liquidity constraints

Over the long term the operators need to focus on improving cost structure, through rationalization at all levels including mix of fleet and routes, aimed at cost efficiency.

The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines.

To address the concerns surrounding the operating viability of Indian carriers, the Government on its part has recently initiated a series of measures including (a) proposal to allow foreign carriers to make strategic investments (up to 49% stake) in Indian Carriers (b) proposal to allow airlines to directly import ATF (c) lifting the freeze on international expansions of private airlines and (d) financial assistance to the national carrier.

While the domestic airlines have not been able to attract foreign investors, foreign airlines may be interested in taking strategic stakes due to their deeper business understanding, longer investment horizons and overall longer term commitment towards the global aviation industry.

There are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets.

The challenges in importing, storing and transporting jet fuel will be a considerable roadblock for airlines due to OMCs monopoly on infrastructure at most Indian airports. From the working capital standpoint too, airlines will need to deploy significant amount of resources in sourcing fuel which may not be easy given the stretched balance sheets and tight liquidity profile of most airlines.

INDIAN AVIATION INDUSTRY

Strong passenger traffic growth aided by buoyant economy, favourable demographics, rising disposable incomes and low penetration levels

Domestic airlines operate under high cost environment; intense competition has constrained yields; aggressive fleet expansions have impacted profitability and capital structures

The industry has grown at 16% CAGR yet the comparative statistics says….

Airlines Deregulation Act (LCC Model )

How LCC try to achieve cost advantage

Entry of many new Airlines company after the success of low cost Airlines – Air deccan

Problems faced by the Indians Airlines company which increased their overall cost

Harsh desai

FREEZE ON INTERNATIONAL PERMISSIONS TO PRIVATE

CARRIERS REMOVED It’s a major boost to private airlines especially IndiGo and

SpiceJet.

The government had imposed the freeze in Mar-2011 with the objective of protecting the financially strained Air India from more competition on foreign routes.

The move will benefit the private carriers although may increase competition and losses for the national carrier.

FINANCIAL GUARANTEES TO THE DEBT-RIDDEN NATIONAL CARRIER

The Group of ministers (GoM), headed by finance minister cleared the financial restructuring plan for Air India.

Air India will be allowed to raise Rs 7,400 crore through government- guaranteed bonds bearing a coupon rate of 8.5-9%.

Air India has outstanding loans and dues worth Rs 67,520 crore and carries an accumulated loss of Rs 20,320 crore.

KING WITHOUT FISHES !!!CASE STUDY

Its an Airline Group based in India. Its Head Office is The Qubein,Andheri(East),Mumbai. Its Registered Office is in UB City,Banglore. It was established in the year 2003. It is owned by the Bengaluru based United Breweries Group. The airline started commercial operations in 9 May 2005 . Kingfisher also owns the Skytrax award for India's best airline

of the year 2011.

STARTING OF THE CRISISEver since the airline commenced

operations in 2005, the company is reporting the losses. But the situation became more horrible after acquiring the Air Deccan in 2007.

The company suffered a loss of over Rs. 1,000 crore for three executive years. By early 2012, the airline accumulated the losses of over Rs. 7,000 crore with half of its fleet grounded and several members of its staff going on strike.

DEBT RESTRUCTURING In the situation of loss and tough financial condition, the

company went for more loans. Due to heavy burden of debt and interest, in November 2010,

the company adopted the way of debt restructuring .

CRISIS TILL CONTINUEDebt restructuring also couldn’t change the

game. The company faced liquidity problems due

to which it faced problems in d payments of :

-Delayed Salary-Fuel Dues(HPCL & BPCL)-Aircraft Lease Rental Dues-AAI Reports-Service Tax-Bank Appearances

THE CRISIS CONTINUE… Market share clearly dropped to 11.3% and cancellation of flights

accompanied by a 13.5% drop in the stocks of company on 20 Februrary 2012

No fresh loans given to kingfisher until they come up with new equity itself .

Direct flights to smaller airports were also shut down

Vijay Mallya announced that he had organized funds to pay all the employees' overdue salaries

Many more accounts froze and are unable to pay dues as per schedule.

On March 7, 2012 IATA suspended ticket sales of Kingfisher airlines citing non-payment of dues as the primary reason.

IATA also immediately directed all travel agents to stop booking tickets for Kingfisher.

Kingfisher Airlines, posted the heaviest loss among the listed carriers in what was a tough quarter for India’s aviation sector as a whole.

The global economic crisis and rising fuel prices contributed to the carrier's problems and has left it heavily indebted to lessors, suppliers, lenders, airline partners, employees and the tax department.

THE COLLAPSE Kingfisher airlines kept on changing business model and

random expansion and therefore airline has no time to stabilize.

Kingfisher was gifted to Mr. Siddhartha Mallya by his father on his birthday and later was appointed as CEO.

The lack of trust was shown recently when Mr Mallya asked the government of India to bail him out.

The company blames the government for its predicament — the high cost of aviation fuel, the requirement to service non-profitable routes

3 KEY MISTAKES Tied up with Air Deccan.

Had more likely seen to been an absent landlord.

The airline should have first consolidated its domestic operations and then introduced international routes because on the foreign routes.

MADE BY HARSH DESAI – 04

AKANKSHA JAIN – 13

CHINTAN JOSHI- 19

SUMAN ANGARA- 27

KAVISH PAREKH-35

DHWANI SHAH- 43

PALAK SHAH- 55

CHINTAN PARMAR- 63

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