Article: Dwindling Kingfisher Airlines: Nidhi Bisht

C-Suite

Dwindling Kingfisher Airlines: Nidhi Bisht

Factors that brought "bad times" to the king of "good times"
Dwindling Kingfisher Airlines: Nidhi Bisht
 

In the spree of going international, Kingfisher Airlines acquired Air Deccan, which eventually brought ‘bad times' for the ‘king of good times'

 

To cope up with the cash crunch, the airline decided to get away with Kingfisher Red, its low cost segment, in September 2011; but it seems the survival mantra was too late for the ailing airlines

 

It is said the Kingfisher is the promise of abundance, of new warmth, prosperity and love that is about to unfold within your life. I wish so was germane for the Kingfisher Airlines. Kingfisher Airlines, supposedly a dream venture of Vijay Mallya, amplified the glamour quotient of the industry with its entry. The neophyte introduced in-flight entertainment system on every seat for domestic flights for the first time in India. The Airlines was bestowed with some of the most prestigious awards in the beginning of its journey, however the hunky-dory picture did not continue for long. In June 2007, Kingfisher Airlines, a five star airline decided to acquire cash strapped low cost airline Air Deccan. The process was eventually completed as a reverse merger, which gave international flying rights to Kingfisher Airlines according to Indian norms; as Air Deccan already had a stint of 5 years in the industry.

In the spree of going international, Kingfisher Airlines acquired Air Deccan, which eventually brought ‘bad times’ for the ‘king of good times’.

Before settling down and understanding the aviation industry, it was an amateurish move by the business tycoon, to acquire another airline with a different USP and brand positioning. The irrational exuberance of the owner triggered a spate of poor decisions contributing to the plight of Kingfisher Airlines. The merged entity got synergies in terms of shared infrastructure and back-end operations; but also led to the dilution of the brand and the loss of brand equity. Vijay Mallya continued to assume the role of Chairman and CEO in spite of the fact that he had to oversee many other diverse ventures of UB Group.

The airline started juggling for its survival in the sick aviation industry of the country, but Mallya was running amok and could not foresee the future of Kingfisher Airlines. With recession hitting in 2008 and rising fuel prices along with the mandatory requirement to service non-profitable routes, the road ahead was riddled with challenges. It was now trapped in turmoil and was burdened under huge debt, which it owed for fuel, airport fees, salaries, service tax and repayment of loans to different banks. Amid not so normal circumstances, Sanjay Agarwal, ex-CEO Spicejet, joined Kingfisher Airlines in Sept 2010, and Vijay Mallya assumed the role of MD and Chairman of Kingfisher Airlines. To cope up with the cash crunch, the airline decided to get away with Kingfisher Red, its low cost segment, in September 2011; but it seems the survival mantra was too late for the ailing airlines.
Violation of the basic business rule of cost benefit analysis; with skewed expenditure and income balance over the years has brought Kingfisher, at the verge of bankruptcy.

In the annual report of Kingfisher Airlines for the year 2011, auditor B.K. Ramadhyani & Co. raised considerable doubts over the company's survival and pointed out that the airlines has not deposited the government money, which it deducted as TDS and provident fund contribution, highlighting frowzy financial upkeep of the company. It was getting worse with the passage of time, leading to abortion of international flights and cancellation of domestic flights, which is still continuing unabated. Its languishing shares hit an all time low of 13 on April 25, 2012.

In view of these predicaments, Mallya approached the government for a bailout, but was denied the same; and in contrast, Air India was given a lifeline of 30,000 crores. Does this mean that corporate governance is only meant for private sector; and tax payers will continue to foot the bill for such disasters? What is the limit of giving leeway to any airline and allow squandering crores of rupees saying that the industry is at a take-off stage? (Civil aviation minister Ajit Singh recently made a remark that aviation industry is at a take-off stage in India)

In a contentious report by Canada based Veritas Investment Research, the analysts raised questions on the entry of Mallya into the airline business and pointed out that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that the ownership of India's premier liquor and beer assets has been forfeited at the altar of egoistic ambitions. The saga of Kingfisher Airlines financial health unveils the downside of Indian corporate governance structure showcasing crony capitalism, regulatory failure, banking imprudence, lack of accountability and complete lack of financial literacy among corporate directors and management. If we try to figure out reasons for the perils of Kingfisher Airlines, it reminds us of typical features of the control model of corporate governance suggested by McKinsey in 2001, applicable to developing countries like India. Whether it is concentrated ownership, incentives aligned with core shareholders, limited takeover market, reliance on family, bank or public finance, inadequate minority protection or other factors, we can clearly see the resonance.

In Indian milieu, Kingfisher is yet another episode where ownership becomes the basis of power and the owner fails to accomplish fiduciary obligations. The fiasco, clearly exemplifies lack of strategic leadership and raises questions on the owner’s dominance in the corporate decision making and exaggerated risk taking ability. It highlights the owner’s obsession for power and chair and raises doubts on the role and competence of executive and non-executive directors of the company. It highlights the features of rubber stamp boards, which assume a passive role in the board meetings with a lax corporate oversight. It also focuses on the outlook of gaining market share as a strategy by losing billions and focusing on short-term gains. The debacle even raises questions on the role of civil aviation ministry, ministry of corporate affairs, tax authorities, banking system of the country and SEBI as well.

The intricate relationship between all these issues has caught Kingfisher Airlines in a treacherous web of corporate viability and governance issues. If Kingfisher Airlines has not seen a year of profit since its lineage, why were things not handled on time by the regulatory bodies, which allowed it to continue to burn cash in spite of piling losses over the years? This is highly detrimental to the country’s financial growth where financial institutions are often allocating capital to non-optimal uses, contributing to an upsurge of non-performing loans.

Do we still have the hope to save the squawking bird, which is bleeding from different cuts? How can the financial woes of the sputtering airline be put to rest?

Vijay Mallya has been hitting hard for the approval of FDI by foreign airlines in Indian carriers, which is supposedly the only option left for the red bird to stay afloat. Although the central government signaled for the approval of 49 percent of FDI, but it got stuck because of the opposition from the allies. This decision, if taken, can prove to be milestone for the Indian aviation industry, which will pave the way for the much awaited prospective joint ventures between foreign carriers and Indian conglomerates.

Taking in view the inherent complexities and bottlenecks in the Kingfisher imbroglio, it is required to delve deeper and understand different perspectives, so that reforms can be initiated at the corporate and the institutional context for better corporate governance.

Dr. Nidhi S. Bisht has teaching and research experience of around 7 years. She has also served as a trainer for many organizations.

 

 

 

Topics: C-Suite

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