Kingfisher lawsuit against IAE shows Vijay Mallya's desperation

by Vinay Bhaskara and Devesh Agarwal

Earlier this month, defunct Indian carrier Kingfisher Airlines, which has been grounded since 20th October, 2012 when the Indian regulator, the Directorate General of Civil Aviation (DGCA) suspended its flying license, filed its annual report for fiscal year 2012-2013.

Instead of focusing on finding a way to pay off the nearly Rs. 7,000 Crore debt the airline owes to a consortium of lenders led by the State Bank of India, Kingfisher used the annual report as a mouthpiece to announce a lawsuit filed in the City Civil Court at Bangalore against engine manufacturer International Aero Engines (IAE) for $235 million (damages of $210.4 million plus $24.6 million in punitive damages), claiming that the IAE V-2500 A5 engines used to power Kingfisher’s once 32-strong fleet of Airbus A320 family aircraft were “inherently defective, both in design and manufacture.” The Kingfisher annual report says.

United Breweries (Holdings) Limited has filed a suit in the City Civil Court at Bangalore against International Aero Engines AG, its shareholders / joint venture partners and your Company being O.S. No. 6406 of 2012, alleging that the IAE V-2500 A5 engines supplied to your Company were inherently defective, both in design and manufacture, and has claimed damages of USD 210,400,000 plus Rs. 1,621,000,000 (aggregating to approximately $24.557 million as per the current exchange rate of approx Rs. 66  per US Dollar) and has reserved liability to claim further damages. No relief is sought against your Company in the said suit.

This lawsuit smacks of desperation on the part of Kingfisher and its management, as the carrier continues to flounder.

Considering that it did not operate for most of the year, if Kingfisher still managed to find enough cash to pay CEO Sanjay Aggarwal US $591,000 in an annual salary, clearly demonstrates a carefully managed business strategy will allow the airline to slowly pay off debt without resorting to doomed strategies such as this lawsuit.

Kingfisher restart would be a strategic mistake

Kingfisher also continues to pursue the flawed idea that the carrier should “restart” operations with up to 20 aircraft, or that the carrier will make back the money by selling itself to an investor. This is a mistake. Re-launching operations in today’s Indian airline industry would be a tragic mistake. For starters, the Indian macroeconomic picture is very poor; the Indian Rupee has continued to decline and growth projections for the fiscal year have slipped beneath 5%. This has driven demand for Kingfisher’s premium style product lower than when Kingfisher shut down, and that too up against a somewhat re-vitalized Air India, a re-capitalized Jet Airways, a market leading IndiGo, and a soon to arrive behemoth AirAsia India. 

Moreover, India’s other airlines have committed to firm orders of at least 93 current generation narrow body aircraft, as well as 272 next-generation re-engined products (which doesn’t even include an expected re-engined order from low cost carrier (LCC) SpiceJet. This doesn’t even include the fleet of well-capitalized startup AirAsia India, who we project to grow to a fleet of between 10 and 12 Airbus A320s, and regional startup Air Costa, who is supposedly on the verge of launching operations within the next two months. And all of these orders and startups have locked Indian carriers into domestic capacity growth, even with the persistent demand weakness. LCCs have been flooding major Metro markets with capacity (see IndiGo driving out Jet Airways with a massive capacity dump in the Bhubaneswar market as just one prime example).

Even at the peak of the Indian market, Kingfisher as an airline was not profitable and the one part of their network which was profitable, the regional ATR network in the South, has been co-opted by LCC SpiceJet using a fleet of Bombardier Dash 8 Q400 turboprops. SpiceJet already has 15 Q400s in its fleet, and is working to secure financing to grow the fleet by another 15 frames. For example, one of Kingfisher’s most profitable routes pre-shutdown was the trunk route between Bangalore and the industrial Karnataka city of Hubli, but Hubli is now a SpiceJet monopoly with service to five destinations using the Q400s. And Air Costa is due to start operations, muddying up the waters with even more capacity.

One cannot blame Kingfisher’s investors for the idea that if only Kingfisher were to be re-started and/or sold, they will make back their money over time. This sort of playbook is present all over the global airline industry, most notably with US LCC Virgin America whose investors have continued to swallow persistent losses over the past six years in hopes of making their money back via an initial public offering. This would be a mistake in the Indian market, where the existing carriers are already struggling. SpiceJet, Jet Airways, and Air India have all hiked their fares by more than 25% in recent days to offset the rise in the Rupee, with GoAir and IndiGo expected to follow suit soon. Kingfisher re-launching into this environment would just be a recipe for racking up thousands of crores more, in further accumulated losses.

It is better to leave Kingfisher's aircraft rotting on tarmacs across the country where they could at least serve as a reminder to Dr. Mallya, how he, and his incompetent mis-managers, drove a great airline concept in to tatters.

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Survey: The Kingfisher Airlines drama continues. Is the airline ready for euthanasia?

Employees of Kingfisher Airlines have finally reached a breaking point. The airline, blaming the employees has declared a lockout

Kingfisher Airlines Limited today announced that following a series of protracted and unabated incidents of violence, criminal intimidation, assault, wrongful restraint and other illegal acts including refraining from attending work, by a small section of recalcitrant employees which were all unnecessary and unprovoked, the management has been forced to declare a partial lock-out at the airline, effective immediately.

May be the airline should look at the insensitive tweets of Sidhartha Mallya, son of Kingfisher Chairman Dr. Vijay Mallya.

Just spent the morning playing volleyball with 12 bikini clad models on the beach...now I understand why people hate me. HA!
— Sid Mallya (@sidharthamallya) September 29, 2012

Rubbing a high flying lifestyle, in to the face of employees whose salaries remain unpaid for months, will surely achieve disastrous results.

The Directorate General of Civil Aviation (DGCA) summoning the Kingfisher management to a meeting on Tuesday, which happened to be Gandhi Jayanti, a national holiday, shows us, the seriousness of the government, which till now has been treating Dr. Mallya with kid gloves.

Even the Civil Aviation minister Ajit Singh, a well wisher of the airline, warned that the government establishment could no longer ignore frequent disruptions and non-adherence to published flight schedules, reports The Economic Times (ET).

"Disruption of (flight) schedule has become an issue with Kingfisher Airlines. While the issue of passenger safety is paramount and cannot be jeopardised and DGCA needs to be satisfied that there are no safety concerns, Kingfisher has to also ensure that they operate flights as per the schedule they have submitted to the DGCA," Singh told ET over phone.

To rub salt in to the wounds, the Kingfisher management arrived in Delhi on board a flight of arch-rival IndiGo. Kingfisher CEO Sanjay Aggarwal and Executive Vice President Hitesh Patel had an hour’s meeting with DGCA chief Arun Mishra. FirstPost reports, Aggarwal told the regulator, Kingfisher is loosing Rs. 80 million (Rs. 8 Cr., $1.5 mn) per day and also presented ten points. Most of them we have heard before. During the lockout, the airline cuts its losses in half, says Mint. This raises the question, why not keep the airline in hibernation till a foreign investor is found? Two immediate answers are; (1) Given its massive losses and accumulated debt, it is not very certain how attractive an investment Kingfisher is, despite the claims of the company and (2) With each passing day, by not operating its schedule, the airline is loosing its most desired assets, the routes and peak-time landing and parking slots at the major airports.

In the meeting, the airline executives reportedly told the DGCA, Kingfisher is in talks with the various authorities for unfreezing multiple bank accounts, holding about Rs 600 million, frozen due to non-payment of various taxes and mandatory dues, which includes the with-holding taxes deducted on employees salaries, but not remitted to the government. An act, which invites immediate trips to jail for mere taxpayers like you and me, but not the Chairman sahib. 

In the meeting Mishra gave an ultimatum, that the airline must give a time-line for paying employees, apart from a “satisfactory and realistic” operational preparedness plan, before it can get permission to fly again, as per a report in Business Standard.

Mr. Mishra went to warn other airlines not to profit from the suspension of Kingfisher flights, but market forces are already taking effect, and fares are rising, thanks to panic buying for the upcoming holiday period by concerned travellers

Aggarwal who apparently has not been paid salary himself was left to defend the airline while the Chairman was nowhere to be seen. He was confident the airline, which has a monthly wage bill of Rs. 200 million, would be able to pay the pending salaries in the next few days. The reason for Aggarwal's confidence? May be a deal between United Spirits and Diageo, which DNA reports should be announced tomorrow. However, some other reports suggest that Mallya will use the proceeds of this sale to retire those liabilities that have his personal guarantee. Is he getting ready to finally bail out of Kingfisher Airlines? Or once his guarantees are retired, he threatens the banks to walk away from Kingfisher unless additional funding is provided?

The Economic Times also reports that Mallya has borrowed Rs. 525 Cr. from HDFC Bank against his ancestral property, but it is not clear whether this money has been used to fund Kingfisher Airlines in any way. Is Dr. Mallya reduced to selling the family jewels to wriggle out of the situation?

Despite the regulator not being satisfied, according to the Mint, Mishra has indicated there is no risk of the airline being shut down, since they have more than the minimum five aircraft.

This surely begs the question, why is the airline still being propped up? Is it to protect the books of the various government owned banks, led by State Bank of India, who are owed over Rs. 80 billion (Rs. 8,000 Cr.), and whose books will be awash with red if the airline goes under? Is it because of the government's policy, which does not allow for quick or easy liquidation of failed companies, thanks to a misplaced pride to demonstrate, that Indian companies do not fail?

Can this airline be saved? Or is it time for this airline to be euthanised? Share your views via the survey below and via comments.

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Analysis: Kingfisher's LCC withdrawal may be a precursor to fleet downsizing

Last week Kingfisher Airlines Chief Executive Officer Sanjay Aggarwal issued some clarifications about the airline's decision to withdraw its Kingfisher Red LCC service. Below is our author and analyst Vinay Bhaskara's analysis of those clarifications.

Operating costs of so called low cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs on global distribution, in-flight catering, ground amenities and the frequent flyer programme. These additional costs are more than recovered through higher yields.

This is a very good point, as the incremental cost of bringing the rest of Kingfisher’s operation as one would assume. Beyond the physical cost of retrofitting the aircraft in the new configuration, the only new operational costs are related to distribution and amenities.


The difference in cost per available seat kilometer (CASK) between the Red and mainline Kingfisher class was not very large. This may explain Red’s unprofitability and the decision to close.

Kingfisher has traditionally offered products that are superior to their competitors’ but at similar or lower prices. As an example, the Kingfisher First cabin product has a seat pitch of more than 47 inches while Jet Airways and Air India offer a business class with a pitch of 42~44 inches, yet the Kingfisher product is available at the same or lower price than Jet Airways. If the revenue gains are truly realised, and in the quantum as large as Mr. Aggarwal has stated, then the move can improve profitability significantly, otherwise, the downward spiral will only escalate.

In addition to large aircraft orders placed at time of start up in 2004/2005, the Indian LCCs in the recent months have placed orders for over 250 aircraft. In the last two years, capacity induction of the LCCs has outpaced the demand growth in the domestic market. The induction of so many additional aircraft in the low cost / low fare segment will potentially lead to substantial over capacity and a price war with declining yields.

Both SpiceJet and Jet in their comments for Q1 of fiscal 2012 noted that capacity growth exceeded demand growth (domestically) by about 5%. IndiGo has really been the only carrier to see the benefits of this growth, but the declining yields have not only hit the low cost sector, but full service economy class travel as well. Simply converting the entire network to full service will not automatically insulate Kingfisher from low cost competition.

With continuing economic growth, business related travel is increasing significantly. Businessmen and executives prefer to fly with full service carriers because of ease of buying tickets, frequent flyer program and convenience offered. They are willing to pay extra and this segment is not as price sensitive as the classic low cost / low fare segment where there is a lot of discretionary travel involved.

However, one has to consider the volume of business travellers relative to the number of leisure travellers. Currently, the second group represents more than 60% of Kingfisher’s revenue, much of it via Red, and Kingfisher may struggle to fill its planes. Moreover, growth in the Indian market as a whole is very much driven by low cost flying; we feel Kingfisher is limiting its future growth potential with this move.

A detailed study over the last six months during the high oil price regime has clearly demonstrated that Kingfisher’s full service product has generated higher yields and load factors which is consistent with the assessment that the business travel segment is more sustainable than the extremely price sensitive low fare segment. The analysis also showed that of the incremental yield, only 25% is spent on providing the extra services associated with a full service carrier. The remaining 75% is net contribution to the bottom line.

The figure of only 25% of the additional yield being wiped out by higher costs is consistent with the first bullet point. By adding more capacity to the full service segment will have a lowering effect on fares, meaning that the benefit will likely not be as large as 75% of higher fares.

While there are currently five airlines participating in the low cost / low fare segment, there are only three full service carriers namely Air India. Jet Airways and Kingfisher Airlines. While competition certainly exists in this full service segment, such competition is tempered because of the frequent flyer loyalty programmes that are offered by each one. In short, we believe that the competition will be far more intense in the low fare space than in the full service space.

While the competition for full service passengers can be characterized as less fierce than in the low-cost sphere; one has to consider the effects of Air India on the pricing environment for full service carriers. Recent statements by the Aviation Ministry give indications that Air India will be looking to re-capture its “lost” market share. If Air India is pricing with an eye towards re-capturing market share in the full service sector, then it is likely that Kingfisher will find the competition to be just as difficult.

Kingfisher Airline is widely recognised as a premium carrier and is the recipient of 38 national and international awards. The brand and service quality image is well established. This is evidenced by the higher yields and higher load factors generated on Kingfisher’s dual cabin aircraft. For the first five months of this fiscal year, based on DGCA published data, Kingfisher Airlines has delivered highest load factors of any airline in India.

Kingfisher’s reputation amongst passengers, especially business travellers, is perhaps its greatest asset. This reputation though, has taken a significant beating due to poor maintenance, shoddy aircraft, IFE that has been switched off due to a lack of payment to the content providers, large scale groundings and cancelled flights. Re-building this reputation will be imperative to Kingfisher’s ability to succeed as a full-service carrier.

With peeling paint, this Kingfisher ATR-72-500 looks shabby

In a way Kingfisher is returning to its roots – offering a premium economy product for the price of economy. Eliminating Red will also allow Kingfisher to offer a consistent product across its network; no more connecting from luxurious Kingfisher First to low-cost single cabin flights.

Kingfisher currently operates airbus aircraft with two cabin configurations – Dual cabin full service and Single cabin no frills. This also means the Kingfisher does not offer its premium Business Class or full service economy class product on all its routes. As a result Kingfisher is losing a certain amount of business class traffic on many routes.

On the metro routes especially ex-Mumbai and ex-Delhi, where there is heavy senior corporate executive travel, Kingfisher can and will fill business class seats (especially if the configuration is reduced to 8~12 seats), but most of Kingfisher's revenue is coming from Red’s current traffic of junior business travellers and low fare leisure travel. Kingfisher should be able to replace some of Red’s flying with 2-class service, but it is doubtful they will enjoy a higher revenue.

Kingfisher’s integration into the oneworld alliance is on track. oneworld is supportive of Kingfisher’s move to focus its energy and resources on a full service and premium product which is in line with the philosophy of oneworld and its member airlines.

The shift towards full service is consistent with the oneworld branding, AirBerlin notwithstanding, and ending Red flights means that all oneworld customers connecting onto Kingfisher flights can remain in business class for the duration of their flight, unless they connect onto ATR operated flights.

Over the next 4 months Kingfisher will reconfigure all its airbus aircraft including its single cabin aircraft into dual cabin aircraft with a reduced premium business class cabin and an increased number of full service economy class seats leading to a capacity increase of approximately 10%.

A very smart and long overdue move. With most seats empty, the over-extravagant Kingfisher First class, is a drain on the effective utilisation of aircraft. With an average flight during of 1.5 hours, not too many domestic passengers are inclined to spend the five figure fares of premium classes. Increasing the number of seats per aircraft is one way for Kingfisher to reduce the seat-kilometre costs of its aircraft. However, it remains to be seen whether they will be able to fill all of those seats at profitable fares.

The economy class will offer the same comfort as it does today. The space requirement for additional economy seats will be made available by reducing the number of business class seats.

Once the aircraft are re-configured, Bangalore Aviation will assess the validity of this statement.

The reconfigured aircraft will have the seat equivalency of a low fare carrier but an opportunity to generate much higher revenue as demonstrated by current yields. Kingfisher will achieve incremental business class revenue as a result of wider and uniform availability and the airline will also generate incremental revenue through its increased full service economy class capacity.

Increased capacity tends to place downward pressure on fares, so for Kingfisher to assume that current yields will hold even with more capacity might be presumptuous. There should be certain incremental gains for having a consistent product with business class on most flights, especially with regards to passengers connecting onto Kingfisher from domestic flights.

There will be no reduction in Kingfisher’s fleet size or its network. Our guests will continue to enjoy the benefits of Kingfisher’s network that provides connectivity to 60 domestic and 8 international destinations.

It remains to be seen whether or not the entire network will stay intact. The majority of air travellers in India choose low-cost carriers. Given such an environment, Kingfisher may see fit to reduce flights, even if it does not cut destinations. Perhaps they end up with a fleet of 40-45 aircraft that is more in line with market demand for full service flights?

Kingfisher was the only publically listed Indian airline to show an operating EBIDTAR profit in the first quarter of fiscal 2011~12. Globally airlines struggle to generate 6%~8% EBIDTAR profit. Yet, Kingfisher spends an unheard of 16% of its total revenue towards debt servicing. Despite all its positives, unless debt levels are reduced, something extremely difficult in today’s bear market conditions, the future is bleak. Ulike another red and white liveried airline, Kingfisher does not have access to the tax-payer funds of the Government of India.

With the growth in aircraft demand and and the diminishing returns on A320 classic family aircraft as we get closer to the launch of the A320neo, it is very plausible that Kingfisher will have some of its fleet re-possessed by lessors, as the aircraft leases expire. As revenue falls with a smaller fleet, and debt levels remain the same, fiscal pressures will put the carrier’s very survival at risk.

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Sanjay Aggarwal joins Kingfisher Airlines as CEO - a great coup for Dr. Vijay Mallya

Dr. Vijay Mallya, Chairman of Kingfisher Airlines has scored a coup of sorts by bagging one of the most "eligible bachelors" in Indian aviation today -- Mr. Sanjay Aggarwal, appointing him as Chief Executive Officer of the airline.

I am pleased to announce the appointment of Sanjay Aggarwal as Chief Executive Officer of Kingfisher Airlines Limited with immediate effect.

I will continue in my role as Chairman & Managing Director and Sanjay will report directly to me. All Executive Vice Presidents and other officers currently reporting to me will, henceforth, report directly to Sanjay.

Mr. S.R. Gupte, Vice Chairman, will continue to Chair the Executive Committee of which Sanjay will become a member with immediate effect.

Sanjay Aggarwal was CEO of SpiceJet till June 30th this year when he tendered his resignation soon after the take over of the Gurgaon based low fare carrier by media baron Kalanidhi Maran.

I've had the pleasure of interacting with Sanjay on many an occasion, his pragmatism, lateral out-of-the-box thinking, and professionalism is without parallel.

Dr. Mallya is strong on hospitality, and likes all Kingfisher Airlines passengers to be treated as his guests. Just as in the world of Disney, the airline refers to customers as guests not passengers. Mallya is renowned for his flair, style, and panache, and offers domestic passengers a Kingfisher First instead of just a business class and an international business class that is a cut above the traditional international business class.

Despite these customer centric offerings, and his extreme passion for the airline business, Mallya lacked a hard-nosed person, well experienced in the tough world of airline business, to manage the day to day affairs, and the sorry financial state of the airline today, reflects this gap.

With his background at US Airways, Marriott International, and private jet provider Flight options, Sanjay brings a unique combination of hospitality, transportation, style and panache, that blend very well with the product positioning at Kingfisher, married to a hard-nosed business operator who has turned ailing airlines around, skills that the airline desperately needs.

At both of his other major and very successful businesses, United Spirits Ltd., and United Breweries Ltd., Mallya has very strong and capable CEO's in the form of Vijay Rekhi and Kalyan Ganguly. Sanjay Aggarwal comes from the same mould of capable professionals.

Many of Aggarwal's initiatives at SpiceJet showcased his learning from these diverse, yet customer-centric industries, and are widely credited with his successful turn-around of the carrier.

The question on the minds of many will be that can he do a repeat of his turn-around for SpiceJet at Kingfisher?

The simple answer depends on whether the Chairman will let go his passionate grip on the airline, and give Sanjay the CEO, the autonomy and freedom to execute; and therein lies the challenge.

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