Indian airlines industry is in red. Almost all airlines except one have clocked losses. Even though increased taxes on fuel in India and other such generic causes could be attributed to the failure of Kingfisher, there are a few specific reasons that drove Kingfisher into losses. An irrelevant business model and a few faulty decisions at Kingfisher not only present a very interesting reading to the students of management but also offer enriching learning insights.
Trouble at KingfisherAirlines (KFA)
KFA has accumulated losses to the tune of Rs. 6,524 crore and accumulated loans totaling Rs. 7057.8 crore. It has not paid to the government Rs.410 crore collected by way of taxes deducted from the employees' salaries. It has defaulted on the payment of salaries and taxi, airport landing and parking, catering and aviation turbine fuel bills. A consortium of banks, including state-owned banks did bail out KFA last year when they converted loans totaling Rs. 1303 crore into shares. This gave banks about 23.37% stake in KFA. However, banks are now not ready to repeat their old mistake. Banks have already classified their loans to KFA as NPAs. This precarious financial situation has forced SBI, one of the prime lenders to KFA to state that it will not consider any fresh loans until fresh equity is infused into KFA.
Possible reasons
KFA committed a few glaring mistakes in crucial decisions and its business model is also faulty, as said by Capt. Gopinath, who sold his Deccan airways to KFA. The failure to sense the fortune at the bottom of pyramid and giving up of the philosophy low-cost carrier can be the possible reasons specific to KFA for its downfall.
In December 2007, KFA took over Air deccan, a low-cost carrier. Mallya initially was not enthusiastic about the deal since, he felt, the business philosophy of low-cost carrier does not go with his. At the time of deal, the understanding was that both Kingfisher and Air Deccan would run as separate brands. Kingfisher and Air Deccan had a very different set of customers. The idea was to operate low-cost carrier to domestic flights and Kingfisher full service to international flights. It was reasoned that low-cost arm could feed Kingfisher full service and thereby reduce the costs. Mallya never looked at the bottom of the pyramid. He always wanted to cater to the needs of top-class people. He could not ever imagine offering no-frills service on his airline. So he started offering free water, food and newspapers on board deccan flights, thereby going against the philosophy of no-frills low-cost service. The low-cost arm offered almost the same facilities which Kingfisher full service offered. This blurred the distinction between the two brands. Passengers started shifting from Kingfisher full service to its low-cost arm. This led to the cannibalization of own brand.
According to Gopinath, another mistake, in retrospect, was Kingfisher's decision to do away with Kingfisher Red's early morning slots, which were scheduled around the same time as Kingfisher full-service's flights. This did not mean that customers started travelling on Kingfisher full service; they merely migrated to rival LCCs in the same time slot. Another reason for the crisis was Mallya's decision to go international even before his domestic operations became profitable.
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