IIPM: Where do you think you are going honey?!

As if the problems with global fuel prices weren’t enough, Kingfisher has gone ahead and undertaken strategies that only seem a do ‘and’ die effort. How is Mallya even sustaining the unbelievable losses quarter after quarter? B&E’s Shashank Tripathi and Angshuman Paul meet Vijay Mallya and other top Kingfisher executives and investigate...

We know why you stopped by this page [Surely, not because of your killing enthusiasm to understand complicated structural factors affecting the Indian aviation industry, huh!]. We call it the 3G of aviation. Glamour, girls and gizmos! Mallya was counting on the same three factors to ensure that passengers ‘stop by’ his airline. Well, passengers, like yours truly, did stop by in the thousands, but unfortunately, rather than striking the metaphoric gold, all that Mallya struck were three pathetic more Gs! Global fuel prices, government regulations and gadzillion godforsaken losses! Check the figures out! While the global aviation industry is expected to cross the $6.2 billion mark this year, the Indian aviation industry is expected to cross a loss of Rs.9,000 crore at the minimum, more than 33% of global losses. Forget forecasts, for the last financial year (FY07-08), the Centre for Asia Pacific Aviation (CAPA) has estimated the Kingfisher Airlines losses to be at a killing $500 million, or Rs.2,100 crore! If you add Air Deccan’s FY07-08 losses of Rs.834 crore to that, the combined loss comes to close to Rs.3,000 crore! That’s more than 33% of the Indian aviation industry’s losses!

When we met Vijay Mallya just a handful of months back, and had asked him the logic of such a business, Mallya had confidently parried, “I think other business leaders think of many strategies before investing into certain businesses; but for me, it’s just passion that drives me.” But really, can just passion make any group withstand such humongous and gut wrenching losses? Kingfisher’s Executive Vice President, Hitesh Patel, confesses to us, “We are just looking for survival first, and everything rest would follow.” It’s a serious question we ask now – Can Kingfisher Airlines really be sustained? Can it, in short, survive?

It’s not that such a situation suddenly crept up on Mallya. Various reports estimate that Kingfisher posted Rs.240 crore of losses in FY05-06, Rs.577 crore losses in FY06-07; and Air Deccan – India’s largest publicly listed loss making company – was never a profitable company in the near past! And one cannot forget that Mallya had spent a huge Rs.975 crore approximately of his invaluable cash to purchase 46% stake in Air Deccan in FY 07-08! All airlines in India, for that matter, are in losses and are bleeding bad. Where Jet has been facing a daily loss of almost over Rs.9 crore, Air India is expected to post well over Rs.4,000 crore losses in the current fiscal year as compared to net losses of Rs.2,144 crore in FY08.

All this has badly affected in-flight services and airlines are now even planning to charge for the water they serve on board. Would such process moves help Kingfisher? We found the question pretty hilarious. The per passenger loss for the combined entity of Kingfisher and Deccan is a confounding Rs.2,400! What help can charging for one bottle of water or even a meal help? So why can’t Kingfisher simply increase ticket prices? That’s the Devil and the Deep Sea conundrum. Competition ensures that the highly price sensitive consumer today has minimal loyalty to any airline [and is even ready to switch to the Indian Railways: read 4Ps B&M cover story, June 20-July 3, 2008, ‘Laloo has the last laugh’]. The initial 3Gs are no big help in increasing switching cost of the customer, neither are promo tactics like frequent flyer or advertising various quality awards.

The worst part is that the Kingfisher combine has seen passenger market share grow to close to 30%.That is simply fabulous! But if fabulous gets fabulous losses, then any self-respecting CEO should close down the business model. Air India has cancelled around 30 flights, Jet Airways 20 flights, SpiceJet over 17 while even Deccan has cancelled 50 flights due to mounting losses. To their credit, Kingfisher, which used to operate 218 flights on 38 destinations, pruned 10 percent of its flights and also sent 47 expatriate engineers back home to cut the operating cost.

Read more......

Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.