In India, the government took the first step forward to allow private companies or operators to operate under the air transport operator (ATO) license in 1992. Around 40 companies from different backgrounds rushed to obtain their licences but these new companies had to face the problem of outdated traffic allocation rules which led to closure of many companies. The surviving companies enjoyed the boom of the Indian aviation industry with annual growth rate of 10 percent and the international traffic increased at a rate of 85% in 1995-2004. Due to high fuel costs operating in India became difficult. In 2003 the government took initiatives to make changes which included preparation of road map and new civil aviation policy. With the positive change in the economy there was an increasing demand for air travel. Reforms were brought in the aviation sector by the government and reduced the regulatory barriers for supporting the industry.
1.2 Kingfisher airlines- the king of good times
The airline industry was growing rapidly and kingfisher airline started its business on 9th May 2005 which shared the name with India’s largest beer brand. It positioned itself as a full service airline more in keeping with DR. Vijay Mallya’s style.
Kingfisher airlines acquired Deccan airways and tried to acquire air Sahara in June 2006. The airline was more suited for international travel for which kingfisher airline did not have licence. Dr Mallya also wrote to the government and tried convincing them to reconsider the 5 year moratorium on new carriers before flying international route.
After acquiring air Deccan the company had a good positioning strategy, now it was looking at both high end and economic travel. The world’s independent travel forum and air travel information organization awarded ‘5 star airline’ status to kingfisher airline in 2008. In the same year a major expansion of 15 routes was planned also the company’s first air bus A330-320 was launched with the fundamental idea of providing unparalleled super business class that would offer people to fly in style.
1.3 Issues faced
Due to increase in fuel charges and management processes the business began to drip. The company was very weak in resources and capital debt. The company soon got into a lot of debt. The business was unprofitable since 2006 and one third of the debt was already been converted to equity.
On 5th Jan, 2012, state bank of India which was the largest creditor of the company stated that it was a non performing asset (NPA). The shareholders had received no profits during the last year. The private carrier was in a mess and struggling to service its loans that were above 6000 crores. For the very first time the company declared that it had serious cash flow problems and it was considering to sell or lease back some of its air crafts as a measure to reduce debt.
The company was facing many problems in terms of the governance system. Firstly as per the annual report of 2011-2012 the company had only 4 directors with Dr Mallya as the Chairman which was decreased from 9 directors last year. All the directors were on the board of other companies also Dr Mallya was under the board of 19 other companies all the other directors had the same responsibility. Though none of the directors of the company had enough qualification or experience for airline business and moreover there was no evidence of any professional consultation or advice. The company did not have any specific job responsibilities pertaining to the functioning of the committees and did not attempt to demonstrate commitment to governance of the company. During 2011-13 the company board met 5 times only. The chairman, vice chairman and one of the directors attended all of the meetings which clearly indicates that majority of the decisions made were autonomous. Less meetings and reduction in the number of members suggested that there has been very little communication. Like many other companies KFA also followed a particular code of ethics with no concrete contributions towards good governance of the company. (Ojha, 2012)
According to Section 292 A of the Companies Act, 1956 and the Listing Agreement KFA’s audit committee was constituted which included 3 independent and 3 dependant non-executive directors for audit purposes but due to the resignations there was only one independent and one dependant member on the board which was an area of concern.
Kingfisher Airlines has delayed salaries for Jul 2011 of its employees in Aug 2011. The management stated that it was in heavy financial crises and does not have the money. Almost 130 pilots had left the company because of the financial crises. The issue of salaries have been resolved till a certain extent when the management had agreed to pay the outstanding salaries in instalments, but suicide of an employee’s wife had already put a lot of pressure on the Remuneration and Compensation Committee. A lot of employees were jobless and were encountering challenges in seeking suitable employment.
The ownership of the company was mainly owned and managed by the promoter group of the company which accounted 50.20 percent of the total shares. The promoter group had full control over the company and so rest of the shares were widely distributed among financial institutions and for public offerings.
The airline company took help from the government as Vijay Mallya was a member of Rajya Sabha and also in the Parliament Consultative Committee on Civil Aviation. This helped the company to operate at highly economical prices that created challenges for other airline companies. Even the customers were not any more satisfied with the service and many corporates wanted to switch from kingfisher airlines to nits competitors.
Problems faced from external factors like fuel prices and government policies were the initial problems faced and due to aggressive expansion in times of low business led to the failure of the company, also the governance structure and ownership majority misbalance created a negative impact on the company. (Panchasara, 2012)
1. Part B
2.1 Advertisement
Critics said that the group’s involvement in the airline business was a way to promote its beer in countries where active promotion was prohibited. Aggressive expansion took place in the initial years despite rising costs and falling fares due to competition. Dr Mallya also admitted in one of his interviews that the company is making losses and will continue to make because it lacked sustainability. Trade experts believed that Mallya’s larger than life image could be a negative factor considering the cut throat competition faced by the industry. The airline company was also able to redefine passenger expectation with superior quality and add glamour. The company also engaged with SABRE Airline Solutions to manage, ticketing, pricing, and efficient reporting. Its frequent flyer program called King Club provided advantages to customers that were very well-appreciated. Its lounge facilities at various airports established new standards in services not seen in the country before.
2.2 Social responsibilities
As an individual and as a Chairman of the company Dr Vijay Mallya has not been socially responsible towards the company specially employees. Employees of the company refused to work from October 2012 since they were not paid any salary from February 2012. Suicide of spouse of an employee was very devastating and blamed no salary and financial crises for it. A candle light vigil was led by the employees in support of the family but there was not even a word from the Chairman of the same company. Though he is not legally liable to pay salaries to staffs from his own wealth, he has to take moral responsibility for his actions that have caused so much tragedy in the lives of his employees. There was nothing from him for a few days and he flew out of the country and on twitter he tweeted on 23rd October 2012, ‘I travel 24??7 where my multiple work responsibilities take me. Sections of media call me an absconder because I don’t talk to them’. Also when the financial situation was very weak there was a statement made in an interview for a famous magazine, ‘In a place where is one man, who might be the chairman, responsible for the finances of the entire place? And what has it got to do with all my other businesses? I have built up and run the largest spirits company in the world in this country. He has clearly abdicated from his responsibilities as the Chairman of the company. (Jaspal, 2014)
Concluding thoughts
The major ethical issue was that the governance of the company was very immoral; a few people controlled the whole management and the decision making process was unilateral. A lot of support was taken from the government to sustain but there was a fail in the business model. Fuel was directly imported from aboard and the white bodied planes purchased were not allowed tom travel overseas because of government policy. So there was a clear mismatch in the decision making process. There was a lack of transparency and the board was disrupted and the directors lacked experience and knowledge about the industry
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