The Kingfisher Airlines Financial Crisis: An Essay On Comprehensive Analysis.

History of Kingfisher Airlines

Discuss about the Kingfisher Airlines Financial Crises.

History background and discussion of the case

‘From bang to bust: The Kingfisher Story. ‘Kingfisher Airlines Limited was an airlines group established in India which operated by its parental corporation United Breweries Group. The parent company had invested its 50% stake in the low budget airlines Kingfisher Red. Till the year 2011, it was the second biggest airlines in the national airlines of India. But to its bad fate, it incurred heavy losses and had to withdraw itself from the market in 2012. It was established in the year 2003 and since then it was incurring heavy losses till it got listed in 2006(The Hindu, 2017).

Its chairman Vijay Mallya is an Indian businessman and a former Politian.  He was once called the ‘King of Good Times ‘. He and his company were involved in financial controversies and scandals since 2012. Kingfisher has been the unfortunate recipient of a great press of time recently. In 2006, a year after the launch of the airlines, the Mumbai branch of IDBI Bank got a proposal from the Kingfisher Airlines that it required funds for purchasing an aircraft .Afterwards in 2009, the bank decided to provide a loan of Rs. 900 Crore . A group of around 17 banks are trying to collect loan amounting to around Rs7000 crores   through which Mallya had tried to gain 100% or partial shareholdings in about 40 corporations worldwide(Narayan et al.,2016).  

The issue started long back in the year 2007 when   Vijay Mallya bought the loss making Air Deccan owed by Captain Gopinath. The merged group had planned to save Rs.300 Crore with a collective fleet of 71 airplanes.  Afterwards in 2009, the board of Kingfisher accepted a resolution to add $100 Million (around Rs. 487.8 Crore)   through various investments comprising of Global Depository Receipts (GDRs) along with the decision to add the capital of Rs.500 crore through the right issue of equity shares. The capital was required for the expansion of the project.

In the year 2009, a loss of Rs. 418.77 crore was announced by Kingfisher during its second quarter and its revenue decreased by 13.6% during that particular quarter as compared to the same period last year. Due to the enormous losses and it decide to lay off nearly 100 pilots. In the year 2010, the board of Kingfisher Airlines  had approved the debt recast package resulting in the  total debt to around Rs.7000 crores (Devi ,2016).

Financial Losses and Controversies

In the year 2011, the auditors of the company reported that  its accumulated losses  were more than  50% of its net worth  of the financial year 2010-2011.By the end of 2011 , the loss doubled to Rs.469 crore for the third quarter of 2011. As a result, Mumbai International Airport sent a warning to the company to pay the unsettled dues amounting to Rs.90 crore. The Service Tax Department had frozen its 11 accounts due to the nonpayment of its dues.

The company again reported losses amounting to Rs. 44.26 crore in the third quarter results of 2011-2012. Due to its continuing losses and nonpayment of taxes and dues, the income tax department had to freeze   some of its accounts. The International Airport association had asked the travel agents to stop booking tickets for the airlines due to its failure to pay the dues.  To add on to the misery it had stopped paying salaries to its employees   and it had to withdraw its operations from the international market (Shastri, 2014).

Burdened from the debt, it had decided to withdraw its operations from the domestic market as well. Due to this the value of its share prices tumbled down to 13 % followed by the announcements that 34 aircrafts had been confiscated due to the nonpayment of the lease amount. The company had a total loan of around Rs.7000 crore led by a group of 17 banks under the leadership of State Bank of India. The SBI bank had declined the appeal for the working  loan of Rs. 200 crore by the company .  As a result, it had to request   its subsidiary SBI Capitals to   formulate a new revitalization plan  for the airlines in order  to pay  salaries and operating expenses  (Srivastava, 2016).

 The banks agreed to release Rs.60 crore which were inaccessible to the company in the form of an escrow account to recompense the salaries to its employees. The airlines continued to extend its partial lock out because it was not able to convince its employees to rejoin without getting their salaries. A non - bailable arrest warrant was issued against Mallya relating to the case of failure of cheques allotted to the GMR Hyderabad International Airport Limited.

On 20 October, 2012 the permit of the airlines got suspended as its parent company United Breweries Group required Rs.3000 crore to get the company back in action as no foreign operator was ready to help in its present condition. In the fourth quarter of 2012, the company announced a loss of Rs.754 crore. Also, the carrier lost its aviation license due to the refusal of DGCA for the renewal of its Air Operator Permit (AOP) (Aggarwal and Singh, 2015).

Ethical Decision-Making Approaches and Theories

In the year 2013, the when the air carrier was not able to clear its dues and pay the pending salaries to its employees, DGCA deregistered 15 aircrafts of Kingfisher. Besides this, no interim relief was allowed to United Breweries Holdings by the Bombay High Court in the case related for  prevention of the lenders of Kingfisher airlines from selling the guaranteed shares of the companies of the UB group.

In the year 2014, the several banks which were the lenders of the loan to the company initiated proceedings against it. They declared the board of the airlines as willful defaulters and the company was declared as the top NPA of the country. As a result, Vijay Mallya was asked to quit his position of a director and chairman of the company.  A money laundering case was registered by the Enforcement Directorate against CFO of the company and Vijay Mallya  which was relating to the default he has done along with the IDBI officials.  On March 2, 2017, he had left the country (Gokhale, 2017).

Surprisingly, despite of the huge losses incurred by the company in the past years, Mallya continued to draw salaries amounting to Rs.33.46 crore in 2011 and2012 respectively. Supreme court further asked him to declare his personal assets along with his wife and children (Kuchhal ,  Verma  and Mandawat ,2016).

According to McKay, Nitsch and Peters (2015) the primary object of the company should be to enhance the shareholder value. Successful companies must operate within the societal norms and maintain its value and integrity. Corporate governance is directed towards ensuring that the organizations take hold of its affairs such that the interests of shareholders are being protected. The accountability can be taken by the board willingly or it can be imposed on them by law or a combination of both. The companies are required to take the accountability for the influence they create on societies and their shareholders.

The theories related to the ethical decision making are classified into three categories namely Non – Consequentialist, Consequentialist and Agent Centered Theories.

Consequentialist theory emphasizes on the ethical significances of the action whereas the Non-Consequentialist theory emphasizes on the intention of the individual involved in the decision making. The Agent centered theories are directed towards the complete moral status of the individuals.

The consequentialist theory comprises of many approaches. Utilitarianism is one of them. It explains that acts can be explained as good or evil depending upon the intensity of happiness or discomfort they create. Thus ethical action is the one which generates the utmost happiness and creates the minimum injury. The ethical egoism is a type of utilitarianism which focuses on doing good for a particular person. It has been argued that self-interest is a requirement   for self-respect and respect to others (Azzam, Qura‘an and Mohameed, 2015).

The Common Good Approach argues that the general will of the people helps in formulating the best society. It would subsequently produce what is best for the people living in the society. It lays emphasis on respect and compassion for others specially the weaker section of the society.

The Non –Consequentialist theorycomprise of the duty based approach. Also known as deontological ethics, lays emphasis upon the importance of the will and intention of the person involved in decision making. It is associated with Kant. He argued that doing what is right is dependent on the intention of the person performing the act. The ethical action is derived from the intention to perform the duty (Cheteni and Shindika, 2017).

The rights approach is another branch of non-consequentialist theory. It explains that the greatest moral act is the one which safeguards the moral rights of those who are influenced by act. It is based on the conviction that all the human beings have the privilege to live a life of dignity. The categorical imperative suggested by Kant forms the basis for this approach. It says that a person should act in such a way that he treats humanity with himself and others (Deloitte, 2016).

The fairness and justice approach explains that all the humans should be treated equally. It provides the process for performing a fair action and it is not concerned about the results arising from those actions. The last approach of the non-consequentialist theory   is the divine command approach. It suggests that the right action is commanded by God and the ethical standards are created according to God’s will. So, following God’s will defines the ethical actions (Bisht, 2015) .

Agent Centered theories comprise of the virtual approach. It suggests that the ethical actions should be aligned with the ideal human virtues. The person with a good character is the one who has attained the ethical values. The virtue ethics are concerned with the whole life of the individual and he has to be trained and educated to imbibe the ethical values in himself. The feminist approaches are related to virtue ethics. It is associated with the totality of human life and how the ethical decisions are influenced by life (Othman and Rahman, 2014).

The ethical decision making approach relevant to the issue are Utilitarianism and common good approach. The Utilitarian ethical theory forms the basis on the ability of an individual to   forecast the consequences of the action. It suggests that the individual should act in such a way that it results into the greatest benefit for most of the people. In the given case, Vijay Mallya should have acted for the common good for his stakeholders. He should have released the salary of his employees as at the time when the company was incurring heavy losses, he was declared as 84^th rich Indian by Forbes magazine. So he could have released the salaries of the employees of the company as employees are the assets of the company.  In addition to this, he did not even repay the loans which were lent to his loss making company by the banks. The banks had helped him during the financial crisis, so he should have repaid the loan amount and the pending dues to the authority on time (OECD, 2015).

Another theory which can be applied on this case is the common good approach. It states that the general will of the people assist in the formation of the best society. The intentions and actions of the people should be such which favors the weaker section of the society. The directors and promoters of the company should act in the common good of the stakeholders and employees of the company. They should apply this principle to repay the dues of the concerned authorities and formulate policies to revive the company (Musa, Musová and Debnárová, 2015).

Conclusion

Hence, to conclude, it can be said that in order to apply the ethical principles in the decision making in business one should  implement the  thumb rule of common sense and the golden rule of not to harm others and do the common good. The company should act according to the sustainable approach which implies that it should endeavor to safeguard the interests of the stakeholders along with  its objective of profit making.

References

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Azzam, Z.A., Qura‘an, A.A. and Mohameed, H.A.(2015) How The Corporate Governance Affects Organizational Strategy: Lessons From Jordan Environment. IOSR Journal of Business and Management. 17(4),pp. 52-66.

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Cheteni, P. and Shindika, E.S.(2017)  Ethical Leadership in South Africa and Botswana. Brazilian Administrative Review.14(2),pp. 2-19.

Deloitte(2016) Good Governance driving Corporate Performance? [online] Available from:  https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/risk/deloitte-nl-risk-good-governance-driving-corporate-performance.pdf[Accessed 10^th May, 2018].

Devi , M.S.R.(2016) Fraudulent Financial Practices - A Case Study of Vijay Mallya. International Journal of Economics and Business Management.2(2),pp. 237-240.

Gokhale, N.(2017) Banks May Lose ?4,300 crore on Loans to Kingfisher Airlines. Economic & Political Weekly. 52(23) [online] Available from: https://www.epw.in/journal/2017/23/web-exclusives/banks-may-lose-%E2%82%B94300-crore-loans-kingfisher-airlines.html [Accessed 10^th May, 2018].

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