"Fly the good times."
By any chance, do you recollect this tagline?
It belongs to an erstwhile big brand which has now bitten the dust. Yes, I am talking about Kingfisher Airlines here.
But first, let me tell you why I am talking about glory to dust story here. Over the past several months on our social media posts, while talking about different examples of stocks like Maruti, HDFC, MRF, Page Industries, Bajaj Finance etc. which created massive wealth for long term investors, we have been getting several comments. Comments such as " You should also talk about how people lost money in the stock of Kingfisher Airlines”.
Yes, it is a fact that many investors may have lost money in the stock of Kingfisher Airlines. But that is not the biggest problem. The biggest problem lies in the fact that many investors who lost money in the stock of Kingfisher Airlines and other stocks like RCOM, Suzlon etc. still don't understand the reason why they lost their money in these stocks.
Through this article, we hope to present a detailed analysis of what went wrong with the stock and Kingfisher Airlines, so that such mistakes are not repeated by at least those investors who read this article.
Now let’s take a look at why investors lost money in the stock of Kingfisher Airlines.
Launched in the year 2005 with great fanfare by liquor baron Vijay Mallya Kingfisher Airlines was allegedly a birthday gift for his son Siddharth Mallya.
"We are not entering the business of transportation, but we are going to be in the hospitality business," announced Vijay Mallya during the launch of the airline.
In just a year, achieved Kingfisher Airlines achieved a 5 star status and became popular among the business and leisure travellers alike. Kingfisher Airlines had the brand-new aircraft with good inflight entertainment, pretty hostesses personally handpicked by the CMD, Vijay Mallya himself and strong brand recall.
Fast forward to the present. Kingfisher Airlines remains grounded since 2012, mired in controversies of financial mismanagement, substantial unpaid bank debts and unpaid employee salaries, flooring even its CMD, Vijay Mallya.
So, what went wrong with Kingfisher Airlines?
Constant flip-flop on the business model
Vijay Mallya initially launched Kingfisher Airlines as an economy class airline with single-class layout aircraft which offered high-quality service and
entertainment systems. Known for his flamboyant lifestyle, Vijay Mallya wanted the passengers travelling by Kingfisher Airlines to have exceptional travel experience. So, within just a year, the airline shifted its focus to becoming a premium service airline.
Intense competition from low-cost airlines
The domestic air travel segment in India is dominated by the budget-conscious traveller for whom the cost of travel matters more than the services provided during the flight. With intense competition from budget airlines like SpiceJet, Indigo and Go Air, Kingfisher Airlines was successful in attracting the attention of business travellers but missed the significant chunk of the market, the budget class traveller segment. Read more about investing in stocks of Spicejet and Indigo here.
In an aviation market like India cost of travel plays a significant role. Airlines with full economy seating configuration with no added expenses like food or inflight entertainment can carry more passengers at lower prices compared to a full-service airline and still generate more revenue per flight.
As per aviation policy in India, back then an airline needed to complete a minimum of five years of operations within India before they could be permitted to fly abroad. But Vijay Mallya could not wait to take his Kingfisher Airlines brand global. So, he took a shortcut by purchasing an airline which met the criteria of five years of domestic operations. In 2007, the low-cost airline, Air Deccan was taken over by Kingfisher Airlines and rebranded as Kingfisher Red, a budget airline.
To support his global expansion plans, Kingfisher Airlines went on an ordering spree for new aircraft which included the jumbo Airbus 380.
However, in his rush to take the Kingfisher Airline brand global, Vijay Mallya failed to conduct proper due diligence and thus ended up buying a loss-making airline which only added to Kingfisher Airlines woes in two ways. First was the financial burden for acquiring a loss-making airline at a premium which experts claimed as a move of biting more than what one can chew. Secondly, by entering the budget airline segment, the Kingfisher Airlines brand, which stood for a premium service got somewhat degraded. Kingfisher Red, the low-cost airline, was finally shut down in September 2011.
Vijay Mallya had the reputation of being a smart businessman who ran a successful liquor empire. But airline business was different and challenging extensively. Instead of appointing a full-time CEO, Vijay Mallya decided to run the airline on his own, stated a senior Kingfisher Airlines executive in a media report. Media reports also claim that the first CEO was appointed only in September 2010, by which it was too late as the airline was struggling on multiple fronts.
Right from its inception in 2005, Kingfisher Airlines never made any profits. By 2009-10, the airline had accumulated a debt of Rs 7,000 crores, and was declared as a “non-performing asset”. In an attempt to keep the airline afloat, the airline took more debts and finally collapsed under a mountain of debt when lenders refused to infuse additional funds.
Visionary management, zero debt and a scalable business model are some of the most important factors behind the making of a multibagger stock. The stock of Kingfisher Airlines had everything opposite, such as poor management, massive debt and a continually changing business model. There is no doubt that there are some other factors too like the global recession of 2008, exorbitant aviation fuel prices and financial mismanagement which led to the downfall of Kingfisher Airlines and ultimately saw the stock of Kingfisher Airlines getting delisted from the exchanges.
The airline business is very challenging, and many experts have commented in the past that Vijay Mallya had made a very bad move by entering India's cut-throat airline market. But investors who invested in the stock of Kingfisher Airlines also made an equally lousy move as there was no fundamental strength in the stock.
As correctly said by Peter Lynch "Behind every stock is a company. Find out what it's doing”.