Management accounting analysis of King Fisher airlines

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2. Introduction:
• Indian airline industry was one of the fastest growing airline industry across the
world during the last decade.
• India has private airlines as its key players.
• 75% of the market share is owned by the private sector.
• KFA launched its domestic air service operations in May 2005. Promoted by UB
group and offered a single class- “Kingfisher Class”.
• Within the first six months of its launch, KFA managed to corner a 6% market share
in the domestic air travel mark.
• KFA is one of only six airlines in the world to have a five-star rating from Skytrax.
• Kingfisher Airlines Limited, is India's 2nd largest airline operating more than 400
flights a day.
• Has received 30 awards for innovation, customer responsiveness and was voted the
Best New Airline of the year within months of its launch.
• In year 2007-08 KFA merged with Deccan Aviation Pvt Ltd.
• Kingfisher acquired 46% of Air Deccan. Deccan was named as Kingfisher Red.
• KFA now offers services under following classes, Kingfisher First - caters to premium
business class passengers, Kingfisher Class - offers economy class service to its
passengers and Kingfisher Red offers low basic class of service.

3. SWOT ANALYSIS
Strengths: Weakness:
•First airline with full new fleet of • Offered services are very
aircraft expensive.
•Brand Image sst • Yet to breakeven
•Unmatched In-flight service
•Exclusive terminal share deal • High attrition.
Opportunities : Threats:
•Under penetrated market
•Existing Operators
•International market
•Untapped cargo market •Infrastructure issue
•Expanding tourism industry •Fuel price hike
•Route rationalisation •Economic slowdown

4. Distribution of costs(%)
Kingfisher Airlines Ltd. Jun-06 Jun-07 Mar-08 Mar-09 Mar-10 Mar-11
Currency: Rs. Million (Non-Annualised) 15 mths 12 mths 9 mths 12 mths 12 mths 12 mths
Distribution of total expenses 100 100 100 100 100 100
Operating expenses 95.5 95.7 121.6 90.2 83.6 83.9
Financial charges 2.9 2.4 4.4 9.9 18 17.5
Provisions 0.1 0 0 0.1 0 0.2
Non-cash charges 1.4 1.7 2.1 2.2 3.1 3.4
Prior period and extra-ordinary expenses 0 0 0 4.5 6 1.6
Provision for direct tax 0.2 0.1 -28.1 -7 -10.8 -6.6

5. Operating cost distribution (%)
Kingfisher Airlines Ltd. Jun-06 Jun-07 Mar-08 Mar-09 Mar-10 Mar-11
Currency: Rs. Million (Non-Annualised) 15 mths 12 mths 9 mths 12 mths 12 mths 12 mths
Distribution of operating expenses 100 100 100 100 100 100
Raw materials, stores & spares 2.3 1.9 0 0 0 0
Stores, spares, tools consumed 2.3 1.9 0 0 0 0
Power, fuel & water charges 38.7 39.5 41.7 36.9 30.5 36.1
Compensation to employees 11.1 10.2 12 12.4 12 11.1
Indirect taxes 0.1 0.2 0.2 0.9 1.3 0.7
Excise duty 0 0 0 0 0 0
Rent & lease rent 0.4 0.3 0.4 0.8 1.9 1.5
Repairs & maintenance 11.1 9.3 12.6 6.5 6.9 6.1
Insurance premium paid 1.9 1.6 1 0.8 1 1.2
Outsourced professional jobs 1.5 1.9 1.5 1.4 1.7 1.5
Advertising expenses 0.7 0.6 1.9 3 2.6 2.3
Marketing expenses 0.2 0.2 2.1 6.3 8.9 8.1
Travel expenses 2.2 1.1 1 1.7 1.2 1
Communications expenses 1 0.7 0.5 0.6 0.6 0.4
Printing & stationery expenses 0 0 0.2 0.1 0.1 0.1
Miscellaneous expenditure 0.1 0.2 0.5 0.9 0.5 0.5
Other operational exp. of non-fin.
services ent. 28.9 32.5 24.5 27.8 31.1 29.4

6. Competitors Study
Distribution of Costs (%)
Air Transport Services
Provisions Prior
period and Raw
Currency: Rs. Non- extra- Provision materials Compensatio Rent &
Million (Non- Operating Financial cash ordinary for direct , stores & n to lease
Annualised) Year expenses charges charges expenses tax spares employees rent
Jet Airways (India)
Ltd. Mar-10 81.96 8.83 0.44 8.77 0 0 0.8 13.32 3.62
Jet Lite (India) Ltd. Mar-10 92.8 3.38 0.42 2.74 0.65 0 0.86 10.08 3.29
Kingfisher Airlines
Ltd. Mar-10 83.59 18.05 0 3.13 5.99 -10.76 0 12.02 1.85
Spicejet Ltd. Mar-10 97.01 1.12 0 1.25 0.33 0.29 0 8.57 0.36

7. Cost categories:
1. Fuel cost
2. Flying operation labor, hours of flight crew(pilots,co-
pilots,flight engineers)
3. Passenger service labour,(flight attendents)
4. Air traffic and servicing labour (ground personnel
servicing aircraft, handling passengers)
5. Maintenance labour(labour involved in maintenance
of flight equipment, ground property)
6. Maintenance material
7. General overhead
(admin,utilites,insurance,communications)
8. Air transport association cost, landing fees, rental
expense for ground property

8. Volume based cost drivers:
• It appears that only costs of personnel who handle
passengers, handle reservations and sales vary in direct
proportion to the actual outputs.
• Fuel consumption, scheduled flight crew and
attendants vary more with aircraft size, seating
capacity, distance compared to actual number of
passengers
• Expenditures on ground property and equipment,
general overhead and maintenance overhead are
associated with airlines 'overall productive capacity
compared to actual number of passengers
• Cost of maintenance will vary with no. of flights, hrs
flown and characteristic such as no. of engines

9. Operation based cost drivers:
• Aircraft type: Aircraft choices depend on network
characteristic, route length, traffic density and availability of
models.
• Aircraft size and Average stage length: If the volume of traffic is
heavy for a carrier then a larger aircraft would generate more
revenues for a given level of flight crew members.
– Average stage length- It is the average length of a carrier flights in miles, it
increases economies as fuel consumption is greater during take off and
landing
• Hub concentration: Concentrating production geared towards
high volume
• Scale : Ground property and equipment ,general overhead,
maintenance labour etc have a increasing return to scale.

10. Debt Restructuring
KFA is working on a strategy to cut its burgeoning Rs 7000 Cr debt to a
reasonable limit.
• A consortium of 13 banks converted a Rs 750 Cr loan into 23.37% equity
in the airline.
• Management proposing a preferential issue of equity to the promoters
to infuse Rs 2000 Cr.
• Issue of equity to the promoters and other investors worth Rs 800 cr.
• Plans to raise close to Rs 900 Cr by selling Kingfisher House, the airline's
headquarters near the Mumbai domestic airport, and other real estate.
• Rs 700 Cr more by changing the leases on its aircraft from financial to
operating.
• FDI from strategic partners. But dilution of stake depends on
government policy.
• Convert part of its rupee loans into low cost foreign currency loans.
• Explore raising capital through GDR.

11. Financial Restructuring
• KFA suffered a loss of Rs 1027 Cr 2010-11 and reported a
loss of Rs 468.66 Cr in 2nd quarter. Attributed the loss
mainly to high fuel charges and interest burden.
• Focus on reducing the interest cost of 14%
• KFA has reduced its overall cost ,except fuel, by 6%
• Operational revenue grew by almost 10% but EBIDTA
declined due to significant rise in fuel cost.
• KFA has applied for direct import of fuel, will not need to
pay sales tax.

12. Operational Restructuring
• Fleet structure, route network and company policies on remuneration are
the key factors affecting indirect operating costs.
• Focus on the top end of the pyramid as Kingfisher Class has generated
higher yields & posted better load factors than Kingfisher Red.
• The fewer different aircraft types an airline has, the lower the cost.
Maintenance, training & staffing is simplified.
• Till Mar 2011, KFA has airbus fleet size of 60 aircrafts.
• Reduce deployed capacity. Remove flights from low frequency routes.
• Returning surplus aircrafts to the leasing co. would reduce aircraft
maintenance cost.
• Can look for options of hedging the fuel requirement.