Why Kingfisher Exited Low Cost Carrier (LCC) Business [Organizational Culture]!

13

For those unware, Kingfisher recently decided to shut down its Low Cost Carrier (LCC) service branded Kingfisher Red. It is noteworthy that Kingfisher Red is essentially a spin-off of the erstwhile Deccan Airways which introduced LCC in the Indian aviation sector.

That the Indian Aviation sector’s financial stability is in tatters is no surprise despite the players in the sector ordering new aircrafts. Operating factors for all Indian airlines are stressed what with fluctuating oil prices and the deprecating rupee.

So, in a sense it could have made sense for Mallya to take a look at the market dynamics and decide the LCC space was not profitable for the airline which ironically has been in RED for the majority of its operations. The executives have cited certain plausible reasons for taking the decision to get out of the LCC segment including,

Operating costs of low-cost carriers and full service carriers in terms of fuel, airport charges, engineering and maintenance and crew costs are similar. Full service carriers incur additional costs, which are more than recovered through higher yields.

The induction of so many additional aircraft in the low-cost segment will potentially lead to substantial over capacity and a price war with declining yields

With continuing economic growth, business related travel is increasing significantly. Businessmen and executives are willing to pay extra and this segment is not as price sensitive as the classic low-cost segment

All these points make pure business sense along with the fact that where there are 5 Low Cost Carriers, there are only 3 in the full-service segment. Better yield, less competition all suggest that Kingfisher might be better off competing in the full-service segment.

However, here is my issue with the decision to close Kingfisher Red and how it has got to do with the organization culture more than anything else.

All the factors cited by Kingfisher executives are true but here is the thing – These were true even when Kingfisher was trying to buy out Air Deccan, weren’t they? Except for may be the increased competition in the LCC segment.

The thing on LCC and full-service carriers having the same operating costs etc. was something that existed even during the execution. Infact, it was cited that bringing Deccan under Kingfisher will help optimize these costs and in the end manage the full-service as well as the LCC segment more efficiently. Wonder what has changed now?

I think that why Kingfisher failed to bear the fruits of acquiring Deccan is essentially why most M&A’s fail. Cultural disparities!!

Infact, Capt. Gopinath captured it best in his book ‘Simply Fly’ on why he did not want Kingfisher to acquire Deccan

"I am from Mars and Mallya is from Venus" (something of this sort)

It couldn’t be more true. When Capt. Gopinath ran Deccan he created a culture of extreme frugalness or as they say – He ran a lean organization.

Mallya on the other hand has been one of the most flamboyant and extravagant businessman there is. Kingfisher Airlines for its part imbibed the same culture and differentiates itself on the WOW factor that it delivers and how it caters to a target customer who is shell out that little extra. It is evident that the team he put together was a reflection of his vision and the culture he created.

In this case, it can be an arduous task to operate in extreme segments of the market with essentially a single team in place. I am not exactly sure if Kingfisher operates these two segments with different teams, but I am guessing there will be significant overlaps. The cultural overlap that this kind of setup requires seems an uphill task and i am surprised Kingfisher did not decide to fold out the LCC segment earlier.

I am not trying to argue that the decision to Kingfisher Red lacks proper business logic; on the contrary it might even help Kingfisher to concentrate on the segment it has built its brand upon.

However, I wonder if Mr. Mallya really thought that he will be able to associate Deccan’s cultural attributes with his own airline.

What do you think on Kingfisher’s decision to close Kingfisher Red? Is it because of the huge shift in market dynamics or because the merger of Deccan Airways was a cultural misfit right from the start

  1. Altaf Rahman says

    Ankit,
    I read last week that for giving his personal guarantee to Kingfisher and other own companies, he charged 51 crores from them. So the personal guarantee is not a charity. It cost the companies money. How the companies arrived at that figure is again open to discussion ;)

  2. Ankit Louis Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  3. Ankit Louis Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  4. Ankit Louis Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  5. Ankit Louis Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  6. Ankit Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  7. Ankit Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  8. Ankit Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  9. Ankit Agarwal says

    Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

  10. Altaf Rahman says

    Lots and lots can be written by analyzing minute details about why Kingfisher fails (whether it be LCC or regular segment).
    The basic problem (as I commented in scores of earlier articles) remains the same.
    The flamboyance of Malya!!
    He dont care what is the business model. He dont care how to run a certain business. Al lhe looks before jumping into the business is the flashiness. He dont even care if it is business or what ever.
    See for yourself what you can associate Malya with !! Airlines, Kingfisher calender, Formula one racing, 20-20 cricket. Whats next? May be owning a football club in Europe?
    None of the above is generating profits. One thing that differentiates him from all other those who tried fashionable businesses without working out business models is his cash cow. United Brewaries. He knows very well that even if any of his other companies are making losses, he can fall back on UB for money.
    All those who invested in Kingfisher are having sleepless nights. Whether its forign funds or banks who lend money. What he is doing right now is rotating lenders. He takes loan from Bank B to repay Bank A. Loan from Bank C to repay Bank B. And there is a very fashionable name to this excercise. Restructuring capital!! Fits in well with his personality. As long as the name is fashionable, just do it!!. Now there is an excercize to convert loans to equity. If it is loan, the company has to pay interest. If it is equity, they dont have to pay dividend. All the lenders are forced to agree to this option.

    May be what I said above may not be exactly fitting into whats happening in a literal way but the essence is the same. May be I look like Kingfisher hater. But thats not true. I flew the airline and the service is good. I am talking about how the business model operates.

    Just my two paisa :)

    1. Ankit Agarwal says

      Altaf, good to have you here and as usual your 2 paisas are insightful.

      Personally i don’t agree that flamboyance= bad business. Agreed that he has spread himself too far and wide in a very short time with businesses that have a very long gestation period. Yes, he is playing the banks and now under fire and had to give his personal gaurantee (from his own wallet). But again, i do think he has the business sense but he is too risky a player :-) For India’s good, i hope he comes out stronger

  11. Sagar Shahane says

    Good one. Well, its similar to AA & Southwest story.
    The way business is carried out at LCC & full service carrier are totally different & hence difficult to juggle two of them. Going LCC way would have been a wiser choice I feel as high load factor is what helps airlines stay in black.

    1. Ankit Agarwal says

      Aha, if its aviation you have to be there :-) [presume you came here from linkedin] . As for the LCC way i am not sure if it would have gone down well with the way KF is structured (what will existing infra and the hostesses) . IMO Air Deccan should never have been acquired atleast by Mallya. Now a lot of that will be dead weight on his already overstreched balance sheet

Leave A Reply

Your email address will not be published.

who's online