Predicting financial distress of firms. A study on bankruptcy of Kingfisher Airlines

Abstract

This paper involves a study of bankruptcy of Kingfisher Airlines and financial health of UB Holdings. Many Indian banks kept on giving loan to Mr. Vijay Mallya’s Kingfisher Airlines and UB Holdings Ltd. considering his reputation as an eminent Businessman and Politician. We will attempt to study if it was possible for Kingfisher Airlines to run smoothly; will also study reasons behind bankruptcy and will see if it was possible for banks to assess creditworthiness and could banks have abstained from giving credit to Mr. Vijay Mallya and his companies. We will study reasons behind failure of Kingfisher Airlines.

Full text

10th Annual Conference of the EuroMed Academy of Business 770
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
PREDICTING FINANCIAL DISTRESS OF FIRMS. A STUDY ON
BANKRUPTCY OF KINGFISHER AIRLINES
Kolte, Ashutosh1; Capasso, Arturo2; Rossi, Matteo2
1Savitribai Phule Pune University, Pune, India and University of Sannio, Italy
2University of Sannio, Italy
ABSTRACT
This paper involves a study of bankruptcy of Kingfisher Airlines and financial health of UB
Holdings. Many Indian banks kept on giving loan to Mr. Vijay Mallya’s Kingfisher Airlines
and UB Holdings Ltd. considering his reputation as an eminent Businessman and Politician.
We will attempt to study if it was possible for Kingfisher Airlines to run smoothly; will also
study reasons behind bankruptcy and will see if it was possible for banks to assess
creditworthiness and could banks have abstained from giving credit to Mr. Vijay Mallya and
his companies. We will study reasons behind failure of Kingfisher Airlines.
Keywords: Z-score model, Bankruptcy, India, insolvency
1. INTRODUCTION
Airlines industry faces financial problems across the world and there are large numbers of other
airlines, which have become defunct till date (Peter Belobaba, 2015). Kingfisher Airlines ltd was
incorporated in 2003, were as it started its operations in 2005. Since its inception, it was not a profit
making enterprise. It was a very ambitious project of Mr. Vijay Mallya to become a market leader in
Indian Aviation industry (Kurian, 2006).
In India, the major constraint is competition faced by new entrants and from government owned Air
India and therefore there is lesser price elasticity. Cost is another major factor, which wipes out
airlines profitability. High taxes on ATF in India forms significant portion of cost of an airlines and
which is just from nations perspective as its generates tax revenues for nation building. Few other
issues faced by aviation sector are lack of connectivity in smaller cities, inadequate infrastructure
facilities and High airport charges. (Crporate Finance (CF) Group, 2014) Also Indian Civil Aviation
Industry witnessed many mergers in its history out of which recent one are Air Deccan and Kingfisher
Airlines and another major merger was acquisition of Air Sahara by Jet Airways (Joshi Nisarg A.,
2012) (CRISIL, 2015). Post-merger neither of the company performed satisfactorily. Jet Airways is in
losses post-merger and whereas Kingfisher Airlines has become bankrupt.

10th Annual Conference of the EuroMed Academy of Business 771
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Post global economic slowdown in 2008 there was reduced demand for Air Tickets and the demand
that was coming was only for low cost tickets. In 2008-09, passengers load factor had worsened.
Moreover, post 2013-2014 demand started increasing compared to seats available and passenger load
factor has also improved. 2016 was the best year for Indian aviation industry in the last decade
(DGCA, 2016).
As per IATA, India is a high growth civil aviation market in the world. India’s domestic demand for
air tickets have grown by 28.1 percent in July 2015 if compared to last year. Growth of Indian Civil
Aviation is three times more than that of China’s growth and around six times if compared to US
Aviation industry. (Rajeev Satav, 2016) (IATA, 2016)
India’s Aviation industry employees around 8 million and its share in GDP is about $72 billion in GDP
as per IATA. As per 20 year forecasts made by IATA, growth of Indian Aviation industry will be so
fast that it will surpass UK and will be the third largest aviation industry with 278 million passengers
in 2026. As per IATA it is predicted that, by 2035 the Indian Aviation industry will have to cater 442
million passengers. (IATA, 2016) As discussed above the opportunities for growth in Indian Aviation
Industry are huge.
United Breweries Holdings Ltd., which also referred as UB Group was founded in 1857 to produce
beer. Vitthal Mallya father of Vijay Mallya became director of UB group in 1947 when he was 2 2 years
old. Over the period, the company prospered and many subsidiaries were formed under UB Group.
Due to early death of Mr. Vitthal Mallya, Mr. Vijay Mallya had to take charge of UB Group at the age
of 28 years (UB, 2017). Mr. Vijay Mallya is known for his luxurious lifestyle and is also known as ‘King
of Good Times’ and was known to showcase his extravagant wealth and for extravagant spending. In
an auction at London, he purchased a ‘Sword’ of ‘Tipu Sultan’ for huge amount and thereafter
purchased Mahatma Gandhi’s belongings for 1.8 million dollars in an auction held at Manhattan.
(TOI, 2010) (TOI, 2009) Mr. Vijay Mallya owns various Sports teams. At Indian Premier League, he
owns a cricket team known as Royal Challengers Bangalore and owns Formula 1 team known as
Sahara Force India. He also owns a football team. Main businesses he own are Beer and Spirits
making, Chemicals, Fertilizers, Real Estate, and Airlines etc. It is said that, Kingfisher Airlines was
started as a gift by Mr. Vijay Mallya’s to his son Siddharth Mallya on his 18th birthday, but later
Siddharth Mallya denied it (Dalal Mihir & Janjai PR, 2016).
Mr. Mallya used to call his customers as ‘guests’ and not customers. He wanted his customers to enjoy
same luxury that he used to enjoy and spent extravagant amounts on aircraft interiors. He had
informed his airlines staff that every ‘guest’ must be served as if he was Mr. Mallya’s personal guest.

10th Annual Conference of the EuroMed Academy of Business 772
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Passengers were treated very well and were given luxury, which resulted into huge costs. Kingfisher
airlines had less number of seats in an aircraft compared to its competitors and other low cost carriers.
Many freebees were distributed out of airlines also like t-shirts, pouches, bags etc. It wanted to
showcase itself as a 5 star airlines. It is observed that Kingfisher airlines was more particular about
hiring good looking airhostesses with specific characteristics in its airlines, which used to result into
reduced eligible applicants and resulted into rise in ‘cost of hiring’ and ‘higher staff costs’. Also,
airlines used to provide subsidized passage to passengers from home to airport adding to the cost.
(CRISIL, 2015)
Due to war at Iraq and at Afghanistan, Aviation Turbine Fuel (ATF) prices kept very high by Oil
Companies due to heavy taxes on ATF and rise in Oil prices in international market. ATF forms a
major operating cost in any airlines industry and in case of Kingfisher Airlines major revenues were
being utilized in buying ATF due to high ATF prices (MCXINDIA, 2008) (IOCL, 2017). India is the
costliest place in the world to run a fleet of planes because of Taxes, ATF Charges and Airport charges
(MarketLine, 2014).
2. LITERATURE REVIEW
Hooper (1997) has discussed in his paper about Liberalization in the Indian Airlines Industry post
1991 era and pointed out various problems of Indian aviation industry like Financial Problems,
Airport Infrastructure, and Social Routes. Hooper has pointed that Social Routes are the causes of
financial trouble for Airlines Industry. Moreover, financial problem of the industry are responsible for
slow growth on the industry. Unit cost of Indian Airlines Industry is higher than in USA, but he
believes that improved performance would help industry to become profitable. Also, Hooper has
pointed out benefit of low wages and salaries in India as a benefit to the industry. Williams (2012) and
O'Connell (2012) in their study indicated that Indian Airlines Industry is cost sensitive and majority of
customers prefer low cost airlines to full service airlines and if full service airlines match fairs of low
cost airlines then there will be shift of passengers to full service airlines. Prizing is a very sensitive
factor and very few customers will have loyalty towards airlines in case of price changes.
Kanthe (2012) has pointed out that Aviation Turbine Fuel (ATF) prices are very high and keep on
fluctuating and that rises fuel costs. Airlines industry has also faced shortage of skilled labor force and
infrastructure required for aviation industry, though conditions have improved in recent years.
Kanthe has also pointed that due to higher taxation input costs are higher in India. He has pointed out
that restrictions on foreign ownership and labor laws have kept the industry from innovating.
Mathiesen (1996) says that many airlines in USA have become bankrupt due to competition, economic

10th Annual Conference of the EuroMed Academy of Business 773
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
recessions and in industry scandals. Till date hundreds of airlines have gone bankrupt. Mathiesen
believes that in 1990’s major reasons behind bankruptcy was economic recession and higher fuel
prices.
Ravi (2016) has raised a question on banking system in India and points out that collective Non
Performing Assets (NPA’s) of Indian nationalized banks is around USD 120 billion in 2016. He also
points that factors like political nepotism, outright corruption facilitate the many questionable
practices of Indian Banking sector. His another important observation is, Banks converted Kingfisher
airlines debt into equity at a premium of 61%.
Altman (1968) has assessed bankruptcy potential of companies, by using a set of ratios using
discriminant analysis. Discriminant Financial Ratio function developed was very reliable in predicting
bankruptcy of a company correctly in 94 % of the sample with 95% of all firms in the bankrupt and
non-bankrupt groups assigned to their actual group classification. Discriminant formula was reliable
in most secondary samples used to know usefulness of the formula. This formula is known as
Altman's Z Score. The only limitation of the model was that it was tested on publicly held
manufacturing firms. Altman (2000) in this said paper he has discussed about his previous work
related to his revised Altman's Z Score Function, which can be used for the privately held firms. He
has also tested another set of ratios were using discriminant analysis and he came up with reliable
discriminant function for non-manufacturing firms. Further, he analyzed sets of financial ratios for
emerging markets and came up with another Z Score formula to predict bankruptcy of companies in
emerging markets.
Piotroski (2000) in his work shows that a fundamental analysis using simple financial ratios, when
used is a portfolio of high book-to-market firms can shift the distribution of returns earned by an
investor. His work do not aim to find the optimal set of ratios for evaluating the performance
prospects of individual “value” firms, the results convincingly demonstrate that investors can use
relevant historical information to eliminate firms with poor future prospects. Higher Piotroski f Score
indicates strength of financial statements and vice versa.
After literature review, we arrived at few research questions as below:
i. What were the Factors responsible for bankruptcy of Kingfisher Airlines?
ii. Could banks have avoided loans to Kingfisher Airlines Limited? Was it possible to predict
bankruptcy?
ii. Wasn’t it possible for Banks to evaluate strength of financial statements and making fair valuation
of Kingfisher Airline's Share Prices before converting debt into equity at a very high premium?

10th Annual Conference of the EuroMed Academy of Business 774
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
3. RESEARCH METHODOLOGY
We started with review of literature and examining the past Annual Reports and Financial Statements
of UB Holdings Ltd. and Kingfisher Airlines Ltd. We have used secondary data from Money Control,
Value Research and Annual Reports of the company.
The methodology will involve study financial statements of Kingfisher Airlines, Conventional Ratio
Analysis, and study of Capital Structure, Calculation of Altman’s Z Score and Piotroski F Score. We
will do Acid Test of Altman’s Z score with Kingfisher Airlines and UB Group to know if it could have
been used to predict the potential bankruptcy of an organization beforehand. Will also use Piotroski F
Score to determine financial strength of company and to know if Banks could have abstained from
giving loan and converting debt into equity of Vijay Mallay’s companies.
3.1 Altman’s Z Score Model:
In 1968, he arrived at first discriminant function as below:
Z = 0.012 X1 + 0.014 X2 + 0.033 X3 + 0.006 X4 + 0.999 X5
Where,
X1 = working capital / total assets,
X2 = retained earnings / total assets,
X3 = earnings before interest and taxes / total assets,
X4 = market value equity / book value of total liabilities,
X5 = sales / total assets,
And,
Z = Altman’s Z Score.
In year 2000 Altman suggested an alternative way of calculating, which he found was used by large
majority, as stated below:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5.
In said method, multipliers of first 4 ratios are multiplied by 100 and thereafter Altman suggested
that, if this correction is made in the formula then all ratios will be calculated in fractions or number of
times and not in percentages. Scores to assess corporate bankruptcy and cut off scores will be same as
it was earlier. (Altman E. I., Predicting Financial Distress of Companies: Revisiting the Z-Score and
Zeta Models, 2000)
Now after the Z score of an organization is derived from the above equation, it is compared to the Z-
score indicator to determine the current financial status of the organization.

10th Annual Conference of the EuroMed Academy of Business 775
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Table: Z-score indicators
Z-Score Range
Indicator
Conclusion
Less than 1.81
Bankrupt
Danger zone, most likely to go bankrupt
1.81 to 2.99
Gray zone
Maintain caution, bankruptcy cannot be easily predicted
More than 2.99
Stable
No bankruptcy indicator
Thereafter Altman’s model was further revised so that it could be used for Non-Producing companies
and Emerging Markets. This revision of the Z-Score score model studied the accuracy of a new Z Score
model in absence of X5 (that is, sales/total assets). Revised Z Score model was tested with the financial
condition of non-American companies. Also this revised model was used in emerging markets and
was found useful (Altman E. I., Revisiting Credit Scoring Models in a BASEL 2 Environment, 2002).
The classification results were identical to the revised five-variable model (Z’Score).
The new Z” Score model is (Altman E. I., 2005) :
Z” = 6.56 (X1) + 3.26 (X2) + 6.72 (X3) + 1.05 (X4)
When Z Score is below 1.1 it is a indicator of a distressed company. This particular model is also
useful within an industry where the type of financing of assets differs greatly among firms and
important adjustments, like lease capitalization, are not made. In this further revised model, constant
term of +3.25 was added (Altman E. I., Revisiting Credit Scoring Models in a BASEL 2 Environment,
2002).
Z-Score model for Emerging Markets:
Z = 3.25 + 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
Table: Z-score indicators
Z-Score Range
Indicator
Conclusion
Less than 1.1
Bankrupt
Danger zone, most likely to go bankrupt
1.1 to 2.6
Gray zone
Maintain caution, bankruptcy cannot be easily predicted
More than 2.6
Stable
No bankruptcy indicator
3.2 Piotroski F Score Model:
‘Piotroski F SCORE’ is addition of individual binary signals given by Piotroski as below:
F_ SCORE = F_ ROA + F_ΔROA + F_CFO + F_ ACCRUAL + F_ΔMARGIN + F_ΔTURN + F_ΔLEVER +
F_ΔLIQUID + EQ_OFFER.

10th Annual Conference of the EuroMed Academy of Business 776
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
F SCORE can range from a low of 0 to a high of 9, where a low and high F_SCORE represents a firm
with very few and most good signals respectively. To the extent, current fundamentals predict future
fundamentals, Piotroski expects F SCORE to be positively associated with changes in future firm
performance and stock returns. (Piotroski, 2002)
If company scores 7 to 9 we may conclude that it is financially strong from investment perspective and
if it scores 0 to 3 we may consider it has weak financials and not an attractive investment option.
Where,
F_ROA is return on Total Assets (Scores 1 if positive else zero)
F_ΔROA is change in ROA (Scores 1 if higher than previous period else zero)
F_CFO is Cash from Operations (Scores 1 if positive else zero)
F_ ACCRUAL (Scores 1 if CFO/TA is higher than ROA of present period)
F_ΔMARGIN is variation in Gross Profit (Scores 1 if higher than previous period else zero)
F_ΔTURN is variation in Asset Turnover Ratio (Scores 1 if higher than previous period else zero)
F_ΔLEVER is variation in Debt Equity Ratio (Scores 1 if lower than previous period else zero)
F_ΔLIQUID is variation in current Ratio (Scores 1 if higher than previous period else zero)
EQ_OFFER is change in shares outstanding (Scores 1 if Shares outstanding has not increased)
4. ANALYSIS OF DATA:
Expenses as a ratio of Sales:
Ratio of Various Expenses to Revenue of few companies in Aviation Sector:
Airlines
Mar
2007
Mar
2008
Mar
2009
Mar
2010
Mar
2011
Mar
2012
Mar
2013
Mar
2014
Mar
2015
Mar
2016
Ratio of ATF cost to Total Revenue
Kingfisher
Airlines
47.87
60.38
43.47
36.21
35.01
50.58
58.84
-
-
-
Interglobe
Aviation
-
-
-
-
39.06
50.94
46.28
48.74
40.74
29.48
Spice Jet
47.89
48.84
52.91
36.32
0.89
0.91
48.65
50.83
44.77
26.68
Jet Air
32.92
34.85
41.76
29.68
33.77
43.70
40.18
40.51
32.97
22.89
Ratio of Aircraft Lease Rentals and other operating Costs to Total Revenue
Kingfisher
Airlines
28.83
26.41
18.23
21.77
15.15
14.91
103.89
-
-
-
Interglobe
Aviation
-
-
-
-
10.39
14.01
14.35
14.62
13.62
15.73
Spice Jet
19.71
18.99
21.20
20.76
75.18
91.35
34.83
43.06
44.52
44.26
Jet Air
16.81
19.44
21.51
19.91
6.53
5.97
7.08
9.46
9.66
9.70
Finance Costs to Total Revenue
Kingfisher
Airlines
1.59
3.26
11.40
19.79
20.21
21.92
210.13
-
-
-

10th Annual Conference of the EuroMed Academy of Business 777
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Interglobe
Aviation
-
-
-
-
1.14
0.90
0.61
1.07
0.81
0.81
Spice Jet
0.43
0.70
0.70
0.28
0.36
1.33
2.09
1.57
2.78
1.99
Jet Air
3.26
5.21
6.27
9.35
8.66
6.40
6.43
5.63
4.36
3.96
Ratio of Other Expenses to Total Revenue
Kingfisher
Airlines
29.41
38.67
42.61
47.09
38.92
54.40
270.42
-
-
-
Interglobe
Aviation
-
-
-
-
22.27
22.70
20.09
21.40
21.58
23.13
Spice Jet
22.46
21.09
22.42
21.34
56.84
71.69
15.76
20.48
23.15
23.66
Jet Air
28.32
24.20
24.06
25.16
34.75
35.95
35.52
45.36
43.40
43.01
Employee benefit Expenses to Total Revenue
Kingfisher
Airlines
11.56
15.85
13.52
13.54
10.41
11.50
51.09
-
-
-
Interglobe
Aviation
-
-
-
-
7.43
8.97
7.31
8.05
8.31
10.78
Spice Jet
9.90
9.38
8.19
7.51
8.23
10.02
9.14
9.00
9.99
9.45
Jet Air
12.73
12.75
11.98
11.55
10.36
10.54
8.87
10.72
11.06
10.90
Calculated by Authors, Source of data: (Moneycontrol, 2017)
We have calculated ratio of various expenses to revenues to know the reasons behind failure of
Kingfisher airlines and viability of its competitors. It was observed that on an average ratio of almost
all costs to revenue was higher for kingfisher airlines. Finance costs to Revenue is significantly higher.
After studying ratios of all four companies compared, we found that kingfisher could have survived,
if it would have not expanded its operations faster and should have avoided excessive debts. Also
controlling costs was possible as other airlines were managing with lower costs. In addition, Jet
Airways, whose financial statements look week to bare eyes but it has managed to survive and kept its
Net Worth positive. Higher costs, higher debts taken with a greed to grow faster led to liquidity and
ultimately bankruptcy of the company.
Kingfisher Airlines kept on rising its costs and step competition in the market did not allow it rise its
fairs. This resulted in financial distress and they defaulted payments of Fuel and salaries of employees
for several months. Followed by it kingfisher Airlines discontinued its international operations in mid
of 2012 and thereafter discontinued domestic operation later that year. (CRISIL, 2015)
Discussion on Financial Statements and Ratios:
Key Financial Ratios of Kingfisher Airlines
Financial Ratio
Mar 13
Mar 12
Mar 11
Mar 10
Mar 9
Mar 8
Per Share and shareholder related Ratios
Basic EPS (Rs.)
-56.27
-46.92
-40.16
-65.6
-60.5
-13.93
Diluted EPS (Rs.)
-56.27
-46.92
-40.16
-65.6
-60.5
-13.93
Book Value / Share (Rs.)
-166.59
-97.56
-70.4
-150.54
-83.88
13.9
Revenue from Operations/Share (Rs.)
6.2
95.1
127.76
190.59
198.16
107.24
PBT/Share (Rs.)
-53.18
-59.66
-30.55
-79.66
-72.12
-52.07

10th Annual Conference of the EuroMed Academy of Business 778
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Net Profit/Share (Rs.)
-53.18
-40.3
-20.64
-65.6
-60.5
-13.93
Profitability and Leverage Ratios
PBT Margin (%)
-857.85
-62.73
-23.91
-41.79
-36.39
-48.55
Net Profit Margin (%)
-857.85
-42.37
-16.15
-34.42
-30.53
-12.98
Return on Capital Employed (%)
71.66
-361.44
-30.32
-66.86
-79.61
-21.06
Return on Assets (%)
-153
-25.63
-12.44
-21.86
-21.73
-10.33
Total Debt/Equity (X)
-0.64
-1.42
-1.97
-1.98
-2.54
4.95
Asset Turnover Ratio (%)
17.83
60.49
77.05
63.51
71.2
79.57
Source: (Moneycontrol, 2017)
EPS was always negative for Kingfisher Airlines. Kingfisher Airlines was in losses for several years, it
resulted in accumulation of losses and it eroded company’s reserves and surplus. Erosion of reserves
and surplus also led to erosion of company’s Net Worth and therefore book value per share is
negative. Profit margins were negative, return on Assets were negative and leverage ratios showing
worst capital structure and companies failure shows us implication of wrong capital structure
decisions.
4.1 Altman's Z Score:
Altman's Z Score of Kingfisher Airlines:
Financial Ratios
Mar 13
Mar 12
Mar 11
Mar 10
Mar 9
Mar 8
Working Capital/ Total Assets
-2.83
-1.37
-0.58
-0.23
-0.31
-0.01
Retained earnings/ Total Assets
-1.53
-0.46
-0.19
-0.36
-0.44
-0.15
EBIT/ Total Assets
-1.02
-0.43
-0.04
-0.29
-0.39
-0.48
Market Cap/Total Liabilities
0.04
0.07
0.18
0.11
0.10
1.03
Sales/Total Assets
0.24
1.15
1.22
1.14
1.14
1.22
Altman Z-score (1968 formula)
-8.63
-2.51
0.23
-0.51
-1.08
0.05
Altman Z-score for emerging markets
-27.09
-10.04
-1.29
-1.23
-2.74
0.59
Altman Z-score for non-manufacturing industries
-30.34
-13.29
-4.54
-4.48
-5.99
-2.66
Calculated by Authors, Source of data: (Value Research, 2017)
While calculating Altman’s Z Score Deferred Tax Assets are ignored from Total Assets, as these are tax
benefits expected in the future provided company makes profits in the following years. As far as
Kingfisher Airlines is concerned, its losses were accumulating over the period and we are testing this
company for bankruptcy. Therefore, considering no hope of profits in the near future, we have
ignored Deferred Tax Assets from Total Assets. Cumulative retained earnings are not considered; on
the contrary, we took yearly transfers to retained earnings in calculations.

10th Annual Conference of the EuroMed Academy of Business 779
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
Our calculations show that Altman’s Z Score as per 1968 model was always below 1.81 post March
2008 and was always below 1.1 as per Altman’s model for emerging markets and model for non-
manufacturing industries. Therefore, we can conclude that Kingfisher Airlines was not a viable
company. Banks kept on sanctioning Loan to this company. We have also calculated Altman’s Z Score
for few other companies in the same industry and found jet Airways in bankrupt zone and spice jet
also do not have sound financial position where as only Interglobe Aviation has better financial
position amongst companies compared.
Altman's Z Score of UB Holdings Ltd.
Financial Ratios
Mar 16
Mar 15
Mar 14
Mar 13
Mar 12
Mar
11
Mar
10
Working Capital/ Total Assets
-0.16
0.18
-0.09
-0.38
-0.19
-0.33
-0.08
Retained earnings/Total Assets
0.00
0.01
-0.31
-0.03
-0.23
-0.06
-0.15
EBIT/Total Assets
0.03
0.09
-0.20
0.03
-0.09
0.00
-0.11
Market Cap/Total Liabilities
0.03
0.03
0.04
0.03
0.05
0.10
0.17
Sales/Total Assets
0.18
0.18
0.18
0.09
1.00
0.52
0.49
Altman Z-score (1968 formula)
0.12
0.74
-1.00
-0.28
0.18
0.07
-0.07
Altman Z-score for emerging markets
2.44
5.12
0.36
0.90
0.68
0.93
1.67
Altman Z-score for non-manufacturing industries
-0.81
1.87
-2.89
-2.35
-2.57
-2.32
-1.58
Calculated by Authors, Source of data: (Value research, 2017)
UB Holdings Ltd. kept losing its controlling stake in kingfisher airlines Ltd. post 2011 and kingfisher
airlines Ltd. has not remained subsidiary of UB Holdings Ltd. We studied certain ratios of UB
Holdings and calculated Altman’s Z Score for it. As per Altman’s Z Score, company is in bankruptcy
or gray zone till financial year 2013-2014 and showed good signs or recovery in financial year 2014-
2015. In addition, while reading financial statements we could not see soundness in the financial
statements, but definitely not as worst as Kingfisher Airlines.
4.2 Piotroski F Score:
Now the reason why we are calculating Piotroski F Score for Kingfisher Airlines, the reason is to
assess if it could have given signals to non-Promoters, other investors and Financers about financial
strength of company. In addition, banks had converted debt of Kingfisher Airlines ltd. into equity.
Piotroski f score
Mar 2013
Mar 2012
Mar 2011
Mar 2010
Mar 2009
Mar 2008
Kingfisher Airlines
3
1
3
4
4
1
Calculated by Authors, Source of data: (Value Research, 2017)
If Piotroski f score is between 0 to 3 it is considered that company has week financials and not a good
option for investment. For kingfisher Airlines Piotroski f score has indicated clearly that its financials

10th Annual Conference of the EuroMed Academy of Business 780
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
are not sound except two years where scores were 4 also which was very low and even after that
banks kept on financing company by providing debt and converting its debt into equity.
4.3 Capital Structure:
Capital Structure of Kingfisher Airlines had excessive amount of debt with adverse debt
equity ratio and company was suffering operating losses. Company Balance Sheet have also shown
negative Net Worth for several years. In addition, January 2004 onwards benchmark Prime Lending
Rate continuously kept on rising with few minor exceptions or reductions. This let to continuous rise
in the cost of debt (SBI, 2017). Higher cost of debt kept pushing weighted average cost of capital
higher and higher. Company having negative earnings or lower operating earnings should abstain
from higher debt, but kingfisher kept on increasing is debt, higher and higher to attain its ambitions of
faster growth and market leader. While Kingfisher Airlines was trying hard to succeed macro-
economic conditions like Interest Rates, ATF Prices, Stock Market Sentiments and International
Economy were worsening, which gave a tough blow to ambitions of Kingfisher Airlines.
More and more infusion of Debt in capital structure be a positive certain cases (RAVIV, 1990) or can
have adverse impacts in certain cases (MYERS, 1984) . However, it is seen that in financially
distressed firms adverse impact of increased leverage is frequently visible. Kingfisher kept on taking
more and more debt until bankers refused to provide further finance.
Since 2007 it was seen that Kingfiher Airlines kept on issuing more and more equity shares. They kept
on converting debt into equity and pledging it’s share with banks for raising finance. Frequent
accessing to capital markets and constant dilution of the stake to is also indicator of poor financial
heath in case of kingfisher airlines.
5. FINDINGS
Factors responsible for bankruptcy of Kingfisher Airlines are classified as primary and secondary
factors. Primary factors include Greed to Grow faster and wrong capital structure decisions.
Kingfisher Airlines wanted to grow faster by rise in fleet of aircrafts to growand market share and
wanted Airlines to fly international early. To finance growing Kingfisher Airlines and to achieve high
ambitions wrong finance decisions were taken like excessive debt and in later years when finance cost
was rising for company and retained earnings were not generated due to losses, which were resultant
of higher costs. More finance was required by promoter group to keep company running and they
resorted to dilution of ownership stake in company. External economic factors did not support
kingfisher airlines. There was recession in 2008-09 and due to war in Iraq and Afghanistan, oil prices
were rising also, exchange rate kept on fluctuating. Kingfishers Airline’s 5 star luxury model was

10th Annual Conference of the EuroMed Academy of Business 781
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
building costs for the company and competition had reduced price elasticity and thereafter employees
revolted due to nonpayment of salary for months and suppliers refused to supply fuel to airlines due
to its delayed payments. Kingfisher Airlines grounded its flights and had to bear fixed costs and
situation started further worsening. Airlines could have remained operational if company would not
have resorted to faster expansion.
Excessive Leverage distorted capital structure. After looking at higher and higher debt in balance
sheet and negative net Worth, banks refused to provide further finance and advised promoters to
infuse more equity. Excessive leverage, higher cost of finance with negative margins led to failure of
the airlines.
Apart from primary factors discussed above, there were few secondary factors responsible for Fall of
Kingfisher Airlines. Factors like, Aircraft Lease Rentals and other Operating Costs were on an average
more than that of its competitors. Employee benefit and other expenses were more than the average
expenses of its competitors over the period. Higher cost of ATF, Finance Costs, Aircraft Lease Rentals,
Operating Costs, other expenses and staff costs were responsible to reduce financial flexibility of
Kingfisher Airlines. Ultimately, higher Finance Costs eventually broke spine of airlines. In India due
to taxes, ATF prices are high. If ATF prices are compared with neighboring countries like Malaysia,
UAE, Qatar, Oman, Saudi Arabia, Singapore etc. Also with changes in international prices of oil, ATF
prices tend to fluctuate.
Before acquisition of Air Deccan by kingfisher, low cost carrier Air Deccan used to have lowest airfare
amongst all operators. Strategic reason to acquire Air Deccan was to kill this competition. There was
another major issue of tough competition by state owned carrier Air India and its subsidiaries in terms
of pricing. During Kingfisher Airlines expansion period, prices were kept low to improve Passenger
Load factor compared to its competitors so that airlines can increase its size of operations further. This
competition led to greater financial turbulence for Kingfisher Airlines.
There was economic show down in 2008, which resulted in reduced passenger load factor and
reduced demand for full service career. Customers migrated towards low cost careers. There was
lesser price elasticity in hands of Kingfisher Airlines. After acquiring Air Deccan, many customers
migrated to other airlines. Services, Aircraft interiors, seat arrangements and staff costs kept cost high
and Kingfisher Airlines was trying to keep its prices very low to keep passenger load factor high.
Lack of capable leadership in company’s day-to-day management resulted into faulty strategy and
faulty expansion decisions, which showed lack of control over excessive costs and resulted into losses
for several numbers of years, which resulted into accumulation of huge negative Net Worth and
thereafter bankruptcy of Kingfisher Airlines.

10th Annual Conference of the EuroMed Academy of Business 782
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
After looking at Financial statements with bare eyes there was no need to predict potential bankruptcy
of Kingfisher Airlines Ltd. Nevertheless, to have precise analysis of financial data we decided to
calculate traditional financial Ratios and calculate Altman’s Z Score and also to calculate Piotroski F
Score to determine strength of financial statements. Upon examination of the results, it is clear that
Altman’s Z could have been used to predict the potential bankruptcy of Kingfisher Airlines. Also our
analysis shows, UB Holdings Ltd is also not stable. Piotroski F Score of Kingfisher Airlines suggests
that company’s financial statements are not strong.
CONCLUSION
As we started studying the case of Kingfisher airlines, its financials didn’t look attractive since its
inception to our bare eyes. Things were so clear from financial statements that there is no need of
traditional ratio analysis also. As per financial statements there are accumulated losses, Negative Net
Worth, higher costs compared to the industry. As per above calculations, Kingfisher Airlines was not
a viable company unless there was major reduction in cost or increase in fairs, then also banks kept on
sanctioning Loans to this company.
It was possible for banks to predict potential possible Bankruptcy of Financial statements using
Altman’s Z Score. Moreover, prediction of bankruptcy would have saved banks from resultant default
from kingfisher Airlines.
If banks would have calculated Piotroski F Score they could have come to know in advance that there
is no strength in financial statements of Kingfisher Airlines and they could have abstained from
converting debt into equity at substantial premium.
Kingfisher Airlines is a company incorporated under Indian Companies Act 1956 and had a limited
liability. Mr. Vijay Mallya was a businessperson and he failed in this business. However, how banks
have sanctioned finance to Kingfisher Airlines? Now question arises, haven’t public sector banks
failed miserably? It raises a big question on the way Indian Banks operate and malafide intentions in
financing to Kingfisher Airlines Ltd can be sensed.
We strongly recommend banks to use Altmans Z Score while analyzing creditworthiness of a
company and Piotroski F Score to determine strength of financial statements.
Any business (more particularly Airlines business) with growing revenues at a higher rate with low
profit margins with external business environmental factors having significant implications on costs
should abstain from taking excessive debt, as little change in pricing and costs may have negative
implications on profits and resultant recurring losses may lead to a tragic bankruptcy.

10th Annual Conference of the EuroMed Academy of Business 783
Global and national business theories and practice: ISSN: 2547-8516
bridging the past with the future ISBN: 978-9963-711-56-7
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