Kingfisher Airlines

1.  Background
 
 Kingfisher Airlines Limited (formerly known as Deccan Aviation Limited)
 (the Company) is engaged in rendering scheduled and unscheduled
 aircraft passenger services, including charter services. The Company
 was incorporated on June 15, 1995 as a private limited company and
 converted itself into a public limited company on January 31, 2005.
 Consequently the Company changed its name from Deccan Aviation Private
 Limited to Deccan Aviation Limited. On June 12, 2006, the Companys
 shares were listed on the Bombay Stock Exchange Limited and the
 National Stock Exchange Limited, pursuant to the Companys initial
 public offer of shares. The Company changed its name from Deccan
 Aviation Limited to Kingfisher Airlines Limited, with effect from
 September 5, 2008.
 
 2.  Demerger of the commercial airline division of Kingfisher Training
 and Aviation Services Limited
 
 a) The Honble High Court of Karnataka approved a Scheme of Arrangement
 vide its order dated June 16, 2008 under Sections 391 to 394 of the
 Companies Act, 1956 (Scheme), which inter alia resulted in the
 demerger of the Scheduled airline business of Kingfisher Training and
 Aviation Services Limited (KTASL) (previously known as Kingfisher
 Airlines Limited) on a going concern basis with the Company, with
 effect from April 1, 2008 as thedemerger appointed date.
 
 b) The Company has filed an application with the Honble High Court of
 Karnataka, for issue of an order under Section 394 of the Companies
 Act, 1956 in form 42 of the Companies (Court) Rules; 1949. Pending
 adjudication of the Stamp Duty by the Honble High Court and payment of
 the same the issue of the order in form 42 is awaited. However, the
 Stamp duty payable has been provided on the basis of the said
 application filed by the Company with the Honble High Court of
 Karnataka.
 
 c) Consequent to the Scheme, all the assets and liabilities of the
 commercial airline division of KTASL have vested with the Company. The
 balance sheet of KTASL as at March 31, 2008, duly audited by its
 statutory auditors after eliminating assets and liabilities of a
 division retained by it have been incorporated in the books of account
 as of April 1, 2008 after taking cognizance of the Scheme, particularly
 clause 13, part C prescribing the accounting treatment to be followed
 by the Company.
 
 d) Pursuant to the Scheme, in consideration of the demerger referred to
 above, three equity shares of Rs. 10/- each in the Company for every
 seven equity shares of Rs. 10/- each held by the equity shareholders in
 KTASL and one 6% redeemable non cumulative preference shares of Rs.
 100/- each in the Company for every 6% redeemable non cumulative
 preference share of Rs.100/- each held in KTASL, have been allotted to
 the shareholders of KTASL. The face value of such equity and preference
 shares aggregate to Rs. 1,300,333,500 and Rs. 970,000,000 respectively.
 
 e) Difference between the book value of assets minus liabilities of
 KTASL so taken over by the Company and the face value of shares
 allotted as consideration vide sub paragraph (d) amounting to Rs.
 9,413,558,768 has been set-off against the Securities Premium Account
 as detailed in clause 14.1 of the Scheme read with resolution of the
 Board of Directors dated July 25, 2008 pursuant to clause 25.1 of the
 Scheme as detailed below:
 
 f) Harmonization of accounting policies of the commercial airline
 division of KTASL taken over with that followed by the Company has been
 made to the extent identified and adjustments required thereof have
 been made in the Profit and Loss Account.
 
 g) Documentation in respect of transfer of certain assets and
 liabilities so taken over to the name of the Company are pending. The
 Company is in discussion with the Registrar of companies for transfer
 of charges created by KTASL to its name in respect of securities
 granted for loans taken over by the Company.
 
 3.  Share Capital
 
 During the year, the Company has allotted 77,030 equity shares under
 the Employee Stock Option Plan at Rs. 10/- each at a premium of Rs. 55
 per share.
 
 4.  The Company raised an aggregate amount of Rs. 36,328 lakhs through
 a public issue of shares during the period ended June 30, 2006. The
 proceeds of the issue have been utilized as follows:
 
 5.  Commitments and contingent liabilities not provided for:
 
                                                    (In Rupees)
                                                 As at     As at 
 
 Particuars Remarks
 
                      March 31, 2009 March 31, 2008
 
 Estimated amount of 267,522,960,069 67,709,799,738 Pertains to
 contracts remaining                                acquisition of 
 to be executed                                     aircrafts & other 
 on capital account                                 capital
 and not provided                                   assets in future.
 for (net of advances)
 
 Guarantees/letters of 7,443,597,228 2,946,740,641  Pertains to
 credit given by                                    guarantees and letter 
 of creditgiven/                                    issued by banks
 banks on                                           to Airport Authoritie 
 behalf of the                                      lessors,suppliers
 Company                                            of spares, stores
                                                    & components and
 
 Demands raised          272,155,247   Nil          Pertains tax
 by tax authorities.                                The disputes with 
 authorities against                                which Company has 
 filed necessary                                    appeals the Company. 
 has preferred appeals.
 
 Claims by ex-lessors  2,131,637,613   Nil          Pertains to claims by
 no tex-lessors                                     arising out of
 acknowledged as debt                               repossession of 
 leased  aircrafts                                  on account of
 alleged breach of                                  contractual obliga-
 tions. The Queens                                 court in UK has
 held that termination                              of the lease agree-
 ments by the                                       lessors is in
 order and that damages                             need to be quantified
 The Company has                                    contended that the 
 honorable high court                               of Karnataka has 
 exclusive jurisdiction                             to consider the 
 matter. The matter                                 pending before the
 Supreme Court of India.                            on a SLP filed 
                                                    by the Company.
 
 Redelivery and              Not         Not        In respect of 
 operating leases,    ascertainable ascertainable   the other costs 
 Company is in respect                              of assets taken 
 required to return the                             aircrafts as per 
 prescribed on operating                            lease at the terms
 However, the lease                                 periodsare extendable 
 end of the lease period                            for a longer period 
 and considering on going                           maintenance of air-
 crafts, a reliable.                                estimate cannot 
                                                    redelivery costs.
 
 Amounts payable,if any       Not           Not
 for breach of contractual ascertainable ascertainable
 obligations
 
 Liability for deduction 580,834,404    86,323,352  TheCompany
 of tax                                             has filed applicat-
 at source on                                       ions under section
 lease payments 10(15A)                             of the Income 
 Tax Act, 1961                                      with the in respect 
 of aircrafts and                                   Central Board of 
 Direct Taxes seeking                               exemption
 engines, where agreements                          from deduction of 
 tax, which are pending.                            These were entered 
 into with are being                                followed up by 
 the Company.                                       lessors prior to 
 March 31, 2007                                     (excluding interest). 
 
 The Company has entered into agreements for purchase of aircrafts/
 engines under which the Company has commitments to purchase aircrafts /
 engines over a period stipulated in the agreements. Such agreements
 involve complex pricing arrangements wherein the Company receives
 discounts / credits on such purchases, which are based on the
 commitments to purchase, which the Company is confident to fulfill
 currently. Accordingly, the amount of contingent liability, if any, as
 at the balance sheet date is currently not ascertainable.
 
 In addition to the above, there are certain arbitration proceedings
 with customers / suppliers / contractors, in respect of which claims
 are currently not ascertainable.
 
 The management believes, based on internal assessment and/or legal
 advice, that the probability of an ultimate adverse decision and
 outflow of resources of the Company is not probable and accordingly, no
 provision for the same is considered necessary.
 
 6. a) Buildings constructed at a cost of Rs. 8,873,587 are on land
 rented from the State Government, for which lease has been transferred
 to Deccan Charters Limited (DCL). Such rental agreement is renewable on
 an annual basis. The Company is in the process of entering into an
 appropriate arrangement with DCL.
 
 b) Buildings Constructed at a cost of Rs. 86,585,820 are on land
 belonging to the Airport Authority of India. Such rental agreements are
 renewable on a periodical basis.
 
 7.  Employee Stock Option Plan [ESOP]
 
 On March 16, 2005, the shareholders of the Company approved an employee
 stock option plan [ESOP 2005]. Further on December 21, 2005, the Board
 of Directors approved the ESOP 2006 scheme, which will govern issuance
 of options on or after January 1, 2006. Options issued under ESOP 2005
 would continue to be governed under ESOP 2005\ The shareholders have
 approved the issuance of 8,181,779 options in aggregate subject to a
 maximum of 10% of the aggregate number of issued and outstanding equity
 shares (calculated on an as converted basis), under both the options
 put together.
 
 The weighted average price of the share on exercise date was Rs. 87.69.
 
 The weighted average contractual remaining life of the options is 7.73
 years as at March 31, 2009.
 
 The Company has written back deferred compensation expense of Rs.
 15,660,635 during the year, on account of forfeitures for options
 issued. (During the nine months ended March 31, 2008 the Company
 recorded an expenditure of Rs. 11,420,490 net of forfeiture)
 
 8.  Related Party Disclosures (Parties identified by the Management)
 
 a) Names of related parties       holding Company 
 
 United Breweries (Holdings) Limited (from August 1, 2008)
 
 Fellow Subsidiaries
 
 Kingfisher Finvest India Limited (formerly known as Kingfisher Radio
 Limited) (KFFIL)
 
 UB Infrastructure Projects Limited (UBIPL)
 
 Kingfisher Training and Aviation Services Limited (KTASL)
 
 Deccan Charters Limited (DCL)
 
 (All from August 1, 2008) DCL ceased to be a fellow subsidiary from
 November 29, 2008.
 
 Subsidiaries of the Company
 
 Vitae India Spirits Limited Northway Aviation Limited
 
 Key Management Personnel (KMPs)
 
 Dr. Vijay Mallya (from October 16, 2008), Capt. G. R. Gopinath, Capt.
 K. J.  Samuel and Mr. Ramki Sundaram. The latter named three persons
 ceased to be KMPs from October 15, 2008.  
 
 Associate Company
 
 a) Deccan Aviation (Lanka) Private Limited (DAPL)
 
 (till transfer of the relevant investments to DCL pursuant to Scheme)
 
 b) Kingfisher Finvest India Limited (up to July 31, 2008)
 
 Enterprises owned or significantly influenced by key management
 personnel or their relatives or persons who have control or significant
 influence over the Company
 
 Deccan Cargo Private Limited (ceased to be a related party with effect
 from October 15, 2008) (DCPL)
 
 Deccan Charters Limited (up to July 31, 2008) (DCL)
 
 Relatives of Key Managerial Personnel
 
 Mr. Joseph Samuel, son of Capt. K. J. Samuel. He has ceased to be a
 related party with effect from October 15, 2008.
 
 Remuneration paid to directors is disclosed in the note 7 above.
 
 Salaries paid Rs. 1,515,037 during the year ended March 31, 2009 (March
 31, 2008 - Rs. 1,903,548), to a relative of one of the directors of the
 Company. Balance due to such person as at March 31, 2009 is Rs. Nil
 (March 31, 2008 - Rs 195,613).
 
 Some of the key managerial personnel have given personal guarantees. In
 addition to key managerial personnel, their relatives have offered
 collateral securities to banks and financial institutions against the
 loans taken by the Company from such banks and financial institutions.
 
 In addition the Company has derived revenue from certain related
 parties from sale of tickets / cargo space in the normal course of
 business. These have not been quantified & shown separately.
 
 b) List of Associates*
 
 City Properties Maintenance Company Bangalore Limited
 
 Deccan Charters Limited(formerly Kingfisher Aviation Training Limited)
 
 H. Parsons Pvt. Limited
 
 Inversiones Mirabel, S.A
 
 Kingfisher Aviation Training Limited (formerly Kingfisher Training
 Academy Limited)
 
 Kingfisher Training and Aviation Services Limited (formerly Kingfisher
 Airlines Limited) *
 
 Kingfisher Finvest India Limited (formerly Kingfisher Radio Limited)
 
 Mangalore Chemicals & Fertilizer Limited
 
 McDowell Holdings Limited
 
 Mendocino Brewing Co.lnc, U.S.A
 
 Pixray India Limited
 
 Releta Brewing Company LLC
 
 Rigby International Corp .
 
 Rubic Technologies Inc
 
 UB Electronic Instruments Limited
 
 UB Engineering Limited
 
 UB Infrastructure Projects Limited
 
 UB International Trading Limited
 
 UB Overseas Limited
 
 UBHL(BVI) Limited
 
 UBSN Limited
 
 United Breweries (Holdings) Limited
 
 United Breweries International (UK) Limited
 
 United Breweries of America Inc, Delaware
 
 United Racing & Bloodstock Breeders Limited
 
 United Spirits Limited
 
 DCL Holdings Private Limited
 
 WIE Engineering Limited (Under Liquidation)
 
 * The above parties do not necessarily fall within the meaning of 
 Related Parties in terms of Accounting Standard-18.
 
 9.  Leases and Hire Purchase
 
 a) The Company has entered into operating and finance lease agreements.
 Disclosures required under AS 19 on Leases is as given below:
 
 Operating leases
 
 Operating lease arrangements comprise of leases of aircraft,
 helicopters, spare engines and office premises. The salient features of
 operating lease agreements for aircrafts, helicopters and spare engines
 are as follows:
 
 - Lease periods range up to twelve years and are usually
 non-cancelable.
 
 - Lease rentals are usually fixed over the term of the lease while some
 arrangements are subject to adjustments linked to the Libor rates
 movements.
 
 - The Company also has agreements for maintenance and lease of stores
 and spares for such aircrafts for which fixed and variable rentals are
 paid. Variable rentals are paid on a pre determined rate payable on the
 basis of actual flying hours / cycles. Such variable rentals are
 subject to annual escalations as stipulated in the agreements.
 However, the Company is eligible to claim reimbursement of maintenance
 costs to the extent eligible under the agreements.
 
 - The Company does not have an option to buy the aircraft or
 helicopters and spare engines or to renew the leases.
 
 - In case of default by the Company, in addition to repossession of the
 aircraft, penalties are stipulated in the agreements.
 
 - The Company is required to deposit a commitment fee and a security
 deposit with the lessor or provide a letter of credit for such amounts.
 
 In addition to the above, the Company has entered into agreements to
 lease aircrafts / engines in respect of which the aircrafts/engines are
 pending delivery/the lease is yet to commence as at March 31, 2009. The
 above table of minimum lease payments does not include amounts that may
 become payable in respect of leases yet to commence as at March 31,
 2009.
 
 Salient features of Finance Lease Agreement (Aircraft):
 
 - Monthly aircraft lease rentals are paid in the form of fixed rentals.
 
 
 - The Company is responsible for keeping the aircraft airworthy in all
 respects and in good condition and insuring the same throughout the
 lease period.
 
 - The Company has an option to purchase the aircraft either during the
 term of the lease on payment of the I outstanding principal amount or
 at the end of the lease term on payment of a nominal option price.  
 
 - In the event of default, the Lessee is responsible for payment of all
 costs of the Owner including financing costs, and other associated
 costs. Further, a right of repossession is available to the Owner
 Lessor.
 
 Assets given on lease
 
 The Company had given one helicopter to Deccan Aviation (Lanka) Private
 Limited under an operating lease arrangement. Lease rental income
 recognized in the Profit and Loss account amounts to Rs. Nil (Previous
 period Rs 1,943,778).
 
 b) In addition, the Company has entered into cancelable leasing
 arrangements for office premises which are renewable at mutual consent.
 The lease rentals of Rs. 546,080,596 (Previous period - Rs. 78,694,983)
 have been included under the head Operating and Other Expenses - Rent
 under Schedule 17A in the Profit and Loss Account.
 
 10.  Segment disclosures
 
 The Company operates in a single business segment, i.e. of providing
 scheduled and unscheduled air transportation services. Accordingly, no
 separate segment disclosures for primary business segment are required
 to be given.
 
 Geographical segments
 
 Sales (domestic sectors) Rs. 51,674,163,151 (Previous period Rs.
 14,413,948,348)
 
 Sales (international sectors) Rs. 1,017,543,654 (Previous period Rs.
 Nil)
 
 The carrying value of assets held outside India is not material.
 
 Deferred tax asset on unabsorbed depreciation and business losses has
 been recognized on the basis of business plan prepared by the
 management, which takes into account certain future receivables arising
 out of contractual obligations.  The management is of the opinion that
 there is virtual certainty supported by convincing evidence that
 sufficient future taxable income will be available against which the
 deferred tax asset can be realized.
 
 11.  Provisions
 
 In accordance with Accounting Standard - 29 Provisions, Contingent
 Liabilities and Contingent Assets, following is the movement in
 provision towards cost for frequent flyer program.
 
 Frequent Flyer Program:
 
 The Company has a Frequent Flyer Program (King Club), wherein
 passengers who fly frequently are entitled to accumulate miles to their
 credit. The passenger is eligible to redeem such miles in the form of
 tickets. The cost of allowing free travel to members is accounted
 considering the members accumulated mileage on an incremental basis.
 The movement in the provision towards cost for frequent flyer program
 during the year is as under:
 
 12.  In respect of certain training costs which are initially funded by
 the employee, the Company has an obligation to reimburse the employee
 such training costs in case the employee fulfills certain employment
 conditions under the terms of agreement with the Company. The Company
 has made a provision for the year ended March 31,2009 of Rs. 33,720,332
 (March 31, 2008 Rs. 61,280,041).
 
 13.  Other Direct Operating Expenses for the year ended March 31,2009
 is net of credit memorandum of Rs. Nil (March 31,2008- Rs.
 208,989,119).
 
 b) Contribution to defined contribution plans
 
 Contribution to provident fund is Rs. 64,796,883 (Nine months ended
 March 31, 2008 Rs. 21,743,735). Contribution to social security schemes
 Rs. 15,779,354 (Nine months ended March 31, 2008 Rs. Nil).
 
 14. The Company has initiated the process of obtaining confirmation
 from suppliers regarding the registration under the MSME Act, 2006
 (Micro Small and Medium Enterprises Development Act 2006). The
 suppliers are not registered wherever the confirmations are received
 and in other cases, the Company is not aware of their registration
 status and hence information relating to outstanding balance or
 interest due is not disclosed as it is not determinable.
 
 15.  Accounts with certain creditors, debtors, loans & advances are
 subject to review/reconciliation/confirmation. Adjustments, if any will
 be made on completion of such review / reconciliation / receipt of
 confirmations.
 
 16.  The Company has incurred substantial losses and its net worth has
 been eroded. However, having regard to the Scheme, the synergies
 expected there from, the recently launched international operations,
 loans granted by banks after March 31, 2009, further loans from banks
 under negotiation, group support, capital raising plans, the financial
 statements have been prepared on the basis that the Company is a going
 concern and that no adjustments are required to the carrying value of
 assets and liabilities.
 
 17.  The Companys Centralized Ticket Reservation System (CRS) does not
 support capture of unearned revenue on a comprehensive basis.
 Accordingly, such unearned revenue has been estimated by the management
 based on estimated aggregate number of unflown tickets as at March 31,
 2009 and average estimated ticket value prevailing in each of the
 months to which such unflown tickets relate to. Management is taking
 steps to further streamline the processes of j determination of
 unearned revenue.  |
 
 18.  The Companys Cargo Revenue Management (CRM) system is yet to
 stabilize. Mistakes noticed have been corrected to the extent
 identified. The Company is of the view that any unadjusted differences
 will not be material. Management is taking j steps to further
 streamline the processes and stabilize the system.
 
 19.  A large portion of the business has originated through usage of
 credit card as a form of payment of tickets by the passengers. The
 Company has received chargeback, aggregating Rs. 437,328,467 (Previous
 period - Rs. 66,430,000), from credit card service providers due to
 misutilization of credit cards by third parties. The Company has
 introduced necessary internal checks to mitigate the risk of such
 transactions. Consequently, the Company is hopeful that there will be
 reduction in chargeback in the coming years.
 
 20.  Change in the method of accounting maintenance reserves
 
 On re-examination of the accounting treatment given to maintenance
 reserves payable to lessors in respect of aircrafts and engines taken
 on operating lease and based on expert opinion, such amounts which were
 hitherto charged off to revenue as and when they fell due for payment
 in terms of relevant agreements have been treated during the year as
 recoverable deposits, to be adjusted to the Profit and Loss Account as
 and when relevant expenditure reimbursable from lessors are incurred.
 The Companys revised accounting treatment is fortified by the fact
 that certain lessors have accepted standby letters of credit issued by
 the Companys bankers in lieu of payment of maintenance reserves and
 have also agreed to refund / adjust the amounts already paid.
 Consequently, amounts paid to lessors up to March 31, 2008 (net of
 expenses reimbursed wherever applicable) have been debited to deposits
 refundable by credit to the Profit and Loss Account. But for the said
 change, the loss for the year before and after tax expense would have
 been higher by an estimated amount of Rs. 10,217,995,882 and Rs.
 9,855,166,388 respectively.
 
 The amounts of maintenance reserves so recognized as deposits are
 subject to confirmation from the concerned lessors.
 
 21.  Treatment of capital advances, towards aircrafts and other
 equipments, as a monetary asset
 
 The scheduled airline business of KTASL taken over by the Company
 pursuant to the Scheme considered capital advances made in foreign
 currency and outstanding on the balance sheet date as a non monetary
 asset, thereby recording them at historical cost and not restating them
 at closing rates. On re-examination of the matter and in line with the
 practice followed by the Company, such advances outstanding as at March
 31, 2009 have been restated at closing rates in line with AS 11 and the
 resultant difference (to the extent they relate to the period after
 March 31, 2007) has been adjusted in the Profit and Loss Account. But
 for the said change, the loss for the year before and after tax expense
 would have been higher by an estimated amount of Rs. 1,903,514,614 and
 Rs. 1,256,509,997 respectively.
 
 22.  Treatment of initial borrowing costs on pre-delivery payments for
 acquisition of aircrafts taken on operating lease
 
 In line with the practice followed by the scheduled airline business of
 KTASL taken over pursuant to the Scheme, the Company has changed its
 method of accounting initial borrowing costs on pre-delivery payments
 for acquisition of aircrafts taken on lease till the novation /
 assignment of the right to acquire the same in favor of lessors
 (aircrafts taken on lease on or after April 1, 2008) by deferring and
 amortizing the same over the period of the lease. But for the said
 change, the loss for the year before and after tax expense would have
 been higher by an estimated amount of Rs. 486,322,604 and Rs.
 321,021,550 respectively.
 
 23.  Extraordinary expenses represent redelivery costs and maintenance
 reserves written off on premature termination of agreements for
 operating lease of aircrafts and interest amounts (previously
 capitalized) relating to premature termination of aircraft delivery
 contracts.
 
 24.  The Company has not prepared consolidated financial statements
 (CFS) as required by the AS 21, since the transactions of the
 subsidiary during the year was not material.
 
 25.  Previous periods figures are for nine months ended March 31, 2008
 while those of current year are for the year ended March 31, 2009.
 Current years figures include the combined operations of the Company
 and the commercial airline division of KTASL taken over pursuant to
 Scheme. Hence the same are not comparable. Previous periods figures
 have been regrouped / reclassified wherever necessary to conform to the
 current years presentation.
 
 Kingfisher Airlines Limited
 
 Registered Office: UB Tower, Level 12, UB City, 24, Vittal Mallya Road,
 Bangalore - 560 001