Why Aircel has filed for Bankruptcy despite being a Sixth Largest Telecom Company with around 7.5 Crores Subscribers in the month in which application is filed.
Introduction:
Aircel Limited, which was incorporated in the year 1999 by Sivasankaran, since its Incorporation, it was growing at a good rate. In the initial stages, it started its operations in Tamilnadu where it had a considerable stake till March 2018 (month in which application for Insolvency is being made). Considering its potential and growth, Maxis Communications, a Malaysian Company has invested in 74% of Equity.
We all know that one major reasons which caused closure of Aircel is Jio (which has changed the composition of telecom industry). In FY 2016-17 Q1 (i.e., Apr-16 to Jun-16), it has reported a profit of Rs 120 Crores but within few months after launch of Jio, it started incurring losses of Rs 100 – 150 Crores per month which clearly evidences above fact. But, there are few other reasons which has led to closure of it’s operations as explained below.
Reasons for Closure of Business:
1. Rapid Decrease in Market Share & Income after Launch of Jio:
Aircel, which was a Fifth largest operator in Wireless Connections with an average share of 8.5 % in the market till the launch of Jio. After launching of Jio with penetration strategy, it started experiencing reduction in market share at a high rate which has made Aircel to reduce its prices to sustain its share which was failed. This resulted Aircel in further reducing prices further which resulted in negative operating cash flows and losses and has not stopped erosion of its market share. Market Share of few major wireless telecom operators is graphically presented below:
2. Industry Structure and No Customer Loyalty
Telecom Industry being an oligopoly by nature (where there will be few market participants) due to huge capital outlay. For Example, Jio has made an initial investment of Rs 1.5 Lakh Crores. This makes restricted market entry in the sector.
Customer loyalty in this industry will be very less / nil since customers feel that services provided by all operators are similar and price reduction by one operator will be assumed as a benefit by customer which will trigger change in service operator.
Growth in market share and revenue are key factors in this industry since loss of market share will in turn causes reduction in revenue and ability to repay huge interest and debt. At the time of making application for insolvency, Aircel had an outstanding debt of Rs 15,000 Crores and was incurring losses of Rs 100 – 150 Crores due to reduced market share and tariff prices.
3. Failed Strategic Debt Restructuring Program
On Jan-17, Aircel has planned for Strategic Debt Restructuring (SDR) Program whereby terms of debt may be altered with the approval of lenders and may involve conversion of a part of debt into equity.
RBI has introduced new rules for SDR soon after by making it stricter and has ordered that all SDRs to be resolved within Six months failing which will be transferred to National Company Law Tribunal. This has caused failure of SDR Program by Aircel
4. Funding from Holding Company has stopped
Considering the financial position of the company and failure of SDR Program, Maxis which was holding 74% equity in the company has stopped funding the company since it felt that the company may not be able to sustain the competition with existing market conditions
5. Failure of Attempt to Merger with Reliance Communications (RCom)
Since Aircel was not able to obtain funding to continue business, it has planned for merger with RCom (Anil Ambani’s Company) with 50% stake in merged entity which will be named as ‘Aircom’ which will have 15% market share.
If the merger was happened, Aircel could have reduced its outstanding debt by Rs 14,000 Crores. But the same was rejected by RCom due to bad reputation of Aircel due to Aircel-Maxis scam.
6. Partial stoppage of services due to negative cashflows
With negative operating cashflows and non-availability of funds for running business, it could not pay even
– Interconnect Fee to other service providers (i.e., Fee paid for connection between other operators for transfer of call / messages) which caused stoppage of services by other service providers with Aircel
– Dues to Tower Companies – GTL Infra has switched off nearly one-third of total towers due to non-payment of dues and American Tower Corporation went to court to get their dues paid
7. Failure of final Step to recover business
Aircel has stopped services in circles with very low subscribers to reduce its cost and had a viable strategy to share 4G Spectrum with other operators to provide services in remaining circles.
It has planned for expansion of market to obtain share of atleast 10% in Delhi, Mumbai, Karnataka & Andhra Pradesh where it currently has 2% – 4% market share by launching 4G to make it viable and to continue to provide services in other circles like Tamilnadu where it is already having more than 10% market share (i.e., which is already a viable business).
But Launching of 4G by Aircel was done very late that it could not implement the strategy it has planned. Later, it has sold its 4G spectrum to Airtel and thought of focusing on 2G & 3G which was the strength of the company which was also failed.
Takeaways from fall of Aircel:
- Entities should focus on building good market image rather mainly focusing on monetary terms
- Increase of focus on R&D and being pro-active to change will always pay higher dividends
- Quick and efficient decision making considering current market and entity’s scenario is required for effective implementation of viable strategies.
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