Kingfisher at a critical juncture where its survival itself is in question

The KING of Good Times and Kingfisher Airlines are occupying prominent media space once again albeit for not so happy reasons. This time they are not surrounded by a bevy of starlets at a beach party or cheering the Formula One team. Instead, the picture is sombre. Vijay Mallya's favourite brainchild, Kingfisher Airlines, has reached a critical juncture where its survival itself is in question.

In 2005, Kingfisher Airlines made a great launch and established itself as a formidable player in the full-service segment within just two years. Its initial success fired Mallya's ambitions to make Kingfisher India's largest airline. While Kingfisher's expansion continued unabated, Mallya eyed two ailing airlines, Sahara and Air Deccan. He waged a battle with Jet Airways to take over Sahara but Jet stole the march over Kingfisher. Undeterred Mallya pursued Air Deccan and merged it with Kingfisher to become India's largest airline by market share. This marked the beginning of his travails as the merger added to Kingfisher's problems, which was suffering gestation losses.

Raise fresh equity, SBI tells Kingfisher

The aviation industry suffered huge financial losses during 2007 due to the sudden spurt in fuel prices. Towards end-2008 the situation turned grave. But buoyed by record passenger growth and a vibrant economy, carriers inducted a record number of aircraft into their fleet resulting in an intensive price war. Oblivious to the economics of operations India's airlines incurred losses of over Rs 9,000 crore in one year. The industry reached a flash point in October 2008 when all operators sought relief packages from the government.

Thanks to the good offices of the then civil aviation minister, Praful Patel, both Jet Airways and Kingfisher were provided extended credit lines from oil companies and airport operators as a short-term relief measure. Fortunately, a sudden drop in oil prices and high traffic growth since August 2009 also helped. Cautious players like Jet Airways and SpiceJet consolidated and recouped losses.

PERSPECTIVE: Kingfisher hits an air pocket

However, Kingfisher suddenly announced its international flights resulting in heavier losses and longer gestation periods. Kingfisher resorted to nonstop borrowing from banks and other market sources to fund aircraft acquisitions, Air Deccan merger and to make up for cash losses at a time when its parent company UB Group was also acquiring both domestic and foreign liquor companies.

This year the world is suffering from an unexpected fuel hike. Fortunately, the growth in the number of fliers in India has remained at over 20 per cent in the last two years. But the problems facing the markets since late 2008 have severely restricted credit flow. Mallya has recently tweeted "Why should Kingfisher operate on loss-making routes on government directive?" This is an argument offered by all operators seeking government support.

However, any knowledgeable observer would expect him to know his own route profitability analysis. The main cause of losses for the industry is its excessive deployment of capacity on metro routes where over 70 per cent of capacity is deployed. Metro and international routes account for the majority of losses of Kingfisher, and not government directed sectors.

There is no disputing the fact that the rise in fuel costs is hurting the aviation industry globally. Airport charges too, have gone up substantially in India and the devaluation of the rupee has increased the cost of borrowings. However, these factors have not brought every operator to the brink of disaster. Operators like Jet, SpiceJet and Indigo are in much better financial health. In the last two years major operators have stabilised capacity and avoided a suicidal price war. However, Kingfisher has intensified its lower fare offerings and deployed more capacity for international operations.

Kingfisher's problems can be attributed to its promoter's over-ambitious business plan and mismanagement of the airline. This is a classic case of a debt trap, wherein Kingfisher has borrowed riding the wave of popularity and political support.

Kingfisher's bankers restructured its loan, transforming Rs 1,200 crore worth of debts into equity at a ridiculously high price of Rs 65 per share against the market price of Rs 40. This price is now down at Rs 17. Kingfisher's borrowings stand at over Rs 7,000 crore with annual losses exceeding Rs 1,000 crore. So, no short-term solution can revive it unless promoters bring in huge funds of their own or the company is able to attract a White Knight to bail it out. UB Group's history is replete with instances where they keep borrowing from banks and force them to convert debt into equity as a fait accompli.

Is it prudent to encourage such an attitude just to satisfy the egos of promoters? A crisis calls for sincere efforts by the promoters to revitalise the organisation. Instead of concentrating on Kingfisher's management, Mallya is seen cheerleading his IPL and Formula 1 teams. Moreover, champions of private enterprise should not resort to socialistic slogans of saving jobs or serving a social cause seeking state intervention.

The recent statement of Prime Minister Manmohan Singh to bail out Kingfisher is not only surprising but jarring to some extent. A PM who only few days ago has taken a firm stand on petrol prices being market driven should not be seen contradicting himself in favour of private enterprises.

(The writer is the former MD of Vayudoot)