THE KINGFISHER CANNOT FLY

Kingfisher Airlines has been run to the ground (pun intended)…

But what’s the fuss all about? It is not the first business or industrial unit which has gone insolvent in the history of Indian business landscape…Sure enough, Mr. Mallya and his team have managed to bring Kingfisher to the brink of closure as it stands now. In the process they have put many a creditors, including banks, institutions and state concerns (fuel suppliers) to a disadvantage. In effect the public’s funds stand poised to be lost to the failed venture.

But in Mr. Mallya’s defence, it is a damn tough business to be in. Any business, where the pricing is facing constant pressure in face of competition and the costs are increasing year after year, whether on account of fuel or manpower, is a questionable business to be in. And here, KF does not stand alone. None of the other Indian carriers are better placed insofar as their financial woes are concerned. Paramount Airways wound up. Air India’s position is well known. Jet, Spice, Go Air are also in a precarious position, though they have managed to keep it under wraps for the large part. Indigo is also not profitable at an operational level if you exclude the windfall profits arising from sale and leaseback transactions. Even globally, this business has seen umpteen casualties and the major airlines operating are those which are sovereign owned and funded.

Going forward things are not going to improve much for any of the players anyways. The fares will continue to see cuts, ATF is not going to get any cheaper, and in the face of inflation, the manpower costs and cost of funds will also keep rising. So the margins will keep squeezing and eroding the equity in the balance sheets of these companies. Today it is KF, tomorrow it will be another airline.

The measures announced by the Government, ostensibly in public interest, but obviously to help KF, such as FDI and direct import of ATF will only provide temporary respite. The FDI or any other equity infusion for that matter will only go to fund the continuing losses and get eroded in quick time. The direct import of ATF, if at all that sees the light of day, will only save the airlines the VAT which they presently pay on local purchases but will not help against the rising international prices of the fuel itself. Probably the only thing which can alter the equation dramatically is a significant rise in fares across the board and restricting capacities, something which will need the players to cartelize and fly under the radar of the regulators.

What Mr. Mallya is conveniently looking for, however, is to duck all responsibility towards the stake holders and seek the shelter of the ministries. He is looking to have the lenders take a haircut to help ‘bail out’ his ailing enterprise while he remains categorically obstinate in his refusal to put in his own private funds as additional equity in his own business or to take a haircut himself!!!

If this were to happen, it will not only be daylight robbery by the Mallyas, but will also be a slap in the face of all banks, institutions and the public at large who will end up financially worse off at the hands of the promoters of the airline. The precedent it will set will be in extremely poor taste, as it will alleviate all promoters from their sense of moral and legal responsibility when they take on public debt and have them knocking on the lenders’ doorstep with demands for concessions when they manage to run the business to ground.

At the other side of the coin is the argument of public interest for continuance of businesses which provide goods or services of public utility. Thus the compelling case for keeping KF afloat.

In my opinion, it is quite feasible to kill all the birds with one stone…a stone which does not need to be re-invented…but one which has been around in India for a long long time. It’s called Sick Industrial Companies Act (SICA). While the provisions of SICA have been significantly diluted/repealed in the recent history, there is no reason why it cannot be re-activated for cases like the present one.

Companies such as KF need to be referred under SICA for rehabilitation. The rehabilitation would involve the following main elements –

1.      The Mallyas would take a complete write off of their equity and loans to KF. In effect they would suffer the consequence of their poor management in hard financial terms.

2.      The management control of the company would then be placed (probably through an auction) with a credible and competent entity which has an established track record of running such a business profitably for a sustained period of time (such as Singapore Airlines and Emirates).

3.      Such incoming buyer would infuse fresh equity which would confer management control and majority ownership in its favour and at the same time bring in much needed financial respite to the company.

4.      The lenders and creditors would agree to a deferment of payment of their dues as opposed to a haircut.

5.      The buyer would then set about turning around the business by introducing operational efficiencies and synergies with its existing airline business.

6.      In the process, not only would the lenders not lose the public funds, the minority shareholders of KF would also continue to have a stake in the business with a fresh management and brighter prospects. The only people who would be out of pocket (and deservedly so) would be the Mallyas…a fact that not even a single person…other than the Mallya’s themselves would find objectionable.

The above solution, apart from being simple and equitable, is quite obvious in the scheme of things. It is a solution which has been tested in numerous cases under the erstwhile BIFR regime and even outside of it (Satyam being a fresh example), so much so, that it is rather shocking that none of the stakeholders or regulators have proposed it thus far.

I sincerely hope that this solution is implemented, in the larger public interest as well as to protect the position of all concerned, and while Mr. Mallya may end up taking a huge write off, his legacy would at least live on for having created the airline which indisputably offers the most superlative customer experience in the skies – far ahead of all competition in India – the one (and only) thing for which Mr. Mallya should receive due recognition…