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    From Tehelka Magazine, Vol 9, Issue 43, Dated 27 Oct 2012
    OPINION  
    KINGFISHER SAGA
    Shaili Chopra

    ANALYSIS

    How Mallya killed Kingfisher

    Who’s to blame for the suicide of the wife of a Kingfisher Airlines employee? The management, the banks, the regulators? Or all of them?

    Shaili Chopra, Business Journalist

    A flop show Vijay Mallya with air-hostesses of Kingfisher Airlines at Mumbai in 2005

    Photo: Fotocorp

    ON 4 OCTOBER, 45-year-old Sushmita, wife of Kingfisher Airlines Store Manager, Manas Chakravarti, hanged herself to death at her residence in Manglapuri, New Delhi. Her suicide note, written in Bangla, purportedly said: “My husband works with Kingfisher, where they have not paid him for the last six months. We are in acute financial crisis and so I am committing suicide.” As direct as that.


    This was the first instance of the Kingfisher Airlines’ financial crisis claiming a human life. In what has been a long six-seven months of employees not getting salaries and frequent flight cancellations, the Kingfisher Airlines crisis has spilled over from the drawing board to peoples’ houses. There are numerous stories of employees in distress, some even selling family jewellery to keep their stoves burning. The pitch on the incident has been pushed up by politicians joining the chorus. JD(U) leader Sharad Yadav has already demanded sending Kingfisher Chairman Vijay Mallya to jail for abetting Sushmita’s suicide.

    That the airline has hit rock bottom is evident by the Union Civil Aviation Minister Ajit Singh’s statement: “If they (Kingfisher employees) don’t get salaries for seven months it will definitely lead to problems. Despite that they were working as they had hope that the airline may get revived and their jobs may be retained... but the developments in the last few days indicate that any such hopes have faded.” Notice the past tense the minister uses.

    What made things come to such a head? Did Vijay Mallya put ego before prudence? Were the banks and regulators blinded by Mallya’s pulchritude? Did the banks take it easy? Many such questions arise in the examination of the events that led to the Kingfisher fiasco.

    Turn back time to 2005, when Kingfisher Airlines (KFA) was launched amid much fanfare. Newspaper headlines and TV bites flashed Vijay Mallya posing with air hostesses atop the wings of the planes that would rule the skies. Mallya was called a game-changer, India’s version of Richard Branson. But to anyone willing to forego the momentary aura, this story had flaws even from its early days.

    Mallya began the airline with a rush to buy planes. He started with four-five planes but ordered a lot more, and fast. For the rest of 2005, KFA got one Airbus A-320 every month until March 2012, when the airline had about 92 planes flying and orders pending for over 60 more. In his quest for doing everything in trademark style, Mallya adopted the “customer-at-any-cost” approach. From air-hostesses to food and in-flight entertainment, the cost per passenger as a whole was “double of what Jet Airways was offering”. It was a perfect case of excesses over financial discipline. Food served in KFA, recalls an aviation sector CEO, was about Rs 700-800 per passenger compared to Rs 300 of Jet’s.

    For all of Mallya’s tall claims, KFA could never be clear about what it stood for. Two years after it went operational, the all-economy airline came up with a business-class plan with a big shift to luxury. In short, KFA went from high-end economy-class travel to an unsustainable-luxury-business-class airline, leaving investors confused.

    The chairman’s desire to take the airline overseas added to the mess — a move that earned much criticism for the baron for having put ego before practical business sense. He wanted KFA to go neck-to-neck with Naresh Goyal’s Jet Airways, which had already launched its global operations. Since the rules require an airline to complete five years of domestic operations before it can take flight internationally, Mallya decided to take the shortcut in 2007 by buying Air Deccan, run by Captain Gopinath, which had completed five years of operation. The deal was a dream for Deccan and a deadweight for Mallya who spent Rs 550 crore for 26 percent stake, valuing the budget airline at Rs 2,200 crore. Compare this with about Rs 1,450 crore that Jet paid for the whole of Sahara in an earlier aviation deal.

    Food served in KFA, recalls an airlines CEO, was about Rs 700- Rs 800 per head, compared to Rs 300 of Jet’s

    Air Deccan was rebranded Kingfisher Red, adding yet another layer to the business model, leaving investors confused. The right to fly overseas followed the deal and the international operations began with a bang. Passengers were given Merino wool blankets, Salvatore Ferragamo kits, nightsuits to change into, in addition to standby fare in food and alcohol. Also available were in-seat massagers, chargers and USB connectors. The excesses defied every possible business sense, particularly for a company, which had not even started making money. “KFA was trying to run before it could walk,” says Saj Ahmed, an analyst with London-based Strategic Aero Research.

    Moreover, Mallya refused to see the writing on the wall even when it was pointed out to him. Relations between owner and chief executives were always strained. Chief Operating Officer Nigel Harwood quit due to disagreements with Mallya on running the airline. Against all norms of entrepreneurship, one business was encouraged to fund the misgivings of another. A former CEO had remarked: “As long as the beer is flowing, the airline will fly.” The controversial Veritas report flagged this late last year and raised an alarm on the numbers: “With negative equity value at KFA, it should be no surprise that the UB Group with marketable assets of $1,036 million (approximately Rs 5,490.8 crore), compared to guarantees provided on behalf of KFA of $3,638 million (approx Rs 19,281.4 crore), is also staring into a black hole.”

    A banker who has advised Mallya on many business deals, shares that the liquor baron had an emotional attachment to the airline. “Over the years, the emotional quotient took over the strategic quotient of doing this business,” he says.

    Mallya’s emotional highs were also ill-timed to correspond with economic lows worldwide. Shortly after the merger with Air Deccan, the world plunged into a Lehman Brothers-led financial crisis forcing banks to exercise prudence on loans and punishing blustering corporates. This repeated itself in 2011 and once again economic headwinds devalued Mallya’s fortunes and the ability of his businesses to raise money. Today, the group’s other companies too are looking to sell their stakes in a bid to raise funds for KFA while creditors want Mallya’s plush homes in Mumbai and Goa to be put up for sale.

    “Many see the airline as a joke,” says Ahmed. “It hasn’t or can’t or won’t pay employees for months on end and has a poor reputation. The brand is tarnished and that’s why investors are reluctant to part with their money.” In May 2009, KFA carried more than a million passengers, giving it a high market share among airlines in India. Three years later it’s grounded. For its investors, all these years, it remained an airline that promised style not substance.

    Forget reporting profit, the airline owes millions of dollars to aircraft-leasing companies, suppliers, oil companies and to the government in taxes, since it began operations in 2005. Ironically, Mallya’s speech on the day of the launch made lofty promises on profitability. “We expect Kingfisher Airlines to be profitable in the very first year of operation given its strategic approach to control costs, deployment of technology and outsourcing,” he boasted then.

    Had the regulators and banks cracked the whip earlier on Kingfisher, the current crisis could have been averted

    HOWEVER, THE blame for the present state of affairs also has to be partaken by banks and regulators. KFA has Rs 7,000 crore in debt and the State-run SBI has the maximum exposure to the airline. “Why didn’t the lenders put pressure on Mallya earlier?” asks a private equity analyst. “Coming out now and speaking to the media is an exercise to salvage what’s left. Had there been more public noise to tell the people about the mounting debt, lenders may have saved themselves more money.” Why was Mallya able to push his luck with SBI? Why didn’t he think it important to attend lender meetings when the company was in dire straits? Somewhere it urges the question if this fallout is a result of a cosy relationship between promoters and bankers? Did bankers fail to crack the whip fearing they would lose business from other group companies too? Should the bank(s) have forgotten the massive $1.5 billion (approx Rs 8,000 crore) loan restructuring done by KFA as recently as 2010?

    The aviation ministry too should have seen this coming. The job of the regulator is preventive and not curative. Had it taken action on KFA earlier, the current crisis could have been averted. When warnings didn’t work, the government should have raised an alarm. Instead, it kept procrastinating, keeping the actual state of affairs from investors, employees and the general public. Government spokespersons kept on insisting that the airline has been asked to come up with a revival plan.

    Interestingly, the KFA saga is playing out at a time when American Airlines in the US is going through its bankruptcy proceedings. A bankruptcy judge decided just last month that the airline could throw out its pilots’ union contract, allowing the carrier to impose cost-cuts and other concessions. In due course, it will be merged with a healthy carrier. Now the Indian government is faced with the dilemma of explaining to disgruntled KFA employees why it cannot bail out the airline like it has done in other sectors such as steel in the past? Ajit Singh has gone on record questioning why government should help the private sector. The minister would do well to recall Satyam, where the government constituted a board to rescue the fraud-ridden tech services company and put it on track by selling it to Mahindra.

    Mallya’s proximity to the powerful political class has also for long been a cause of complaint for his competitors. Be it NCP leader Sharad Pawar or former aviation minister Praful Patel, Mallya has been seen to be on cosy terms with those who mattered. No reason has yet been forthcoming for the sudden transfer of former director general of civil aviation, Bharat Bhushan. Bhushan raised meaningful questions on the operations and safety of keeping Kingfisher up in the air.

    It’s ironic that the reform Mallya waited for all these years — FDI in aviation — has probably come a bit too late for him. On at least a few occasions, he has claimed to be in discussions with overseas airlines to sell a stake in Kingfisher. British Airways has shown interest for a tie-up and more recently, there’s been buzz of Etihad Airways, but any intelligent investor will wait till they can buy it for a steal. Investors will also want to figure out how to stake control over management and Mallya before they can be allowed to restructure an airline that went down for reasons other than poor operations.

    “If Vijay Mallya refuses to dip his hands into his own coffers to keep the airline afloat, why would anyone else?” says Ahmed. “In this day and age, no airline is reckless or stupid to throw good money after bad. KFA simply provides no attractiveness. If it did, it wouldn’t be in the quagmire it is now in.”

    Just days ago, banks collectively turned down a Rs 200 crore loan request from KFA. There is a possibility now that the airline may head towards a formal corporate debt restructuring as the company has been failing to service its Rs 7,000 crore debt. SBI CAPS is working on a revival package plan for the airline. Meanwhile, the aviation regulator has served the airline a notice to reply on its financial problems and pay the salary dues of employees. At the time of going to press, Kingfisher had postponed a meeting with employees to explain Mallya’s stand. On their part, employees will not settle for anything less than a full settlement of past dues.

    Somewhere the problem is that both the media and the government are not able to distinguish between Mallya the owner and Kingfisher the publicly-listed company. The minute we think of KFA as a ‘corporation’ gone bust, surely like everywhere in the world, its assets can be auctioned, the business reworked or broken down and the company salvaged.

    Bankruptcies are not new in India, but the curious case of KFA will remain in the spotlight for many reasons. It’s hard for investors and employees to rationalise that the man whose airline is sinking continued to spend his money on Formula 1, sexy calendar shoots and an IPL team. One might call them independent issues, but after all such visual extravaganza, when Mallya calls his pilots and engineers “recalcitrant” employees, he is not likely to get the sympathy vote. For a brand valued roughly at $200 million (approx Rs 1,060 crore) in 2010, it’s no longer the calendar girl of India’s aviation story.

    letters@tehelka.com


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    From Tehelka Magazine, Vol 9, Issue 43, Dated 27 Oct 2012
 

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