Rusty Jets on Tarmac Show India Beer Baron's Fallen Empire

  • How taxes, state restrictions and poor management sank airline
  • Indian carriers hampered by rules Vijay Mallya lobbied against

Kingfisher Airlines planes at a flooded Chennai airport on Dec. 2, 2015.

Source: Indian Air Force

In an airfield in southern India, seven planes of the failed Kingfisher Airlines Ltd. rust away -- relics of a former billionaire’s ambition and emblems of the complex regulations that hamper Indian aviation.

The decaying aircraft, damaged by floods in Chennai late last year, were part of the fleet of India’s once second-largest airline. As authorities try to recover up to $1.36 billion of debt owed by Kingfisher’s founder Vijay Mallya, aviation analysts say regulatory changes in the wake of the airline’s 2012 demise don’t go far enough in supporting the world’s fastest-growing air travel market.

While lower oil prices are helping to restore profit at some airlines after the industry accumulated $10 billion of losses in the past seven years, carriers are still hamstrung by controls Mallya lobbied in vain against: Taxes that mean India jet fuel prices are the highest in Asia and restrictions on international routes that limit growth for new entrants.

Problems Persist

“Regulatory and policy roadblocks, coupled with a very negative fiscal regime and high jet-fuel prices, did create serious financial and viability challenges for Kingfisher,” said Kapil Kaul, the New Delhi-based South Asia chief executive officer at market researcher CAPA Centre for Aviation. “Some of those issues still remain in the industry.”

Besides the risk of a sudden upswing in the oil price, proposed new aviation rules haven’t addressed the taxes and tariffs that have dragged down earnings, according to the International Air Transport Association, known as IATA.

After five straight years of losses and mounting debt, Kingfisher was grounded in October 2012 as workers protested unpaid wages and lenders unsuccessfully attempted to revive the carrier, which ran up high costs in a bid to redefine luxury travel in India. Airbus Group SE still has orders open from Kingfisher for 82 A320s and A330s after the carrier crossed off A380 superjumbos from its list.

Indian business tycoon and owner of Kingfisher Airlines Vijay Mallya gets into his car outside Parliament in New Delhi, India, Wednesday, Feb. 27, 2013. According to local reports the Indian government has cancelled International flying rights and domestic slots of Kingfisher airlines. (AP Photo/Saurabh Das)

Vijay Mallya. Photographer: Saurabh Das/AP Photo

Mallya, the 60-year-old tycoon who presided over a beer and liquor empire a few years ago, has said Kingfisher Airlines was an “unfortunate commercial failure” caused by macro economic factors and government policies. Analysts including CAPA’s Kaul and Robert Mann, a former director of American Airlines Group Inc., attributed its failure to poor management also.

Fastest-Growing

The government released a plan in October to overhaul aviation rules, some from the 1930s, to boost growth in a market that Boeing Co. expects will need 1,740 new planes, worth $240 billion, over the next 20 years. India was the world’s fastest-growing air travel market last year, expanding more than 20 percent, compared with China’s 10 percent and less than 5 percent in the U.S., according to Montreal-based IATA.

While the government’s policy document provides incentives to states to lower aviation turbine fuel taxes, local administrations are reluctant to adopt them, fearing a loss of revenue. Fees collected from the airline industry are also politically sensitive, with flyers generally perceived as elites who can afford existing charges, even though India is one of the world’s most under-penetrated aviation markets.

Fuel Impost

Provincial taxes of as much as 30 percent mean jet fuel prices in some Indian cities are the highest in the world. A liter costs 77 cents in New Delhi, versus 52 cents in New York and 62 cents in Sydney. Higher airport tariffs also means the Indira Gandhi International Airport, which services India’s capital, generates the most aero revenue from an Airbus A330’s international turnaround after London’s Heathrow.

The proposed changes, slated for Cabinet approval by the end of March, include a surcharge on all air tickets to fund compensation to airlines losing money on flights to remote areas. The impost would add to pressure on operators, which were told by the government in September to present plans on curbing fares deemed “excessive” on some routes, and warned that fares could be capped if responses were inadequate.

IATA Director General Tony Tyler said Thursday he was “concerned about some aspects” of the proposed changes, particularly where they will cause the industry to incur additional costs, “or, in some cases, deviate from what are well accepted, tried and tested global principles.”

Making Money

A drop in crude prices that lowered jet fuel costs -- down by about 25 percent in New Delhi since January 2015 -- has helped Indian carriers like Jet Airways India Ltd. and SpiceJet Ltd. to end years of losses.

SpiceJet, which ran into financial trouble in 2014 and had to ground its fleet, reported a profit this year, and Jet Airways, which lost money in each of the past seven years, is on course for profit this year. That’s no help for Kingfisher or its creditors.

A consortium of 17 lenders, led by government-owned State Bank of India, found out the past week in India’s Supreme Court that Mallya left the country around the time the judiciary was approached to bar his departure and recover dues of as much as 90.9 billion rupees ($1.36 billion). Arundhati Bhattacharya, the bank’s chairman, declined to answer questions on Kingfisher on Friday.

Ranked the 45th-richest Indian with a net worth of $1 billion by Forbes in March 2012, Mallya left for London on March 2. In his flamboyant heyday, the super-yacht-owning onetime heir to the Kingfisher drinks empire often drew comparisons with Virgin Group Plc’s Richard Branson.

‘Witch Hunt’

Today, he is a man hounded by politicians, creditors, federal investigators, unpaid workers and media that, he said, are on a “hysterical witch hunt.” Declining to reveal his current whereabouts, Mallya told the Sunday Guardian newspaper that the time isn’t right for him to return to India.

Mallya has been making efforts to reach a “one-time settlement” with lenders, he said in a March 6 statement. “I didn’t flee from India and neither am I an absconder,” a post on his Twitter Inc. said Friday. “Once a media witch hunt starts, it escalates into a raging fire where truth and facts are burnt to ashes.”

Sumanto Bhattacharya, a spokesman for Mallya’s UB Group, didn’t immediately respond to a request for comment.

In 2008, Mallya bought budget carrier Deccan Aviation Ltd. to sidestep a rule that prohibits a local operator from flying overseas before having 20 planes in its fleet and completing five years of operations. Though Kingfisher quickly gained market share to become India’s No. 2 in 2011, additional services and rising costs meant it soon ran out of money.

Kingfisher was also hurt by a regulation that prevented foreign carriers from owning stakes in domestic operators. Mallya had said he had held advanced talks with foreign airlines wanting to buy into Kingfisher. Those took place before changes to the regulations enabled Abu Dhabi’s Etihad Airways PJSC to buy a stake in Jet Airways, and Malaysia’s AirAsia Bhd. and Singapore Airlines Ltd. to start local units.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE