Indian Airline Is Brought Down by Hubris

Kingfisher Airlines Ltd., until 2011 India's second-biggest airline by market share, has this month appeared to enter the terminal stage of a prolonged and painful descent into bankruptcy and stasis.

Dependent for the last few months on the goodwill of its employees, many of whom have not received their salaries since March, Kingfisher on Oct. 1  terminated the last few flights on its schedule after the staff went on strike. A notice on the airline's website said it was "hopeful of resuming operations on October 21, 2012."

But with the airline already more than $2 billion in debt, passenger confidence lost after months of abrupt alterations or cancellations of scheduled flights, no immediate prospect of a fresh infusion of capital from a new investor and no revenue after India's aviation regulator asked it to stop taking fresh bookings, it is hard to see how the airline can -- or indeed why it should -- resume operations.

Last month, Kingfisher's share price, currently hovering around 11 rupees (about 20 cents) from a 2008 high of about 280 rupees, jumped briefly after the government announced that for the first time, foreign investors could buy a stake of up to 49 percent in domestic airlines. But Kingfisher's owner, the flamboyant liquor baron Vijay Mallya, has failed to find any parties interested in his business, and the airline's latest dose of troubles provides little hope of a turnaround.

Indeed, the only reason it has continued to function this long, after years of slipping ever deeper into debt, is because it has been seen, like some U.S. banks after the recession of 2008, as "too big to fail." Many of Kingfisher's creditors are state-owned banks, such as the State Bank of India, and they would take a severe hit if the company went under. Last month a consortium of lenders said they could loan no more money to the airline and gave Mallya one month to put together a plan to rescue the company, possibly by selling stakes in his liquor business, United Breweries Ltd. (Mallya's net worth from the combined holdings of his conglomerate continues to be more than $1 billion). But, as Mythili Bhusnurmath wrote in the Economic Times late last year:

The fact is Kingfisher's promoters have got banks where they want them, locked in a fatal embrace where they can neither pull out (not without paying a high price) nor continue as before.

The pipeline should have been turned off long ago.

Kingfisher's promise when it launched commercial operations in 2005 -- "Welcome to a world without passengers" -- was meant to tell customers they could expect a special class of service onboard. But this phrase seems destined to be quoted in Indian business schools as a cautionary tale about trying to do far too much far too fast in a business as risky and capital-intensive as aviation.

Earlier this year, the journalist Mihir Mishra provided a good overview of Kingfisher's many strategic errors and its failure to lay a solid foundation in the manner of another low-fare airline, IndiGo, that now regularly shows a profit (partly because of a rapid increase in market share after the collapse of Kingfisher). When the recession of 2008, the rising costs of aircraft turbine fuel year on year, and the recent drop in the value of the rupee against the dollar were added to Kingfisher's ambitious expansion into both the low-fare segment and international flight operations in 2008, the result was a financial quagmire.

In the Hindu Business Line, the aviation analyst Kapil Kaul offered a summary of Kingfisher's troubles, and suggested the airline's management needed to shut it down instead of limping along on a truncated schedule heavily dependent on the goodwill of employees owed many months of arrears:

The current suspension of services by Kingfisher Airlines is a sad outcome for an airline that, at its peak, was one of the finest in the world and set new benchmarks in service standards. It developed a loyal following as a result.

Unfortunately, the airline encountered difficulties due to frequent changes in its business model, the acquisition of Air Deccan, and launch of international services just when the global economy weakened and fuel prices started rising. Today, the company has total debts and various liabilities of $2.49 billion, besides accumulated losses of $1.9 billion. We estimate that a fully-funded successful turnaround of Kingfisher will require over $1 billion, including an immediate capital infusion of $600 million. Of this, about $350 million needs to be provided by the UB Group, and the balance from banks. The banks seem willing to help -- in some ways, they have no option -- but they want to see the UB Group take the first step. The above level of funding would allow Kingfisher to operationalise a fleet of up to 20 aircraft. A further $400 million would be required over the next 18 months to support growth and implement a new business plan, which could come either from a foreign airline or another financial investor.

But first, the promoter should take a rational view on whether the airline can realistically be turned around. If a decision is taken to revive the airline, the promoters have to demonstrate that they believe in the business and the required promoter funding should not be delayed. The airline should voluntarily shutdown to reorganise and restructure, which provides the chance for an orderly recovery, howsoever remote. Resuming services immediately will not help. The operating schedule has been downsized to just 10 aircraft, and yet the airline carries the costs of a fleet of 42 aircraft. Limited operations simply cannot expect to generate sufficient cash to meet its fixed obligations.

And in the Sunday Guardian, the editor MJ Akbar had some scathing words about the Kingfisher management's latest misstep, that of claiming that it was being let down by striking employees. Akbar's complaint went beyond the particular example of Kingfisher, and asked if language itself didn't become hopelessly devalued currency by being dragged through the distortions of PR- and corporate-speak. (One could point to similar linguistic acrobatics in the controversial Indian mining company Vedanta's massive public-relations exercise earlier this year, titled, in the face of all evidence, "Creating Happiness.") Akbar wrote:

My jaw dropped upon reading a statement issued by Prakash Mirpuri, a spokesman of Kingfisher airlines, in the middle of the strike by pilots and engineers who, instead of being paid for their work, have been fed a stream of lies about when their salary cheques will arrive. ... The exact paragraph needs to be repeated: "We regret that the illegal strike has still not been withdrawn and normalcy has not been restored in the company, thereby continuing to cripple and paralyze the working of the entire airline." It was deception delivered with pathos. Mirpuri deserves an immediate increment, even if there is no money for pilots. ...

The spokesman has the temerity to suggest that it is pilots and engineers who are "continuing to cripple" the airline. Were pilots taking boardroom decisions? Did pilots order berserk expansion and spending designed to feed an owner's ego rather than a rational business plan? Pilots were in their cockpit, not in chairman's cabin or the chief executive's chair. Note the subtle suggestion inherent in the use of "continuing": pilots are being blamed not only for the present strike but also for what has happened in the past.

In a long letter, by turns cajoling and indignant, to disaffected employees in August this year, Mallya said that "our Company will be re-capitalised" and threatened to "stop my own support as a few are effectively holding the entire Company to ransom." The sand has now almost run out of the hourglass of Mallya's promise, or bluster, and there is something perverse about his inability to admit to errors of judgment of his own, and his perception that staffers should draw on their own reserves of capital to save him from the embarrassment of a total shutdown.

Meanwhile, in the wake of the disappearance from the skies of a major player in an industry with many entry barriers, Indian fliers will have to put up, at least in the short-term, with higher prices. Harsh Joshi wrote in the Wall Street Journal:

Kingfisher's recent woes and seemingly imminent demise might be a big help, easing competitive pressures in the industry. Already, ticket fares on domestic flights have almost doubled in the past six months, KPMG analyst Amber Dubey said. ...

Low-cost budget carriers like IndiGo and SpiceJet -- which have managed to be profitable by being punctual and cutting costs on luxury services and buying new aircraft -- stand to gain the most from less competition and higher fares, industry analysts said.

Joshi also notes:

The dark clouds around Kingfisher do come with a silver lining. India's domestic aviation sector has much long-term potential: air travel revenue will grow at a compounded average rate of 23.1 % until 2016 to reach $37.3 billion, Euromonitor says.

Kingfisher was a big part of the takeoff of that growth story, but it sure looks like it didn't plan to fly the whole way.

(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for World View. Follow him on Twitter @Hashestweets. The opinions expressed are his own.)

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