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Achyuth Punnekat
Thursday , September 27, 2012 at 00 : 24

Air Kerala: A totally mad business plan


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Oommen Chandy recently gave Air India Express a mild heart attack by suggesting that Kerala is relooking at launching its own flag carrier (Kerala has no flag yet, but I have a design in mind going cheap!).

Some Gulf resident Mallus are pretty upset over AI's failure to provide previously announced additional services to the Gulf. So much so that Civil Aviation Minister Ajit Singh flew down to explain. "There simply weren't enough planes", he said, "AI had to give priority to Hajj services". Never mind the fact that Mallus working in the Gulf pay in full for tickets, while Hajj pilgrims get subsidised tickets.

Swish frame to the King of Good Times now staring at penury... Vijay Mallya's Kingfisher is flapping and flapping, but it can't take off the ground. There's no two ways about it. If the airline's fleet falls below five, it's bye-bye licence. Mallus often like to bad mouth capitalism. But if ever a business tycoon gets admiration in God's Own Bar, it is the man who gave us Kingfisher beer and Honeybee brandy.

So here's a madcap plan... Why can't Kerala government buy or commission Kingfisher to fly for it?

"And who would foot the Rs 8000 crore debt Kingfisher has," I hear 'practical' people ask to the accompaniment of sniggers. "The patriotic drunkards of Malayalam", I answer. And how?

Vijay Mallya knows, and really understands I hope, that flying birds all over India is a suicide prospect. What with falling passenger traffic, rising ATF prices and the general bull-headedness of Indians who don't appreciate the value of babes serving you beer on board Boeings. Despite FDI in aviation, he has no hope in hell (I hope!) of getting any foreigner interested in buying stake in the debt ridden airline. The answer, my dear Watsons, is a bailout of sorts. If not from the powerful Government of India, then from the puny Government of Kerala.

Here are two short SWOT analyses of Kingfisher and Kerala.

Kingfisher has the expertise. It has the planes (just 7, I agree, but it's a start). And it certainly has DGCA approval to fly on international routes, even if it is no longer doing so. Even better, it is linked to the UB group, which despite its debt exposure, remains the World's No.3 distiller. But it's true that it's a shell of itself thanks to mounting debts. It is also threatened by rivals like Indigo, who have more capital, better business models and equally beautiful air hostesses.

Kerala is a state. It is debt-ridden and has lethargic governance, but it is a state. With all the powers of a state.

Even better, Kerala is home to a large NRI community with bulging pockets. Just visit Kochi, and you can see how NRI money has changed consumption patterns... even to the point of making Jaguars and BMWs a common sight. Kerala Govt also has the advantage that it virtually controls all liquor sales. In fact, Kerala State Beverages Corporation sold over Rs 7000 crore worth liquor in the last fiscal. Simply put, Mallus love booze... and most of their favourite brands are manufactured by UB group.

Kerala also is home to the Cochin International Airport Ltd, a PPP model airport in which the state government is a significant shareholder. Kerala's weakness though is the snail-pace of anything, the unwillingness to go the whole hog, and professional naysayers. (I would know, my boss just yelled at me for saying, "No"!).

So here's the plan.

An outright purchase of Kingfisher by Kerala is out of the question. The state government simply can't raise the capital. And criticism would be unbearable for a government on wafer thin majority. It also makes little business sense, as the state has no expertise in running an airline.

On the other hand, commissioning Kingfisher to serve Kerala's air traffic needs makes wicked sense. The recent Emerging Kerala initiative has shown that there is at least a modicum of willingness to invest in Kerala. The proposal to start seaplane services is being taken seriously.

It would not be infeasible for the state government to launch a PPP model Air Kerala. The principal shareholders could be the state government, Cochin International Airport and non-resident Keralites (who will provide a major chunk of the initial capital). This firm could commission Kingfisher (for a price, of course) to use all its currently available airplanes to immediately start services on a few lucrative Kerala to Gulf routes.

And why would Kingfisher bother? The clever bit should be the contract... Instead of paying Kingfisher in hard cash, there could be a quid pro quo settlement.

Kingfisher and the UB Group could get -

One - ATF prices comprise 40 per cent of an airline's operating costs. They are dictated by sales tax imposed by state governments. Kerala Govt could provide an ATF tax waiver, full or partial. Kingfisher (and Air Kerala) will save money.

Two - As a partner, CIAL could agree to provide cheaper ground handling services as long as the new airline and Kingfisher agree to make Kochi their hubs.

Four - The state government owned KSBC could agree to purchase liquor from UB group for a set period of time at marginally higher rates. Assuming 150 lakh cases of UB group made liquor are sold in a year (338 lakh cases of liquor were sold in total by KSBC in 2011-12). A transfer of profits of even Rs 200 per case from KSBC to UB Group would yield Rs 300 crore.

And Kerala insists -

One - That ticket fares should be pegged to that of Air India Express making them affordable.

Two - Kingfisher agrees to maintain the core services of the airline for a period of at least 5 years. Additional services to be added as and when more capital is raised to lease aircraft and hire crew.

Three - Profits accruing from the new airline are distributed among shareholders in proportion to their investment.

Four - Kingfisher itself does not launch competing services, and routes traffic from other southern states to the Gulf through Air Kerala.

It is by no means a buyout or bailout for Kingfisher. But it does mean the airline can slowly climb back up the slippery wall. It means Kingfisher will (partly and indirectly) earn Riyals and Dinars instead of Rupees. It also means Mallus get their own airline.

Beer on board may be impossible considering the flights are to the Gulf. But at least Air Kerala could serve beef fry.

Like I said, it's a madcap plan. By all means, laugh! But I can't help wonder if it wouldn't start making some perverse sense if a little more thought is put into it.


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