Can Kingfisher survive without a bailout?

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Kingfisher has been in the throes of a deep financial crisis for quite some time now. The severity of the crisis became evident again earlier this week when the income tax authorities took the drastic step of freezing the bank accounts of Kingfisher in the wake of its failure to deposit the tax deducted from the salaries of its employees.

With almost all service providers like airport operators, oil companies having already placed Kingfisher on cash first, service later system due regular defaults in payments to them in the past, the freezing of bank accounts had an immediate impact on Kingfisher's flight operations causing inconvenience to thousands of passengers.

With most banks unwilling to extend any more loans in the wake of the airline having defaulted on repayments against earlier availed loans, increase in revenues an impossibility at present with flight schedules being constantly trimmed, permission for FDI by foreign carriers still some months away pending a decision by the government, and with more than 50 per cent of the aircraft in the fleet inoperative, the question being asked is: Can Kingfisher survive?

In November 2011, when Kingfisher's poor finances had compelled the airline to cancel flights on a large scale for the first time, Vijay Mallya had presented a road map to help put Kingfisher on track. Three months later, all indicators point to the situation having worsened, and not improved. This has naturally set the alarm bells ringing in the corridors of power in Delhi with many knowledgeable persons even expressing doubts as to whether Mallya is fully seized of the gravity of the problem confronting Kingfisher and how insurmountable the financial crisis really is.

Considering Vijay Mallya's profile, public standing as an astute entrepreneur, the deep financial crisis being faced by Kingfisher has naturally sparked a debate whether the government should extend a financial bailout to it as is being done in the case of the other ailing airline, Air India.

The Minister of Civil Aviation, Ajit Singh, has said in no uncertain terms that government can't bail out private airlines prompting many corporate stalwarts to question the Rs 22,000 crore financial bailout extended to Air India while denying the same to Kingfisher (it must be said in all fairness that formally Vijay Mallya hasn't sought a bailout) is discriminatory.

It isn't, because while private airlines operate independent of the government, Air India has governmental intervention and interference at all stages - appointment of the Board of Directors and Chairman, and termination of their tenure mid way; formulation of all major policies for Air India, and changing them abruptly; decisions on important matters like aircraft acquisition and merger without realizing the full import and implications, et al.

As a major chunk of Air India's cumulative losses of over Rs 20,000 crore today is on account of aircraft acquisition and merger - the two issues handled in great detail by the Comptroller & Auditor General in its recent report and holding the government squarely responsible, the government bailout for Air India should be regarded as application of the universally accepted principle of "polluter pays," if nothing else.

However, having said this the government cannot also remain a mute spectator when one major airline is facing a crisis of survival and most other airlines are registering operational losses. As a facilitator, the government ought to initiate effective measures to make the environment conducive for doing airline business profitably.

Policies on FDI by foreign carriers, direct oil imports by airlines can serve only limited purpose and there is much more that the government needs to do. We cannot have a scenario wherein airlines even after recording 80 per cent plus seat occupancy factor on flights cannot be assured of breaking even or registering marginal surplus when world over the airlines generate surplus at 70-72 per cent occupancy factor.

This simple illustrative example should indicate that airlines in India are operating with a high cost platform and fares reigning in the market are below-cost level making flight operations economically unviable.

As the scope of infusion of funds in Kingfisher from external sources is in the present context limited, the government should rather than adopt a "hands off" policy take a pragmatic view of the situation and extend limited one-time financial help because without restructuring of debt and adequate working capital to meet daily operational needs, survival of Kingfisher may indeed be difficult. As the country cannot afford to see an airline operating off-and-on because of poor finances, some solution needs to be found.

Kingfisher, on it's part, also needs to do a reality check on its business model so that it is aligned with the ground realities of the Indian market, which is highly price sensitive.

To produce a top class product, as Vijay Mallya has done, is one thing but to get passengers to pay for these additional services is quite another. Kingfisher with frequent disruption in its flight schedules in recent weeks has also dented its image as a reliable carrier. The airline should therefore ensure that once it is back after putting it's finances in order it maintains it's flight schedule. Earlier, the corrective measures are initiated the better because if one thing that Kingfisher lacks besides the money is the time factor.