Hey Kingfisher: Stay 'grounded' to fly high

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One of my most embarrassing moments happened on Kingfisher Airlines. Comfortably ensconced in the Business Class after a long day, a charming lady in red, the smiling air-hostess, asked me with immaculate solicitude: "Can I clean your reading glasses, Sir?" I was too dumbfounded to react, not quite accustomed to such archaic debauch excesses, and almost in a robotic reflex complied with her dictates. Evidently, the King of Good Times meant serious business.

I also remember my American colleague from an investment bank in New York gulping, guzzling beer in an up-market bar in the Avenue of the Americas Street. "Man", he said, with prodigious satisfaction: "I love Kingfisher". A decade later in India, harried, worried airline passengers seem to have a totally reverse, adverse experience with that once revered brand.

Kingfisher, may still be the coveted cheery bubbly for a bar-fest, but in the cut-throat capital-intensive airline industry, it is a ridiculed product, becoming the butt of nasty jokes. Flight cancellations (down to 175, roughly half of its peak numbers), financially bankrupt, frozen bank accounts, eroding net worth, falling stock price, disillusioned frequent fliers, angry passengers, pilots resigning in a huff - the laundry list of Kingfisher Airlines' (KFA's) woes is disconcerting.

The King of Good Times, unfortunately, has hit a troubled rough patch. So the billion dollar question ( quite literally) is: should Kingfisher Airlines be salvaged? My unequivocal answer is: Yes!

First, let us get down to simple brass-tacks. KFA is a mismanaged corporate concern driven largely by one man's infinite hubris. Vijay Mallya may deny it, but you don't have to be an Einstein to figure out that that the flamboyant PhD social circuit playboy was perhaps hugely influenced by the irrepressible aura of Virgin's insane genius, Richard Branson.

Airlines maybe a sexy business to own, but to give Mallya full credit, at least he made the right business call. Given market dynamics in India, aviation sector has a huge upside as we barely fly 3-4 per cent of our traveling population and it is growing at a scorching 20 per cent per annum. Market penetration has a considerable distance to traverse. Logically, it makes compelling financial sense. But it has teething challenges especially in a regulated environment and its high vulnerability to external conditions, particularly economic slow-downs and fuel prices.

For Mr Mallya, the bad news was that The Great Recession came within two years of his product launch in 2005. He aggravated it by getting unduly ambitious, changing business strategy from his premium personalised high-end offering by acquiring a low-cost airline in Deccan Aviation at a fairly steep valuation which was rapidly re-branded as Kingfisher Red.

The allure of international routes was irresistible for Dr Mallya. The "red" turned out to be prophetic and inauspicious as Kingfisher went downhill. Management lesson: Until you gain reasonable business stability in your prime area, just because new markets exist, it does not mean you get greedy and make mindless acquisitions/ diversifications.

As it happens, just when low-cost carriers are grabbing market-share, KFA has had to surrender its Kingfisher Red plans.

KFA's biggest face-saving is the dismal state of all the aircraft carriers except one, IndiGo. Five airlines are neck-deep in high losses, aggravated by intense price war for luring cost-conscious travelers and fuel costs. Air-India's losses itself are a staggering USD 4 billion, and the industry loss for 2011-12 stood at USD 3 billion. KFA was in the red by Rs 1027 crore for 2010-11. The most disconcerting fact is that airlines are suffering massive losses despite achieving occupancy rates of over 80 per cent; bad management is being sugar-coated with rigid policies of the government.

The following could be the way forward: (Please note that the airline industry has a strong future business potential in the world's second fastest growing economy once it overcomes myriad regulatory constraints and settles down)

1) The government must insist on either the UB group/Mr Mallya to bring in additional funds into KFA by expanding its equity capital.. The promoter group must send out a positive signal to the market that they are in the airline business for the long haul, and nothing demonstrates that better than self-financing part of the onerous liabilities

2) The PSU banks are now saddled with a substantial ownership of KFA on account of debt converted to equity, thus they also have to protect minority shareholder interests besides their own balance-sheets. Further, KFA's debts of Rs 7057 crore are three-fourths held by them, thus their financial exposure is humongous. KFA now falls into the "too big to fail" category.

The huge upside is that if government policy is amended to allow FDI in aviation up to at least 49 per cent (why not up to 75 per cent, I wonder though), mandatory flying in low-occupancy un-remunerative sectors is removed and direct import of ATF sans high local sales tax is removed, it will give them all some breathing space.

Thus, the consortium of banks can then justifiably lend without trepidation, and with sanguine expectations on the industry's commercial viability. That will also enable better rights issue pricing, softer interest rates being levied by the commercial banks and also international borrowings. While low-cost carriers maybe the future in luring A/C train passengers on board, there is also space for corporate and business travelers expecting premium services, and this is where KFA needs to focus. That was its initial strategy anyway.

If KFA closes down, we have a new problem. Jet Airways will have a monopoly on business-professional class category and this could lead to a high ticket-price regime with air-passengers having no other alternative.

In summation, there is strong domestic growth in aviation sector but most airlines have gone awry with their business plans, perhaps on account of underestimating risks or overstating their market-share. Sloppy corporate management, accentuated by controlled government policy has worsened matters. The problem is both systemic and company-specific.

Thus, what is immediately required for KFA are foreign investors, recast debt schedule, flexible government policy, lower interest expenses and working capital funding. Paying off debtors and salary overdues must be paramount. KFA will also need to do some serious rationalisation of expenses besides laying down a sustainable business plan. Ultimately, the company will have to become cash flow positive at the earliest to lower borrowing costs and head towards recapturing market-share. And also hope the Iranian crisis does not lead to a steep petroleum price-hike that can dampen consumer demand.

The airlines industry worldwide is renowned for its inherent inflexibility. Cost-cutting is at best a temporary panacea, finally it needs innovative business practices. It will help Dr Mallya that instead of watching meaningless IPL cricket matches attired in dazzling red team colours of his Royal Challengers, he spends some time doing introspective thinking about his airline venture. Or else, a management takeover of his KFA assets and brand will be the last option. To fly high you have to remain grounded. Better late than never.