Red Riding Hood


Remember Red Riding Hood ? The fairy tale about the girl who walks through the woods to deliver food to her sick grandmother and is deceived by the wolf who wants to consume her. She is saved by a hunter to end the fable on a happy note. Now consider, Kingfisher Airlines. Represented by the colour red on its fleet and balance sheet , its been riding the clear skies under a hood of debt . Starting off with good intentions quite like the girl to deliver service to  an industry made sick by the government run Indian  Airlines, it finds itself deceived by a high tax burden threatening to consume it and now awaits a hunter for a bailout . Who will be this hunter? Will we have a happy ending is what intrigues most of us.

Lets start with why we are where we are . Kingfisher has been a perfect example of the term ‘high and dry’. Flying on high  debt  it has left its coiffeurs dry. Its investors now  80 pc poorer than last year have been left high and dry with no recourse. Kingfisher’s books of accounts now  resemble the popular kingfisher calendar with bikini beauties. It has begun to conceal less and reveal more .

 Airlines is a business not a social service. Of course Indian Airlines took this argument quite  literally by lacking basic social etiquettes of punctuality, pleasantness , courtesy and response . However, given the bailout of the National carrier and the fact that no airline  has really made money makes one wonder whether is it really a worthy business. In 2012, overall profitability of the airlines is expected to fall by a third . Unlike Kingfisher, Jet has been making profits in phases and GO AIR has had an occasional green quarter, but it does not seem sustainable . In fact they too are now reporting losses and investible shortages as demand falls , discounts rise and tax burdens surmount . Indigo, with no frills but service that thrills , has deservedly  had a great flight.  .

Is this a global trend ? Not really . Top US carriers like United , Delta and US Air reported good profits in the last two quarters. United Airlines turned profitable after losing money for six years, Delta reported the highest quarterly profit in history .Lufthansa doubled its profits. So why are Indian carrier in the red? For one, international airlines are not inflicted with tax burdens . Their fuel spend  as part of their operating costs is 30% which is a third less than  that of Indian Airlines or any other Indian airline .

The biggest debate has been should Kingfisher be bailed out or not? Instinctively , no. How can the taxpayers money  be used for this ? Understandable . But what if hypothetically the airline  was to be permanently grounded . It would reduce competition allowing remaining airlines to hike prices assuming existent demand continues unabated. Here again the public would be paying more . Also why not examine excessively high fuel taxes and service tax which the tax payer is burdened with  .Then, if Air India can  bailed out why not Kingfisher?  Bailout for inefficiencies or misappropriation like Greece is objectionable . But there is no evidence of the same with Kingfisher who have some genuine grievances beyond their control like a global slowdown, rising fuel prices or government policies on taxes and must fly on uneconomic routes . Not too forget ,Kingfisher has set  excellent service standards worth preserving.  Anti Mallya lobbies may criticize  him for his personal excesses , arrogance and at times inconsistent  decisions  but none of these find place on the Balance Sheet of the ailing airlines .  Critics say that Kingfisher has already been rescued in the past and that too at a handsome 62% premium to the owners, thanks  to their political clout and not future prospects  . It has  never ever made profits and rescuing it whereas credit to small defaulters are cut off would stink of crony capitalism.

Political considerations have ,in the past ,  led to the rescue of a national carriers ( like Air India) .Many global airlines have been saved time and again, yet the three biggest US giants of yesteryear-Pan American Airways, TWA and Eastern Airlines-have ceased to exist. A shuffle in the KIngfisher cockpit may be justified .So what does owner Vijay Mallya do.? The King of Good Times is having a bad run. These days visits to banks and possible investors now takes up most of his time.  It is his frequent flier programme.  For Mallya the saying “United we stand….”  finds remarkable relevance  Today he stands strong because of United Breweries and United spirits which have literally speaking kept him on a high even as his airline flies low . Stakes from these companies could be sold to fund the airline  .Disposal of personal assets and loans from corporate buddies are being considered. His high stakes in sporting ventures like cricket,football and racing could  come into play  . Banks may again restructure loan or convert debt into equity .It reduces the company’s interest burden but increases their interest in the company’s management . A rights issue maybe unsuccessful for the wrong reasons .

A case for foreign direct investment by foreign airline becomes strong , if not for funding than for bringing in global management expertise and synergies . Security concerns with FDI can be countered by other mechanisms. Whatever it be given the criticality of the industry ,the government cannot avoid the issue , nor can it look for half measures. It cannot distance itself  and must go the distance in finding a solution, for now and for the future . The best answer   perhaps could be the auction of Mallya’s stakes . There are enough Indian cash rich companies to buy .  For the government it would be a safe landing – No  bailouts . No foreign investment . No political pressures .

For the industry as a whole to keep itself in flight, it needs fuel to fly but needs that fuel at a fair price to keep it flying . Elimination of state fuel taxes,  pricing based on  international  crude , stopping monopoly pricing power of incumbent fuel suppliers and fuel infrastructure  owners by ensuring true open access to new entrants should  be adopted . Deregulation in telecom saw users increase by 1700 times in two decades . For passenger cars the jump was 15 times .  For the airlines it has been lesser but impressive at 8 times. This would have been more had there not been indirect controls through fuel pricing . So what does the future look like ?  Competition is productive . It puts one to test and usually brings out the best . Excessive competition  is counter productive . It can even put the best to rest . At times like these consolidation becomes the consolation  as we saw in the Jet Sahara Deal. More are likely  to come .Air transport contributes 0.5 pc of india gdp and supports a million and a half  Indians . Connectivity brings people , businesses and opportunities together . By 2015 the Indian aviation sector  will have the  world’s fifth  largest domestic market.  It will be the ninth largest international cargo carrier .Going forward its growth is  expected to rank amongst the top ten  in terms of growth . The turn of the century saw Monarchy depart from India. Two representations are  left ,both  from the aviation sector. The “Maharaja “( Air India) which is ailing and “King” fisher which is failing. The Tatas who first owned the former may try to now own the latter. Is Ratan tata listening ? If not , Cyrus Mistry should be .

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