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Saving Kingfisher

An independent, new management team is a must for this airline to survive

Ranju Sarkar  |  New Delhi 

An independent, new management team is a must, amongst other things, if this airline is to survive.

Vijay MallyaLast Tuesday, Vijay Mallya, the chairman of tried to put up a brave face, saying that he had come up with a plan to turn around his troubled airline, reeling under and Could his plan be something that is too little and perhaps too late?

Mallya says he doesn’t want a bailout and is only seeking more working capital to tide over a crisis that has its origins in higher oil prices, high interest costs and rupee depreciation. Meanwhile, he’s trying to extract Rs 1,000 crore lying with lessors as security if banks agree to offer him letters of credit. This can help the airline cut interest burden by repaying some high-cost rupee loans.

This crisis-ridden airline has also sought government permission to directly import fuel, and is withdrawing from loss-making routes as part of its plans to reconfigure the aircraft. And, of course, it is discarding its low-fare service, Kingfisher Red, and will fly only as a full-service airline for higher yields. Mallya is also willing to divest his stake and rope in a partner.

Downsize: Exit all loss-making routes, operate manageable fleet downsize personnel
Negotiate hard to return all unused aircraft to the lessors
Dissolve the present board of directors and constitute a new one with some airline veterans. Ensure proper oversight and accountability
Replace most of the existing management with a new professional team, with proven records, and give them carte blanche in running the airline
Aviation consultancy Centre for Asia-Pacific Aviation (CAPA) estimates Kingfisher needs capital infusion of $400 million over next 3 months; half of which is required immediately
Reduce non-bank debts to the tune of about Rs 2000 crore. Around Rs 1200 crore (debentures and deposits from group cos) could be converted into equity
Redesign the route structure to maximise both aircraft and crew utilisation
Embark on a strong marketing campaign to regain passenger confidence

These could be the equivalent of putting out a raging brushfire with a wet towel, and experts say is yet another indication of how inept a thinker Mallya is, about the airline business.‘‘It is an unbelievable act of incompetence to wait until vendors cut off your credit forcing you to cancel flights before you address the problem in your airline. It is a big joke and unfortunately those who will suffer the most are Kingfisher’s employees who will be the real victims of an incompetent boss and his gang of "yes" men,’’ says an airline expert.

In 2005, when Mallya launched Kingfisher, he had the advantage of starting on a clean slate, with no legacy costs. In his quest for market share and market dominance, Mallya tried to play the same game that many say he did in the liquor business where he gobbled up distilleries and rivals. Here, Mallya snapped up loss-making in 2007. While Deccan helped Kingfisher boost its airport slots and allowed Mallya’s airline to scale up and grab 20 per cent market share, the surge in oil prices and over-capacity in 2008 clobbered the airline.

In fact, the scorching pace at which Kingfisher grew was precisely its Achilles’ heel, leading to heavy losses. In less than three years,the airline had over 90 planes (after it acquired Deccan in 2007) though it has only 66 of them today. (added its 100th aircraft last week, 17 years after it was founded.) Indian carriers, including Kingfisher, kept adding planes irrespective of whether there was a slowdown in the market or how much losses they were piling up—an indication of the industry’s mindset as a whole. This is also partly because they had booked big orders with aircraft makers like Boeing and Airbus and were committed to take the aircraft deliveries.

Then there’s the constant retooling of the airline. From the beginning, Kingfisher positioned itself as a value carrier. When Mallya acquired Air Deccan, he renamed it as Kingfisher Red and the planes were repainted. As the downturn hit in 2008-09, Kingfisher increased its low-fare capacity (and started a no-frills service), some of Kingfisher’s planes were reconfigured and repainted again. Problem is, everytime, you reconfigure and repaint an aircraft it costs a ton of money, and this hasn’t helped the liquor baron any.

Now, Mallya wants to again tinker with his existing model. His plan is to exit his low-fare service, Kingfisher Red, and reconfigure some of his planes over the next four months (sounds familiar?). Plus, he’s reducing business class seats by 50 per cent to make room for more economy ones. Today, he may say there’s a sharp focus on costs, but the story so far has been otherwise. One example: ‘‘It doesn’t make sense to have in-flight entertainment for two-hour domestic flights. The LCD panels on the back of the seats add to the weight of the aircraft, and hence it fuel efficiency,’’ says an executive with a leasing firm. Low-cost carriers like easyJet, Ryan Air or Indigo would be paranoid about inflicting such costs upon themselves.

Not Kingfisher, whose costs are higher than most in the business. In the June quarter, Kingfisher’s domestic operations had a cost per available seat kilometre (cost/ASKM) of Rs 4.32 versus Rs 3.15 for budget carrier but lower than Jet Airways’ Rs 4.50 (but then again, has the disadvantage of legacy costs and structures). If one excludes fuel, Kingfisher’s domestic operations had a cost/ASKM of Rs 2.40 versus Rs 1.54 for during quarter ended June but lower than Rs 2.57 for

This hasn’t helped its debt burden, of which the airline has Rs 7,544 crore worth. Losses stand at Rs 6,081 crore. ‘‘The stock markets have long written it off as a basket case. its net worth has been eroded,’’ said an equity analyst who tracks aviation. ‘‘At the moment Kingfisher is like a black hole that swallows any cash in sight. With all the debts it has piled up, one cannot help wonder if it has crossed the point of no return, even if the loans from the UB Group might be written off in the future. If you read between the lines (reports from his press conference), he is unquestionably gasping for breath. It is unfortunate because many employees and their families will suffer the consequences of a faulty strategy,’’ says an industry expert.

How could such a catastrophic series of events descend on Kingfisher? Was there no one watching out for the airline? Probably not, considering how the airline was run—or not run, rather considering Mallya’s penchant for running the airline without a fulltime CEO until Sanjay Aggarwal came on board last year. When he launched the airline, Mallya had a couple of expats as chief operating officers, Alex Wilcox and Nigel Harwood, but he could not keep them. ‘‘There’s a need to have a new team, with proven record, and give them full freedom to run the airline. This must be done to restore the confidence of investors,’’ says an expert.

Steve Forte, a former CEO at Jet Airways, feels that some of the airline founders in India are more concerned with what Italians call ‘Bella figura’—or how to make the best possible impression above all else—rather than running a business in a professional way. ‘‘At the onset they should ask themselves if they are in for the profit or for the glory. Unfortunately the glory days are over and I classify Dr Mallya in the category of the glory chasers or the “Bella figura” seekers,’’ he says.

In India, promoters have often been found to give more importance to market share than profits. ‘‘This is a major fallacy and it is evident Kingfisher has been a victim of bad decisions, bad management and bad strategic planning. The question that banks and investors alike should ask is ‘who has really been running the company.’ I think we all know the answer,’’ says Forte, Can Mallya save his airline? ‘‘Clearly, he’s looking for an honourable exit. If a foreign airline invests, he can seek a premium. A local partner will buy only if he gets it for a song,’’ says an observer. Till there’s a change in FDI rules, expect Mallya to cut back operations. For now, Mallya needs to quickly bring in funds to keep flying and get support from the banks, who also own 24 per cent of the airline (a debt recast ten months back saw them converting some of their loans into equity). Until then, it’s anybody’s guess as to how long his planes can stay up in the air.

First Published: Tue, November 22 2011. 00:18 IST