Making a case for bailout

JET-KINGFISHER DEAL- I

Pressure from lenders or potential investors may have forced Kingfisher Airlines’ Vijay Mallya and Jet Airways’ Naresh Goyal to collaborate.

Industry sources said that Mallya has been raising money from ICICI Bank and State Bank of India. “With stocks plummeting, the banks may have made margin calls to top up the collateral. But how much can you top up?” said an airline official.

Both Mallya and Goyal have been trying to raise $400 million each from equity investors without much luck. The industry grapevine is that Goyal has raised money from a high-profile domestic investor through private share sales.

“Mallya has taken large debt. While he has built a great product, it has no relation with costs and fare. All the chopping and changing he has done (buying Deccan, re-branding) doesn’t come cheap. Similarly, international operations is bleeding Jet as foreign airlines give it a run for its money,” said a senior official.

Airlines have also been facing pressure from the oil companies on their dues on aviation turbine fuel (ATF), which are mounting beyond the 40-day credit period. Thanks to some lobbying and the shape of airlines, the oil companies have been going easy on airlines in collecting the dues.

Domestic airlines are projected to tot up losses of $2 billion in the current fiscal; both Kingfisher and Jet are estimated to be losing Rs 10 crore a day each though losses would have come down marginally as crude prices have fallen sharply.

“They are both bleeding and cannot sustain it; nor can they hope to raise money in the domestic or global markets for sometime. So, there’s a clear compulsion to cut costs,’’ said Cyruz Guzder, CEO, AFL Logistics and an aviation expert.

Making a case for bailout? For the last two years, airlines have been seeking a reduction in the prices of ATF, which costs 70 per cent more here than in Singapore, and other concessions like allowing foreign airlines to invest in Indian carriers. “The airlines have been seeking relief from the civil aviation ministry but there’s a view that why should they be given relief when they have bloated structures, pay international salaries, or haven’t gone all out to reduce costs,” said an analyst. If they are seen taking tough measures to manage internal costs like cancelling flights, or laying-off people, it would be easier for the government to reduce ATF prices or impress upon state government to reduce taxes. “If they start laying-off people, cancelling flights, and slashing costs quickly, only then can the governments move on fuel. When airlines stop flying to their cities or cut frequencies, states will start bringing down the taxes,’’ said an expert. This theory will get validated if the government provides some relief—like making ATF a declared goods, which will make the sales tax uniform at 8 per cent across states—which some industry experts feel could come fairly soon.

Roping in investors Aviation analysts think the deal between Mallya and Goyal may have been driven by a private equity investor like say, Texas Pacific Group, which has agreed to put in money, provided the airlines are able to cut costs and rationalise routes. “It’s quite possible that the deal has been driven by an investor, who wants them to get together to slash costs, improve yields and bring in some sanity. There’s pressure on both from external sources,’’ said a director with a rival airline. “The investor would have said since I am the only one who’s going to give you the money, why don’t you undertake a self-imposed consolidation, said Amitabh Malhotra of NM Rothschild & Sons, who has helped two carriers raise money. “The airlines are saying let’s do things that anyways we have to do (rationalise routes, cut costs) without opening the books to each other and let the value start creeping in. In three months, you can start reaping the benefits,’’ said Malhotra. This process involves figuring out who’s going to reduce what, eliminate overlap (ensure they don’t fly to the same airports at the same time), cancelling flights, feeding each others flights and adopt (whichever airline) has the best practices.