Tailspin

The Kingfisher saga has dragged on for too long. Mounting debts and deteriorating service levels are bringing the Indian airline, majority owned by Vijay Mallya, the flamboyant liquor baron, to the brink. New investors are in short supply. A proposal to allow foreigners to buy up to 49 per cent of the company does not go far enough. If the government is serious about saving the airline, why not go the whole hog and allow 100 per cent?

Kingfisher, which until this year was India’s second-largest airline, hasn’t turned a profit since it was founded in 2005. In the December quarter, revenue also started falling. That’s no surprise; the firm is so strapped for cash that it has had to cancel flights. Net debt stands at $1.3 billion. Staff are not being paid and tax bills remain outstanding — adding a further $477 million to what it owes, according to Kotak Institutional Equities. Shares in Kingfisher have dropped almost 60 per cent since the beginning of last year, shrinking its market value to around $270 million.

Banks, which took a 29 per cent stake in an earlier debt-for-equity swap, are unwilling to restructure loans further till fresh equity is found. But, there is no sign of the guardian angel Mallya has long promised. In any case, investing small sums of equity will only keep the business ticking over until it runs out of cash again. Only a complete overhaul which reduces its interest expense, clears all outstanding payments and cuts operating costs will give it a chance of survival. That could take well over $1 billion – although the banks might be prepared to cut the money owed them if there was a serious equity injection.

An investor of this scale would become, by far, the largest shareholder, diluting Vijay Mallya’s holding to a minority stake. That might not be a bad thing. He has run the business himself without a full time chief executive until last year. He takes a large share of responsibility for the company’s state.

The airline’s last hope may be to attract a foreign airline, say from the Middle East, with deep pockets. But, if foreign firms are to save Kingfisher, they are sure to drive a hard bargain, both with Mallya and with the government. Hundred per cent ownership is a good place to start the negotiations.