Kingfisher begs for more

BUSINESS

private airlines

Kingfisher begs for more

Why Mallya the Czar of Good Times is taking a back seat while Indigo’s Bhatia is flying high

by RAJENDRA BAJPAI

THE high-flying, slightly overweight and pony-tailed Vijay Mallya of Kingfisher Airlines is always in the news. And not always for a good reason. Right now, his financial woes and valiant efforts to save his airline are all over the front pages of newspapers and magazines. In the past, he has been in the news for holding grand parties on his yacht and flying friends to South Africa in his personal jet to watch a cricket match.

Mallya owns race horses, a Formula 1 team, an Indian Premier League cricket team, football clubs and a hugely successful liquor business. He also owns Kingfisher Airlines, which has been bleeding him for years.

The trouble is, he lives on credit and living on credit is living dangerously. He buys aviation fuel on credit. He defers payments to creditors, making the loans even more costly. Rahul and Kapil Bhatia also own an airline – IndiGo. They don’t have a personal business jet or a yacht. They don’t hold parties in Cannes. They do not fly their friends to South Africa or the West Indies to watch cricket matches. They don’t own cricket teams, football clubs or race horses. And they pay cash for fuel they buy for IndiGo’s 40 A-320 Airbuses.

Both parties are equally wealthy. Mallya, with a net worth of $1.11 billion, is ranked 49 on Forbes’ list of rich Indians. The Bhatias, with a net worth of $1.09 billion, are ranked 51. Mallya and the Bhatias came into the aviation business at about the same time. They knew the business was fraught with risks. For both, it was a gamble. The Bhatias exercised financial prudence from the start. They gambled prudently, Mallya gambled heartily. Both produced first-class airlines. Mallya’s business plan was to run a full-service airline. The Bhatias decided to put together a low-cost carrier.

Kingfisher is generous to its passengers and pampers them. IndiGo would not give you a cup of tea for free. And that is where the difference lies between a profit-making and a loss-making airline. IndiGo keeps a stern eye on its finances. Kingfisher is unhesitatingly bountiful.

The result of IndiGo’s parsimony is that it made a profit of Rs 500 crore in the year ending March 2011 while Kingfisher reported a loss of Rs 1,027 crore.

The lifestyles of Mallya and the Bhatias have left a deep imprint on their business. The Bhatias are careful with cash and avoid both controversy and publicity. Mallya is generous, flamboyant and courts both controversy and publicity. Mallya is always in the news, the Bhatias never. Mallya will be recognized anywhere in the country, the Bhatias nowhere.

IndiGo made a profit of Rs 500 crore in the year ending March 2011

while Kingfisher reported a loss of Rs 1,027 crore.

IndiGo pays cash for its fuel and oil companies offer it a discount. Kingfisher buys on credit, which is far more expensive. This is the key difference between the two because aviation fuel accounts for 42% of an airline’s cost. An airline which cannot control this component of its cost has very little chance of making a profit. Kingfisher has shown no inclination to do this. In fact, it owes more than Rs 1,000 crore to oil companies and some have now refused to give it fuel on credit. The result is that scores of its flights have been cancelled.

That Kingfisher is in deep trouble will be an understatement. It is gasping for breath. The airline’s losses last year erased the profit of Mallya’s other six companies. The group’s net loss stood at Rs 315 crore.

Some voices in the government, including Prime Minister Manmohan Singh’s, have hinted at the possibility of a bailout although there is no logical reason for such generosity. In a free economy, you keep your profit and you pay for your losses. Still, it is more than likely that commercial banks and other creditors will come to Kingfisher’s rescue. If they don’t, they will be in as much trouble as Kingfisher. The airline owes creditors Rs 7,000 crore.

Kingfisher will probably have to radically change its business model. Whatever model it adopts, there will be no escape from reining in expenditure and cutting staff costs. At present, Kingfisher employs 140 people per aircraft compared to less than 100 by IndiGo.

Mallya has enough business and political clout to deal with the crisis at hand but he is running out of options. He has already decided to discontinue Kingfisher Red, the low cost carrier. Obviously, he has decided to vote in favour of a full-service airline. g