Posted by: John Elliott | November 15, 2011

Few friends for India’s king of good times

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It must have been a devastating shock for Vijay Mallya, India’s most flamboyant and image-conscious businessman, when the media and top business colleagues turned on him in the past few days over the plight of his loss-making debt-ridden Kingfisher Airlines.

The Mail Today’s front page yesterday (left) was the unkindest cut, but others also piled in. The Times of India today says “it isn’t the government’s business to bail the airline out”, and the Indian Express simply says “No Bailout”. Rahul Bajaj of Bajaj Autos said he saw “no logic in bailing out any private sector company”, voicing a widely-held corporate view.

Mallya said today that he had not asked for a bail-out, though he did want some help, and he has been lobbying politicians in the last few days. It was in fact prime minister Manmohan Singh who, flying back from an international conference, kindly but unwisely told reporters two days ago that “we have to find a way to get Kingfisher out of trouble”.

The prime minister would do better if he took advantage of Kingfisher’s crisis to clean up the government’s administration of the aviation sector, which has been riddled for more than a decade with corrupt and crony links between the aviation establishment and the private sector. That establishment embraces successive aviation ministry politicians and bureaucrats, other branches of government, and Air India, the government-owned, chronically inefficient and cosseted airline (with includes the former Indian Airlines domestic carrier).

Ratan Tata, head of the Tata group, has said he was not able to start an airline joint venture (about ten years ago) with Singapore Airlines because he was not willing  to pay a minister a suggested Rs15 crore (then about $3.5m) bribe.  Crony links have grown since then – especially between 2004, when the current Congress-led coalition government came to power, and a ministerial reshuffle in January this year. (I alluded to the links on this blog three years ago).  During that period private sector airlines were encouraged, while Air India was decimated by a series of government decisions that included its nominal (still incomplete) take-over of Indian Airlines, questionable large aircraft orders, and foreign airlines being allowed to take over lucrative routes.

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This is not to suggest that Mallya’s airline has benefited most from this cosy relationship, close though he is to many ministers and bureaucrats – six years ago The Economist said he was “famous for his racy, party-loving lifestyle” and for his not unconnected “skill at managing his relationships with government”.

Jet Airways, Kingfisher’s main long-term rival, has had its own deep associations for years. It benefited most from the Tata-Singapore link being scuppered by the government banning foreign airlines from investing in Indian carriers because this blocked a potential serious rival. The fact  that Jet had to lose two foreign airlines that were then its equity  partners was a small price to pay for seeing Singapore off.

Now Mallya is urging the government to end that foreign direct investment (FDI) ban on foreign airlines. Whether this would bring an airline into Kingfisher, given its present dire financial straits and Mallya’s erratic management style, is another question – Mallya says he has an offer from one would-be investor and there are rumours of others.

Today he has tried to stem the tide of bad news with a long televised press conference, where he appeared calm and confident. He produced no solutions to the airline’s problems, but  correctly claimed that Kingfisher’s performance is no worse than competitors’. Its primary financial problem is crippling interest on $1.3bn long-term debt, and it urgently needs fresh working capital.

All airlines, as Mallya said, are hit by sharp rises in fuel costs, a rapid decline in the value of the rupee, and rising interest rates (now near 14%). He is negotiating with exasperated banks, which want him to produce more equity, and the State Bank of India is advising on restructuring the debt. In addition to the FDI change, Mallya is also asking the government to allow airlines to avoid sales tax by importing fuel themselves rather than through state-owned oil companies, and also wants duties charged by individual states to be reduced.

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Mallya’s primary business is the highly profitable United Breweries (UB) group, which he inherited from his father. It is the world’s largest spirits business and India’s biggest brewer – producing Kingfisher Beer that gave the airline its name.

The airline has never made a profit since it was launched six years ago as part of Mallya’s “king of good times” mantra.

Last month it ended its Kingfisher Red cut-price operation that it has run, somewhat reluctantly and with muddled branding, since it bought Air Deccan four years ago. It has also abandoned some loss-making routes, and has cancelled flights because it has been re-configuring aircraft interiors – all of which has helped to escalate the sense of crisis.

As I said, it must be devastating for Mallya, who partly models himself on Virgin airline’s Richard Branson, to find himself so publicly shunned. He has for years wined and dined politicians, bureaucrats, opinion formers and journalists on his private jet and yacht, and at a stud farm, IPL private sector cricket tournaments (he owns a team), and many beach and city homes in India and abroad, as well as on Kingfisher aircraft. Only a month ago he was visibly shaken  (above) when he had to admit India’s Sahara group as a 50-50 investor in his cash-strapped Force India Formula One racing team, now renamed Sahara Force India.

But what a marvellous chance his airline’s plight gives Manmohan Singh and Sonia Gandhi, the Congress Party chief, to begin to honour their pledges of tackling India’s endemic corruption and crony capitalism by dealing with Kingfisher transparently and openly. It could allow foreign airline investors to have minority equity stakes, and provide a level-playing field in India’s rapidly expanding aviation market – even if that leads one day to either or both Kingfisher and Air India closing down.

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Responses

  1. Let this fellow Malaya stew in Kingfisher Beer. India does not need such business men. There are many who are more competent who can take over.

    As for the Congress party, the less said the better. They institutionalized corruption since the days of Nehru.

    Sammy

  2. How I agree with you on the opportunity for the government to at last make an example on cleaning up the cosy corrupt relationships between so many major players in the private sector and government which still plague India after nearly 20 years of starting to open up the economy!

    Since one of the objectives of starting the airline was to be able to promote the Kingfisher brand with massive advertising, thus flouting the rules on promoting alcoholic drinks, surely it is logical for the liquor business to step in now and pay its debts by recapitalising the airline? unless as BKS implies this would upset a hidden balance of ownership….

    The airline sector does indeed need some foreign competition and management expertise, but maybe Kingfisher should be made to clean up first, otherwise it will look like just one more bailout for doubtful reasons.

  3. Satyam

    Of course the government and the rest of India believes in bailouts, all of the business houses, faced with an existential financial crisis, including Mr. Bajaj would be asking for exactly the same thing.

    We are a socialist country, and for very valid reasons, large scale income inequalities, there is no question of whether to engage in some capitalistic debate over the contradiction of a government handout in this country because of some notion of in a free market in which only the strong should survive. We are declared socialists, and that is the prescribed response for companies of a certain size who threaten to default and go bankrupt.

    14 per cent interest on debt compared to Italy’s 7 per cent and a 60 per cent tax on fuel which cannot be passed on to consumers because of price wars.

    He made a silly mistake entering the business that is capital intensive, excessively regulated and historically unprofitable for virtually everyone except state backed Emirates.

    More importantly he made the mistake of flaunting his wealth so extravagantly, and perhaps he should pay for both of those mistakes, but criticism in this country stems from schadenfreude not ideology, and its hypocritical.

    Mr. Bajaj and the Ambani brothers, like their contemporaries did at Ford and General Motors would all be first in line with their begging bowls faced with a similar threat, having flown to Delhi on their private jets.

    The government does not necessarily need to allow foreign players to take minority stakes, what it needs to do is create an environment in which domestic airlines can make money, the first thing it could do is cut duties on fuel and airport landing fees, the second thing it needs to do is cut interest rates, At 14 per cent, Mr. Mallaya may as well be funding using his credit card, though admittedly inflation is a little trickier for the government to manage and therefore so is the interest rate (though I am at pains to understand why he is financing in Rupee and not in Dollar, surely 14 per cent does not outweigh even exchange rate risk, or perhaps it does ).

    At the very least it the CA Ministry needs to focus intensely on creating a sustainable aviation policy so that India can develop financially strong domestic incumbents, and not have one in which all are weak simply because of institutional inertia.

  4. John

    I believe that Indian Business too used to treating Banks as their current accounts making small savers suffer with low savings rates etc.
    Mr Mallaya is no exception. If he can flaunt all that you have eloquently mentioned in your article, why does he need a government bail out. let him sell his family silver if he loves his arline so much? It is high time Government calls his bluff. Let the bail out come from his liquor business
    or from the real owners of this Airline. Whether it is Mallaya or anyone else, the indian business desrves no sympathy. They have looted the country enough for their Royal Pleasures and 100 carat diamond studded ear rings.
    BKS

  5. Kingfisher knew about the high taxes on aviation fuel in India and the consequent high prices. It knew that the airports were operated by a government owned company and turnaround times were low and charges high. It knew there were no low cost terminals. Every business has to suffer volatile foreign exchange values, changing interest rates, bank liquidity, issues, etc. They manage. Kingfisher’s problem like most of the airline industry in india is poor management. I wonder whether there is a pecualiar mental imbalance you need to want an airline in india. I cannot imagine any sensible entrepreneur in our conditions wanting to risk his time and money on it. Mallya is an extreme example of this species. S L Rao


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