Let Kingfisher fish for itself

In the liquor business, only sky is the limit; in airlines though, sky is really the limit, as Kingfisher and Mr Vijay Mallya must now be discovering.

After flailing its wings about in the last fortnight trying to keep flying, Kingfisher Airlines, plagued by a liquidity crisis, has now landed in Rajpath seeking government help. The Civil Aviation Minister, Mr Vayalar Ravi, is reported to have spoken to the Finance Minister, Mr Pranab Mukherjee, recommending help to the beleaguered airline. The Prime Minister, Dr Manmohan Singh, has said that the government would explore ‘ways and means' to help the airline.

Kingfisher was seeking Rs 300 crore of further assistance from banks and a similar amount in the form of Letters of Credit and bank guarantees. Only in January this year, the airline was rescued with a debt restructuring package that converted a third of its loans to equity, extended the tenure of the balance, allowed a repayment moratorium for two years and reduced interest rates on the outstanding loans.

Facing turbulence, again

It is a comment on the airline's business model and its strategies that despite such handsome assistance, it finds itself yet again in turbulent financial weather. And, it is passing the hat around with its lenders, in just eight months from the last time it did so. However, learning from experience, the consortium of banks which met with Kingfisher on Saturday has refused immediate assistance and asked the airline for more financial statements buttressing its plea for support. Interestingly, the bankers have also asked the promoter, Mr Mallya, to infuse equity into the beleaguered company. This is exactly as it should be.

While the immediate stand of the bankers is prudent and commendable, it remains to be seen how they react to pressure once the government gets into the act. A government direction to the banks, at least the ones in the public sector, to go along with Kingfisher's plea cannot be ruled out.

The argument, as put forward by Mr Ravi, is that a collapse of Kingfisher will lead to capacity being taken off the market and a steep rise in air fares, discomforting the travelling public. But the argument is specious. One, the fares that the public now pay are unsustainable and unrealistic and are a product of the cut-throat competition in the market.

As the CEO of SpiceJet, Mr Neil Mills, remarked in an interview to this newspaper just a couple of months ago, the airline companies are playing a dangerous game of ‘last man standing'. You don't have to go beyond the latest quarterly results to see the damage to their balance-sheets from this game. There seems to be a competitive race among these airlines to post the highest possible loss!

If SpiceJet reported a Rs 240 crore loss, Jet Airways stunned investors with a Rs 713 crore loss in the second quarter of this fiscal. Kingfisher has yet to declare its numbers but you can rest assured it will not be a pretty picture. So, air fares need to go up but that cannot happen so long as there is excess capacity in the market. A collapse of one of the players or a merger between one or more of them is exactly what the market needs to get back to its senses now.

Two, while it is true that fares will rise in the immediate term — as we indeed saw when Kingfisher cancelled its flights last week — they will adjust to demand-supply equations once the dust of a possible Kingfisher exit settles.

Besides, travellers need to pay the economic price of an air ticket, that is, one truly discovered by the market. For too long, we have been spoilt by artificially low fares that bear no resemblance to the actual costs of running an airline.

Lose-lose situation

But we are digressing here. The consortium of lending banks has reasons to be stern with Kingfisher. They have lost heavily from the debt restructuring in January. As much as a third of the outstanding debt of Rs 4,263 crore, or Rs 1,303 crore, was converted to shares — Rs 750 crore as equity and Rs 553 crore as preference shares. The equity shares were valued at Rs 64.48 a share, giving the banks a 23.37 per cent share in Kingfisher.

Today these banks find themselves in a lose-lose situation with the stock price tanking to Rs 19. Their collective loss is a massive Rs 529 crore — not so much a haircut as a tonsure! They cannot dump the shares in the market too as they may neither get buyers nor even the current market price.

Directed lending

The government would be well advised not to lean on the public sector banks to accommodate Kingfisher. The days of directed lending are gone with the Dark Ages of yore and these banks are now listed entities answerable to public shareholders. Besides, the banking system is grappling with many grave challenges, not the least of which is its exposure to the troubled power sector. Again, given the troubled state of the industry, we could well see others lining up for similar support.

Besides, public opinion is also very strong against using tax payer money for bailouts. Kingfisher should, therefore, be told to find its own fish. That fish can be an infusion of funds from the promoter group or, if that's not possible, a collaboration with another entrepreneur with deep pockets.

If the government still wants to help, it can perhaps relax its FDI policy in aviation. This will help not just Kingfisher but also other airlines that are now caught in turbulent weather.

Of course, it's another story whether foreign airlines will be willing to get into the co-pilot's seat in Kingfisher!

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