As Kingfisher Airlines Ltd loses its right to fly, it is tempting to cast off its departure as comeuppance. After all, its flamboyant owner Dr Vijay Mallya flouted every rule in the cost-control manual, exerted unusual influence with lending agencies to get cheap and frequent loans and hasn’t paid his staff for months. Fair enough, one would surmise; he had it coming.
But there is also a deeply disturbing undercurrent in the sight of one more private airline in India being confined to the hangars. In its lap dance with the structural problems in India’s aviation sector, every private airline has come to grief.
It’s a trend that began with the six private Airlines—Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air—that started operations post 1992 following the first round of deregulation of the sector. All perished in the first five years of that brave new world.
Post 2000, another set of entrepreneurs, wizened by the failure of their predecessors, came with a new set of offerings. The most successful among them was Kingfisher Airlines. When it was set up in 2005, Kingfisher held out the promise of comfortable travel, with passengers even in the “cattle class” being treated well for the high fares they were paying.
Its capitulation, along with the steep losses of all the other airlines barring Indigo, would seem to suggest there is a structural problem in the way the sector is organized. While Mallya has been accused of trying to use his political clout to influence aviation policy in his favour, the aviation business in India hasn’t been a model of perfect competition. The airlines apart, all other players along the supply chain enjoy some form of monopoly.
The airport operators, the oil marketing companies, each one is a monopoly supplier. The ones left holding the can are the airlines, which must pay high fuel costs inflated by surging oil prices, steep government levies and equally high airport fees. When the airlines seek to pass these levies on to the consumer, the backlash is all theirs to handle.
At this point, of the various airlines operating in India, only Indigo is profitable. Were all the airlines to go the way of Damania and Modiluft and Kingfisher, the results would be catastrophic for India’s travelling public. National carrier Air India Ltd hasn’t made a profit in five years and is surviving mainly on government handouts, a situation that could well continue. With every inch of space that private airlines yield, the government-controlled monopoly could be the big gainer.
For those of us old enough to remember the dark days of government-controlled flying, the long waits at the airport, persistent delays and horrendous airline service are too horrifying to contemplate returning to now.
The moribund state-controlled and monopolized Indian railway system has shown virtually no progress over the past many decades. When the Rajdhani Express first started in the late ‘70s, it would take about 18 hours to cover the 1,500 km distance between Calcutta and Delhi. Over 30 years later, the journey takes the same time, the experience is, if anything, worse, and with no new options in all these years, the struggle for a ticket at a short notice is still an ordeal. The number of accidents caused directly and indirectly by a misfiring rail network is evidence of how shoddily this sector has been managed.
There is a huge economic cost to an inefficient airline sector of the kind that India had till the 1990s. According to a 2011 report by the US department of transport, The Economic Impact of Civil Aviation on the US Economy, civil aviation, accounting for 5.2% of its economy, significantly catalyzes and facilitates all sectors of trade and business.
Researchers Mariya A. Ishutkina and R. John Hansman of the MIT International Center for Air Transportation in their 2009 model, Analysis of the Interaction between Air Transportation and Economic Activity: A Worldwide Perspective, say the value of passenger destination services and transported goods makes up part of enabled impacts or enabled flows. This increase induces a feedback effect whereby the increase in “economic activity in turn provides capital and generates the need for passenger travel and freight, which drives the demand for air transportation services.”
While few tears will be shed if Kingfisher doesn’t take to the skies again, the space vacated by it must be filled by other competitive private players and not taken up by a thoroughly inefficient state enterprise living off the largesse of the tax payer. Unfortunately, that’s not likely to happen till the structural flaws in the sector are fixed.
Vijay Mallya-promoted Kingfisher Airlines Ltd is planning to restart with a few planes and an investment of Rs.425 crore as a short-term measure, according to bankers after a meeting between the company and its creditors. They also indicated that the grounded airline may seek another long-term recast of loans.
“The airline is in talks with DGCA (Directorate General of Civil Aviation) for a limited restart of its operation,” said Shyamal Acharya, deputy managing director (corporate) at State Bank of India (SBI). The airline didn’t seek any money for this partial resumption, he said.
“Mallya is confident that Kingfisher will get the limited restart mandate soon,” Acharya said.
A limited restart would involve flying a few planes on some key routes. A group of six banks will monitor the restarted operations, Acharya said. The banks are SBI, Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank Ltd and United Bank of India, Acharya said.
“We will restart in a phased manner and will provide funding ourselves,” said Kingfisher Airlines spokesperson Prakash Mirpuri. “We have not asked the banks for any support. We have also shared a full recapitalization plan, which will be further discussed with a small designated group of bankers.”
The core group will monitor the progress and report to the consortium of 17 lenders. “This apart, there was no concrete proposal in recovering the dues or pumping in fresh funds,” said another banker who attended the meeting who didn’t want to be named.
Mallya signalled that he may seek another round of loan restructuring and “we are not averse if the plan is satisfactory”, Acharya said.
Kingfisher chairman Mallya made a presentation to the banks about the long-term viability of the airline at the meeting, held at a hotel in south Mumbai.
“Mallya did mention his discussions with foreign investors. He did not specify whether (it was) an airline or a private equity investor,” Acharya said.
The government in September allowed foreign airlines to buy stakes in domestic airlines, which are strapped for cash and weighed down by debt and accumulated losses.
Another banker said operations may start with five planes. “Mallya was confident. His body language too has improved. Mallya has plans to restart the operations with five planes and take it to 21 in the next two months,” said a senior banker who attended the meeting, requesting anonymity.
Kingfisher Airlines owed $2.5 billion (around Rs.13,650 crore today) to banks and majority shareholders as of 30 June, according to aviation consultant Capa.
James Hogan, president and chief executive officer of Etihad Airways PJSC, told the Financial Times on 11 December that his airline was looking at a “couple of” opportunities in India and it was “going through the due diligence at the moment”.
Kingfisher Airlines, which was grounded by the Indian aviation regulator in October after facing labour unrest over unpaid salaries and having to curtail flights for many months, has been working to swing the deal with Etihad its way. The Abu Dhabi airline is expected to decide on whether to invest in Jet Airways (India) Ltd or Kingfisher this week, Mint reported on Monday.
Kingfisher’s directors discussed ways of improving the financial position of the company at a meeting on 12 December, the airline told the BSE.
Mallya, UB Group president and chief financial officer Ravi Nedungadi and Kingfisher Airlines chief executive officer Sanjay Aggarwal attended the lenders’ meet held.
Mallya didn’t speak to reporters waiting outside the meeting venue.
Acharya of SBI said the airline’s total exposure to banks was more than Rs.7,000 crore.
He said Mallya didn’t say where he would be bringing the funds from. His United Spirits Ltd is selling a 52% stake to Diageo Plc.
“Mallya may not be bringing the funds directly to Kingfisher Airlines, but he may bring it indirectly through United Brewery (Holdings) Ltd. But the positive note is that Mallya did not seek fresh funding from banks,” Acharya said.
He added that Mallya did not set any timeline for the restart of operations.
“The idea is to restart operations in the short term and have long-term viability for the airline. The issue of selling non-core assets did not come up for discussion,” Acharya said.
He added that banks wanted more details on the presentation made by Mallya. The airline will present those details before the meeting of the small bankers group formed on Monday.
“This meeting will take place in three-four days,” said Acharya, who spoke on behalf of the lenders’ consortium.
Kingfisher shares lost 4.96% on the BSE on Monday to close at Rs.16.85. The stock has risen about 34% in the past nine trading sessions since 3 December—from Rs.13.24 to Rs.17.73—as investors bought in expectations of a revival of the airline.
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