Suman Layak and Geetanjali Shukla November 21, 2011
Vijay Mallya met Suman Layak and Geetanjali Shukla so late on November 17 that by the end of the interview the clock had ushered in a new day. The liquor baron sipped red wine and smoked his favourite cigars, lighting up more than one in his ashtray. He pointed out a television-ticker on FDI in airlines - betraying some satisfaction on an otherwise poker-face. At the end of a day full of meetings to salvage Kingfisher Airlines from its difficult position, Mallya moved in to his Hoechst House office at Nariman Point for this interview from the Belvedere Club at the Oberoi. Edited excerpts:
Suman: When you started the airline, you surely had a breakeven plan… what went so wrong that the airline is yet to make a profit? Did something not go according to your plan?
Mallya: Within three years of launching KFA and after the acquisition of Deccan we became the largest player. At that time it was seen by the industry that it was a good consolidation play, a savvy move. Deccan was seen to be an irresponsible pricing player…if you recall the Re 1 tickets etc…it reflected in the share price which shot up beyond Rs 102. Immediately after that we flew through the turbulence of the global economic meltdown of 2008-09. Only in 2010 was there any sign of recovery. Again in early 2011 we started facing high fuel prices due to the high prices of crude oil and a global slowdown as well economically. That is really the issue. Oil prices are high, yields are low and capital raising is difficult under these global economic conditions. This is the second time that it is happening. Talking about whether our business model was right or wrong, we are the recipients of 38 national and international awards for the best airline. We have over 2 million members in our King Club loyalty programme. So one cannot speculate on whether what we did was right or wrong. Now, the challenges are how to reduce costs, except that we have no control over the actual price of AFT fuel. The biggest killer is the advalorem sales tax. It is extremely unfair…very unfair that we have to allow states to make windfall profits at the direct expense of damaging the aviation industry. I have so many CMs coming to me and asking me for intra-state connectivity. But they will tax fuel in a highly unreasonable way which is killing the aviation industry.
I am used to paying high tax because I run the liquor business, which is the most highly tax business in the country. State governments have an insatiable thirst for revenue. But when the finance minister prepares the annual budget he does not speculate the earnings based on the prices of international commodities. States are collecting an average of 25% advalorem tax on ATF. When it was $40/bbl in 2009, $50/bbl in 2010, they never complained, they were quite used to it, because $40/bbl remained for 10 years before that…that is the level that they were used to. Now at $115/bbl they are charging the same rate of tax and collecting that money as well. So where is the state government support for aviation? Where is their commitment to connectivity? You take the case of the then AP government, when the new GMR airport was built they dropped the sales tax to 4%...as they should. But because no other state followed suit, they raised it back to 16 per cent. I have senior politicians from Maharashtra who want me to fly to Nashik, Nanded, Latur, Solapur…they want me to fly everywhere. The (state) finance minister announced two years ago…a year ago…said pleased to announce sales tax on ATF is 4%...I said wonderful…(but they said this holds for all cities) except Mumbai and Pune. (Smiles sardonically) What's the use?! In all of Maharashtra it is 4% except Mumbai and Pune.
What sense is this? I read in this morning's newspapers that 4 UK airlines have got together and requested the UK government to cut the tax. Here, despite repeated requests to the state governments they are not prepared to. Now, you should also be aware that there is a precedent to this. Some years ago government declared ATF used by small turboprop planes as a declared good and a 4% sales tax, saying that this promotes connectivity. Then the same government some 3 or 4 years ago suddenly changed and said that aircraft below 40 tonnes max takeoff weight will be entitled to the 4% status. This included the Embraer jets. Today, why should airlines be penalised by the average 25% sales tax? If govt wants to encourage connectivity across the country they should stop this. Now the time has come that the average number of fliers across the country have grown to 50 million a year, slated to grow to 270 million by 2020. You can no longer differentiate between small planes and big planes. Planes are planes, they provide connectivity and growth. If you want to encourage growth you cannot continue to have small planes, because in a strongly growing market, you need more and more capacity. So what is the sense in state governments having a hugely unfavourable tax regime?
Then what else changed? The rupee has depreciated. All our payments for aircraft lease etc are denominated in the dollar, that has pushed the cost up immediately. Then look at the airport charges, they have gone up and are amongst the highest in the world. If charges have gone up and passengers may benefit from nice looking terminals, lounges but that has not improved the efficiency for us. Instead the same delays still exit which make us burn more fuel and add to our cost. Then you look at the air routes in India due to the no-fly zones you have to fly longer routes and burn more fuel. The no-fly zones were put into place during the British rule in the 40's. If you have direct air routes, you save time, you save fuel, you save costs, and lesser emissions. Then govt has put service tax, state sales tax are there only. Bottomline is there is nothing which is a low-cost carrier in India any more. All costs are the same, the routes are the same. The only difference is the frills.
KFA strategy. Some of the carriers in India have ordered huge number of aircraft. All of them are single-class, high density planes, they charge low fares - I will never call them low cost. Can you imagine how much these guys are going to fight among themselves? Now see where I am taking my position. I am not interested in scale and size, to be as big as them. My first thing is that I must be profitable and viable. With India's economic growth where it is today, there has to be growth in the SME segment, there has to be growth in the corporate segment, business has to grow, otherwise where will economic growth come from? We will focus on that segment. That may not have spectacular 25% growth but at least that will have 15% growth. I am quite happy with that. Why? Because my yields are better thus. People are ready to pay for the convenience of being served a nice hot meal rather than they having to pay on board to eat something. People want a lounge facility, people want frequent flyer miles, people want the benefit of network connectivity. Therefore people are willing to pay more. That is the market we are considering. KFA Red was basically the Deccan aircraft, single-class, high density where I also had to be in the no-frills space. Rather than that we are reconfiguring all those aircraft and we are saying that we will have the dual cabin and our yield will be much better. Because we are saying that we get Rs 700-1000 additional per passenger, we spend Rs 200-250 on meal, we are still pocketing Rs 500-700 more than anybody else. That is the right way to be. What happened in this high cost environment is that AI started offering very low fares. Why did AI offer low fares because there was some press article which said that AI is rapidly losing share. So the then CMD in order to show that AI's performance was improving a lot lowered fares without realising that the cheaper that AI sells the more losses it makes. Because it is high cost airline.
Suman: Elaborate on the sector that you are focusing on…
Mallya: I am saying that if you take a pyramid, the bottom of the pyramid is where people are transferring from bus to plane, train to plane. This is where the LCCs are playing because their aircraft are for the low-fare product. There will be a bloodbath there. If you go up the pyramid, up the value-chain, there is the business class passenger, the J class passenger who's on the top, then there people who are not paying for the J class but who are paying for full-service economy, that's the space we want to play in, which is supported by the Indian economic growth forecast.
Geetanjali: How many seats are you looking at with the reconfigured aircraft?
Mallya: Currently in the Airbus 320 we either have 180 all-economy or we have 20 first class - what we call Kingfisher First - and 114 in the back, so 134 seats in all. We are reconfiguring all aircraft to have 8 Kingfisher First plus 156 in the back, that is the total of 164.
Suman: You spoke of a strategic investor…a strategic investor apart from money also brings something else to the table…
Mallya: See, there are two types of strategic investors. Now I am seeing on CNN-IBN which is basically saying that the civil aviation ministry has confirmed FDI. So now it has to go to CCEA, and all the rest of it… This is the first time ever in the last five years that I have seen some spokesman of the government actually say yes - it (FDI) is happening. Which means there will be international airlines willing to invest in the equity of Kingfisher. Why? Because Kingfisher has a huge network in India, which can feed into foreign carriers' flights in and out of India. It is the same thing as the advantage that will accrue to Kingfisher by joining the oneworld alliance. Without waiting for policy change and foreign direct investment, my priority has been to recapitalise the airline with equity and not with more debt. Therefore, I am in discussions with an investor who has made me a proposal and that could be upward of Rs 1,000 crore. I have applied to banks for working capital worth Rs 600 crore from banks, which is secured by current assets. Working capital loans are secured by current assets, that is the meaning of working capital.
Geetanjali: Will you look at something like the Force One deal where fresh equity will be issued to the incoming investor?
Mallya: Correct.
Geetanjali: Your stake will not be diluted?
Mallya: It will be diluted, but it all depends on the price and terms.
Suman: We were speculating about the nature of the investor, but you are saying that you are specifically talking to one person…
Mallya: (We are talking to) one person as in one Group, as in one entity.
Geetanjali: You mentioned that you are open to getting foreign airlines to invest in Kingfisher. They will not come without riders. So how will you ensure that the Kingfisher brand, which is perhaps the most strongest thing about the airline, remains intact?
Mallya: If there is an airline called World One and that invests in KFA then you cannot expect that KFA's name changes to World One. You have global alliances like Star, but the bigger and better alliance is oneworld. Oneworld members are BA, American, Cathay Pacific, Qnatas, Iberia, JAL, they all operate under their own brand name they haven't changed their names to oneworld. So Kingfisher will fly as Kingfisher. In fact, since KFA has a huge brand equity why should somebody want to change it?
Suman: Is the working capital issue closer to a resolution?
Mallya: As you know, every company's working capital is appraised every year by its bankers. Growth requires more working capital, for instance. Here we have higher costs (than most industries), we have growth, then working capital is like an algorithm. It is not just costs, yields, it also the working capital cycles - timing of receipts versus timing of payments. All this constitutes the working capital algorithm. We have a justifiable request to the banks which has been already appraised for an increase in working capital, but that is largely been driven by the increase in the prices of fuel. We have had two consortium meetings (the 14-bank consortium which brought into Kingfisher early this year) and have placed the request before the banks.
Geetanjali: When were these meetings conducted?
Mallya: The last meeting was conducted last Saturday (November 12th).
(Pointing at TV) Yeah - there - aviation ministry - airline FDI
Suman/Geetanjali: Firm on 24% cap
Mallya: Whatever the case may be.
Suman: 24% is okay enough…
Mallya: There's nothing wrong with 24%, at all.
Suman: So aviation investors will be okay with a 24% cap?
Mallya: Why not? At the end of the day 24 per cent is a significant shareholding. This is all very hypothetical that I will block a special resolution. That is the only benefit that a 26 per cent gives you. But who would want to have such a dramatic game changing resolution that a 24 per cent shareholder has to object to. At the end of the day when you invite somebody to invest that much money, in your company, you virtually, become his associate. The blocking of special resolution - and what is a special resolution - please read the Indian Companies Act. 26 per cent… special resolution is for game changing stuff. 26 per cent blocking minority is not in the normal course of business. If you invite an investor who will invest 24%... what is the game changing resolution which anybody will pass that the foreign investor must exercise the right of veto. Please be reasonable. Completely hypothetical.
Suman: Do you have at any stage felt that - acquiring Deccan, do you regret that decision?
Mallya: Why? Please, I began by saying that when I acquired Deccan, the stock shot up to 180 rupees. So if the same commentators today, who are criticising me because of their convenience. Because when you are perceived to be in trouble, every body hammers you harder. The same investment advisors said this was the best thing I ever did. But, let's now forget about what other people are saying. Let me tell you from my perspective. I got, lot of routes and expaded the route network through acquisition of Deccan. Second, I got a lot of parking slots, departure and arrival slots at various airports. Because when Gopinath started Deccan he was the new kid on the block, there were only Jet and Air India. There was still available infrastructure. Now where is the infrastructure. I got hangars. The hangar was very important as Kingfisher could not get hangars. There were no hangars available. So all our aircraft for their C-checks, regular maintenance had to go to Abu Dhabi or Malaysia. Now we can do everything in-house in Chennai. So, its all very well to keep harping on Deccan acquisition. Look it is the same plane. Deccan was a low-fare carrier with 180 seats. All I am going to do is.. the same aircfart, the same plane, all I am going to do is to change to eight plus 156.
Geetanjali: Do you feel you overpaid for the airline, in retrospect?
Mallya: No. Please see what Mr Naresh Goyal paid for Sahara and what I paid for Deccan? I bought a bigger airline for cheaper cost. I bought a bigger airline at a cheaper cost….
Suman: There is a question about shareholder concerns, especially the UB Shareholder and whether you will use UB to bolster Kingfisher…
Mallya: Who has raised this issue? First of all, I want to clarify that there are no shares of United Spirits or my core businesses that is pledged for any Kingfisher loan. Point no 1. Point no 2: Kingfisher loans are primarily secured against Kingfisher's assets. Both fixed assets and current assets. The mother company is UB Holdings, that has put money into Kingfisher. United Spirits and United Breweries are not connected at all with Kingfisher.
Geetanjali: How many of UB's shares in Kingfisher are pledged?
Mallya: No…under the master debt recast agreement terms of December 2010, our entire shareholdings in Kingfisher Airlines only is pledged to the banks. That's part and parcel of the debt recast.
Suman: Is there anything that you would have done differently if you had the last five years to do it again?
Mallya: What could you do differently man? I cannot predict…nobody predicted… the whole economy is in turmoil. Please ask the finance minister, the oil companies, the subsidies, the GDP deficit of the government is all due to the oil prices workldwide. Now if I had a crystal ball to know… I would have thought differently .. but who predicts it?
Geetanjali: There are all kinds of figures bandied about… airport charges etc….
Mallya: But I don't understand. How… is the airline flying, have you bothered to think? You can go on and speculate and on… but the airline is flying. So if you keep saying I owe money and I do this and do this… for instance you have a car… you have a house… you pay your EMIs…now have I a right to tell you… you owe so much for your house… you owe so much for your car? So…I don't get it? I may owe whatever I owe, but I am flying, which means I am paying. So are you suggesting that I am not paying and someone is giving me a free ride? So how is it relevant as to how much I owe? Whatever I may owe or not owe.. keep it to one side. How is it relevant. Why don't you look at the more positive side? Where from thousands of crores of unsecured credit to oil marketing companies, unsecured…I have completely paid Indian Oil, I have completely paid Bharat Petroleum and I owe unsecured Rs 40 crores only to HP. So how much have I paid off? Nobody focussed. But I am not asking people to write my virtues. And say that Kingfisher has paid so much money. I am saying, whatever I owe… so long as I am in compliance of my payment terms… why should there be such a big debate? No I am just asking you…
Suman: I think the debate was fuelled by the cancellations…..
Mallya: See that fact is that we could have handled it better. I admit that… instead of what I thought, people will appreciate that Kingfisher management is taking the correct decision to stop the losses and fly only on profitable routes and cut out all the heavily bleeding routes... instead of that the message was bankruptcy. This is a creation of the media…How wrong could one possibly get?
Suman: There is also a stakeholder who is the passenger, the flyer…
Mallya: Now…let me please address that issue… you are very correct in your questions … that is why I am telling you everything. We pride ourselves in our service standards and service quality. Do you think we would not have reached out? Do you really think we will be so uncaring and irresponsible that we will say we are cancelling your flights… to hell with you? We have gone and contacted more than 90 per cent of all those who were booked to fly with us… rebooked them on other carriers, re-accommodated them on our flights.. other flights.. combined flights as we call them and also refunded with a sincere apology. But we may have not done it correctly for 10 per cent. But unfortunately, the view of the 10 per cent became 100 per cent. Now today - please read this morning's press. One, one passenger is being quoted. "I went to Kingfisher airlines, flight nahi chali…headline news. Now I carry 35000 passengers a day. Did you get 35,000 complaints, 5000 complaints… 10000 complaints? One guy. And you know what is happening now? Geetanjali and Suman…? The public are now using the press as the consumer grievance forum. Anybody has a problem, don't complain to the company don't complain… first thing call the media. And you guys are waiting with bated breath and open arms.. what can I do about it.
Suman: Well now they do not have to come to us.. they tweet… facebook…
Mallya: Ok, I admit and I apologise that cancellations the way it was handled, we could have been done better. I am fully ready to
Geetanjali: That day (November 15th, the day of the press interaction) you had hinted that one of your competitors had a hand…
Mallya: I know whose hand is behind this. I am not going to tell you, but I know. I am not exactly a babe in the woods…Everybody's time will come.
Geetanjali: There are also these policy and regulatory issues which if all airlines go together and approach the government they can be addressed…
Mallya: Two airlines in India want one big airline to collapse, and they are doing everything to ensure that it collapses. It is bit of a contradiction, because they want one airline to collapse so that there is a demand-supply correction and fares will go up, but one of those two is adding more and more capacity every month. I am not naming anybody. And please don't attribute any names to me. I am telling you now.
Geetanjali: No we will not
Suman: We will be faithful to the recorder.
Mallya: You take any other industry, they (all companies) stick together, go together to the government to ask for policy changes, policy reviews, yet they fight like hell as competitors. For me the saddest thing is that our Federation of Indian airlines is a divided house. Though the secy general Mr Anil Baijal is a gem of a man who is trying his best, but we member airlines are not giving him the strength.
Geetanjali: What is the accumulated loss of the airline…
Mallya: That is all there on the website. But once again let me focus on this debt and loss issue…you cannot add loss to debt. Don't make that fundamental accounting error. Debt is a debt. Everybody is focussing on the debt. First check the debt of other Indian carriers operating in India. Check the debt of other international airlines of the same size as Kingfisher. You will find that Kingfisher's debt is not as much of a mountain as you make it out to be. Plus, never forget that we have 9 years to pay this debt. In 9 years where a huge growth is forecast, it is not an insurmountable challenge to pay off this debt. So there is no need to keep focusing on the level of debt. What we are doing because we want to be profitable quarter on quarter, in profit and loss terms, we are cutting all our costs including interest costs. And the focus on interest costs: I would like to clarify when the banks appraised the viability of Kingfisher in December 2010, which is only 11 months ago, it was clearly established to be viable at an interest rate of 11%. With the constant increase in the rates of interest, this has now become close to 14%.
Therefore, we want to reduce our interest burden. One of the way we have thought is that we have cash deposits with our lessors, we want to open standby letters of credit the cost of which is minimal, to the lessors and ask them to refund the liquid cash that is lying with them which is not earning any interest. We will take that Rs 1000 crore equivalent and pay it back to the banks. This means that I reduce my rupee debt by Rs 1000 crore, which means that if I repay Rs 1,000 crore at 14% interest, I immediately save Rs 140 crore. That is all what we are doing.
If the PM of India has very kindly said that he will support Kingfisher and find solutions to our problems, I think that it was very gracious of the PM. I am grateful. However, if you think why, I was not sitting there on Air India One. I was not there requesting him to say something. The fact is that the PM is a renowned economist who understands the importance of connectivity in a growing economy. It is a well-known fact all over the world that civil aviation growth and economic growth go hand in hand. It is not the case of Kingfisher alone. Government has to address the concerns of the whole industry, and ensure its viability. It is a very critical infrastructural asset of the country.
Geetanjali: Your competitor during a conference call with analysts - this was asked even during the press interaction - did not hesitate to criticise KFA. There was talk of how your bet of moving out of the low-cost business was all wrong…
Mallya: See, if I was not a threat they would not have talked about me. It is only because they think I am a threat that they talk of me. And they try to justify their strategy which is different from my strategy. Why should I get involved in all this? I have facts and figures to prove that my strategy and model is better. Maybe when all these low-fare airlines introduce more and more capacity at the bottom-end of the market, my worthy competitor may hurriedly change their mind.
Geetanjali: You have been in the aviation industry for long. When you say that you are moving out of the low-cost category...there have been carriers like AirAsia who have managed to shake the wind out of full-service airlines like even Singapore Airlines…
Mallya: What is AirAsia's competition today? There is no competition. There is Malaysian Airlines which is like Air India. There came along my good friend, Tony Fernandes, with a good product, cheap fares and captured the market. Now he is controlling Malaysian Airways itself. Malaysia is a 14 million market, this is already a 50 million market, going to 275 million by 2020. You cannot compare the two. The scale, the size, the geography, all are different. That is why you cannot operate a low-cost airline in the country.
Suman: You mentioned interest costs. Are there any other areas of cost that you are targeting?
Mallya: I would like to pay the Airport Authority of India in the full and avail of the 15% cash discount.
Suman: So what is the backlog like…
Mallya: Whatever it is, if you pay cash you avail of the discount. That is better working capital management.
Suman: Any progress on the plans to import fuel directly…
Mallya: This was a subject of great debate on TV today (November 17). I am aware of the present rules where the import of fuel has to be canalised through the Indian oil companies. However the DGFT has granted exemption in other cases in other commodities. Our objective is that cost of aviation fuel is critical to the viability of airlines. On these grounds we have applied for direct import of fuel. Somebody came on TV said this is all bogus. If he (Vijay Mallya) brings fuel, where will store it, how will he use it? It is very simple. I import the fuel to JNPT. I have already spoken to a major oil company, who is willing to take it to the airport and pump in a plane for a fee. Not gratis, not free of charge. I have a net saving where the sales tax is an average of 25%.
Suman: You will not need to store it?
Mallya: It will move from the ship to JNPT and then the oil company takes over. The oil company is doing pretty much the same thing.
Geetanjali: Oneworld has stuck by you through these turbulent times…
Mallya: Yes, we have the product and connectivity, which will benefit the alliance. Oneworld is looking forward to welcoming Kingfisher Airlines on board. We will be joining the alliance in February.
Suman: Thank you so much, Mr. Mallya.
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