Saturday, March 24, 2012

Vijay Mallya's looking at TINA to save Kingfisher Airlines

Kingfisher Airlines chairman Vijay Mallya speaks to the media after a meeting with EK Bharat Bhushan, director general of civil aviation, on Tuesday. The DGCA had summoned Mallya after Kingfisher again reneged on its revival plan.

When Vijay Mallya entered the office of the Directorate General of Civil Aviation, the country's aviation regulator, in New Delhi last Tuesday, his face was the picture of stress, his steps slow and shoulders drooped. Taken together, those signs told the story of his crisis-racked airline.

The DGCA had summoned Mallya, chairman of Kingfisher Airlines, asking for an explanation on the state of the carrier, which these past few months has become synonymous with scores of flight cancellations, a pile of debts and frozen bank accounts. The threat of losing the permit to fly hung heavily in the air.

When Mallya emerged after nearly two hours, he managed to smile through the impromptu press conference forced on him by a waiting phalanx of journalists. There was no move to cancel Kingfisher's operating licence. The liquor baron had managed yet another reprieve from the authorities, or so it seemed.

What was unsaid that day was that Vijay Mallya had assured authorities that he will make an announcement crucial to its future on March 27, according to a senior government official familiar with the matter.

Make-Or-Break Time

The announcement could be related to the infusion of equity or entry of a strategic investor, the official said. If a credible plan was not presented by then, the authorities could "pull the plug" on Kingfisher, the official added.

A Kingfisher spokesman has denied that Mallya had given any commitment about a date.

But truth be told, Kingfisher is fast running out of time and ideas as the patience of authorities wears thin. On Tuesday, civil aviation minister Ajit Singh put the onus of revival squarely on Mallya, holding out the prospect of legal action if Kingfisher fails to clear dues and taxes.

Financial analysts and industry experts say the government will be forced to act if the airline fails to come up with a revival plan quickly. An ICICI Direct report earlier this month said the promoter will either have to infuse significant funds into the company or bring in strategic partners with infrastructure for ATF (jet fuel) import or some foreign carriers to survive.

To say Kingfisher is in dire need for cash is to put it mildly. It has accumulated a total debt of Rs 7,057 crore and losses of about Rs 6,000 crore. The airline's bosses have repeatedly assured that talks are on with potential investors, but no name has arrived on the scene. Mallya again said on Tuesday that Kingfisher was working on several recapitalisation initiatives.

Kishor Ostwal, chairman of CNI Research in Mumbai, said Kingfisher needs an equity infusion of at least $300 million immediately. "That is the only option before the airline."

Investment by a foreign airline looks unlikely because the government is yet to clear the proposal and no airline would be interested given Kingfisher's poor state, according to Ostwal. So Mallya would have to sell stake in one of his companies in the liquor business and pump the money into Kingfisher, he says.

Safety Issues

In any case, Mallya must come up with a rescue act and soon, according to analysts. Already, the government has hardened its stance against Kingfisher after criticism that authorities have failed to act despite the airline reneging on promises repeatedly.

Mohan Ranganathan, a former pilot and air safety consultant, said the DGCA is not enforcing rules. "Scheduled carriers cannot be cancelling flights the way Kingfisher has been. Earlier, Kingfisher executives applied for a full schedule although DGCA officials knew that it had only 28 planes in possession." (Kingfisher earlier had 64 planes; the rest were grounded or confiscated by aircraft leasing companies).

Ranganathan said Kingfisher's troubles are also fraught with safety issues despite its curtailed schedule for the summer with just 20 planes and an end to all international flights. "With staff not being paid salary [since December], their focus is not on the job, but the financial shortfall. It just takes a delay of a few seconds for a major disaster to take place."

Grasping At Straws

For its part, Kingfisher plans to run as a smaller, leaner airline without the frills for now, until equity comes in, according to a company insider. This person, asking not to be named, dismissed talk about not finding an investor. "There is value for any airline, be it Jet [Airways] with 50 planes, Kingfisher with 20 planes or GoAir with 10 planes. The question is what would be the valuation and who will invest."

It will have to be a strategic investor, the person said, adding that "we have ruled out a financial investor". "Two international airlines are interested. But for that, rules have to change."

The person was referring to a government proposal to allow foreign airlines to invest in Indian carriers. Finance minister Pranab Mukherjee said the government was considering the proposal. But analysts ask: "Will Kingfisher be around until then?"

The delay in FDI is only one of the many challenges that Kingfisher faces. With its coffers empty, the airline is hard-pressed to operate flights. Cancelled flights are keeping passengers away, which in turn means even less cash to fly. Put these problems together, it is easy to see why finding an investor has been difficult for Kingfisher's bosses.

Low-fare Avatar

But the airline still seems to have a few tricks up its sleeve. To get around the stigma of cancellations and fly anyhow, Kingfisher is offering the cheapest airfares in India (see India's New Low-Fare Airline). That begs the question: who is buying the airline's tickets? Cheap or not, planes have to eventually take off. In Kingfisher's case, there is no surety there.

Hriday Daswani, owner of Dynasty Tours &Travels in Mumbai, says the people flying Kingfisher booked tickets a couple of months ago. Kingfisher is also finding passengers in routes such as Delhi-Dharamsala and Delhi-Dehradun where it has a monopoly, she says.

But Daswani says on other routes, people are switching to an alternative airline like Indigo or Jet. "People hesitate to book a Kingfisher flight despite the lower fares," she says, adding that she has stopped recommending Kingfisher to passengers.

"There is too much stress not just for me but also passengers. With the holiday season here, no one wants to get stranded at the airport." Daswani says Kingfisher employees are not helping. "They just throw up their hands in despair instead of helping the passengers find another flight."

Another travel agent who sells Kingfisher tickets in bulk says passengers are offered two tickets. "Say, a ticket for a Kingfisher flight that takes off at 9 am for Rs 4,000 and an Indigo ticket for 11 am for Rs 6,000. If god willing, the Kingfisher flight does take off, the Indigo ticket is cancelled."

Kingfisher is also winding down operations in several routes. There are no flights on routes such as Delhi-Hyderabad, Delhi-Kochi and Kochi-Agatti Island.

Clock's Ticking

Despite mounting evidence of Kingfisher's desperation and calls for action, analysts and experts say it is not easy to shut the airline.

CNI's Ostwal says the government is in a dilemma over Kingfisher's fate because of its unwavering commitment to Air India, the distressed national carrier that the authorities are propping up with taxpayers' money.

There is also the issue of putting Kingfisher's more than 7,000 employees out of work and loans to the airline by government-owned lenders turning bad.

What about Mallya putting the airline on the block? "He will not sell. The valuation is quite cheap," says Ostwal. "Not that there are many takers."


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