Will Kingfisher fly again?

Has the end-game begun for Kingfisher Airlines? After flapping its wings about and trying to stay airborne for the better part of the last two years, Kingfisher has finally run out of fuel and seems headed for a belly landing. The government has sent a notice to the airline asking why its flying licence should not be cancelled on grounds of safety.

The airline needs urgent funds to pay up dues to banks, employees and the government and to cover at least a part of its accumulated losses estimated at Rs.7,200 crore. Yet, with banks refusing to touch the company with a bargepole — rightly so too — and Vijay Mallya unable to find a partner, Kingfisher appears headed for infamy as one more in a long list of badly-run free-market enterprises that bit the dust. Unless, of course, if Mr. Mallya brings in his own money, something that he has not shown any inclination to do until now.

Hubris in the sky

The reasons for Kingfisher’s predicament are all well documented — over-ambition to lord it over Indian skies, bad strategy in acquiring Air Deccan and competing on price in an environment of rising costs, especially of fuel. That the airline has never reported a profit ever in its 7-year life says it all.

Kingfisher is probably paying a just price but what about its stakeholders — employees, shareholders, customers and lenders — who will also now suffer? Employees have been working without a salary for six months now and the human tragedy was highlighted by the suicide of an employee’s spouse last week. What is the answer to these employees and why is the government not leaning on the company to find funds for at least salaries?

Lenders have agreed to release Rs.60 crore from an escrow account to pay salaries but the company needs more than that to pay the six-month dues to its employees. Though there are other airlines where Kingfisher’s employees can possibly find jobs, the fact is that they have to under-sell themselves as they will be bargaining from a position of weakness.

Collateral damage

Customers are the next big losers. Kingfisher, at its peak, had a market share of around 23 per cent but it is down to a little over 3 per cent now. It used to fly to more than 25 destinations in the country with 63 aircraft; that is now down to just 10 planes. When such a significant player goes down, the impact on passenger fares can well be imagined. Indeed, fares have been rising steadily over the last few months as Kingfisher gradually pulled out of some destinations and routes and with holiday season approaching now, they are bound to rise further.

Shareholders may well be holding worthless paper in the context of the ongoing troubles. The Kingfisher share was trading close to Rs.200 in early-2008 but since then it has been on a secular downtrend and is now worth just Rs.13.25, which is an improvement over the single-digit prices that it was trading at in August.

The biggest losers of all though will be the lenders who restructured their loans in early 2011. Out of the then outstanding bank term loans of Rs.4,263 crore, as much as a third or Rs.1,303 crore was converted into shares. A consortium of lenders led by State Bank of India got Rs.750 crore worth of equity shares and Rs.553 crore of preference shares. This granted banks a 23.37 per cent stake in Kingfisher. Notably, the Kingfisher share was valued at Rs.64.48 in March 2011 for the purpose of conversion against the then prevailing market price of Rs.39.90 a share. So, the banks lost straightaway. With the share at Rs.13.25 now, the loss to banks from this conversion of loans to equity is Rs.596 crore. Simply put, the banks will get just Rs.154 crore if they were to offload their entire stake in Kingfisher in the market now. Of course, this is assuming that they will find buyers, which is rather optimistic! Besides, the Rs.553 crore of preference shares were supposed to be converted to equity during a planned GDR issue, which may never happen now. Banks also gave other concessions such as lower interest rates. It is interesting that the airline never really flew out of the turbulent zone despite this bailout.

Too big to fail?

Lobbies have been and still are at work trying to convince the government to push banks for another bailout. The banks are clear that it is not an option sitting as they are on big losses already. But it begs the question: why should the government use taxpayer money to rescue a private commercial enterprise that has been run to the ground by a combination of inept management and circumstances? If at all anybody is to be rescued it is the employees and then the banks. Kingfisher Airlines should be allowed to fail if only for reasons of flight safety. The DGCA has questioned the maintenance of the aircraft and their airworthiness. There can be no compromise on this score.

raghuvir.s@thehindu.co.in