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Fishing For A Bailout


From my piece at Yahoo!

Much has been made of the fall from grace of Kingfisher Airlines. The King of Good Times — the Kingfisher brand byline — is a Pauper of Bad Times, it seems. The largest airline by market-share (according to its own investor presentation, Oct 2011), Kingfisher recently cancelled a large number of flights from November to January, and rumours persisted that the airline’s planes were seized by the rental companies for non payment of dues.

In its investor presentation, Kingfisher reveals that it has over 6,000 cr. of debt. This is after a debt recast earlier this year, when more than 1300 cr. of bank debt and 745 cr. of promoter debt was converted to equity, at a price of Rs. 64.48 per share. Apart from the debt, there are payments pending to oil companies for fuel, to rental companies for aircraft leases, and, it seems, even to pilots for salaries.  Altogether, on the deep-in-the-doo-doo scale, Kingfisher ranks at "Neck".

At the current market price of Rs. 25, the shares of the company are worth — in entirety — just 1,250 cr. , less than the amount of taxes a buyer may save because of the accumulated losses (of over 3300 cr.) that Kingfisher has. The stock price crash means the banks will take a big hit on their portion of equity, as well as losing out on the debt portion if Kingfisher becomes a full fledged defaulter.

The calls for a bailout seem to be largely media generated, as the flamboyant Vijay Mallya has stated that he requires no public help. There are others, like the ex-Infosys-biggie Mohandas Pai, who write that Kingfisher deserves a bailout anyhow (note: it’s tongue-in-cheek, I think) because:

  • Airlines don’t get to fly profitable routes abroad unless they finish five years of operations.
  • ATF prices are increased randomly by the oil companies, to subsidize those that use Diesel or Kerosene.
  • Further, high taxes levied by states on ATF fleece airlines even more.
  • Airlines are forced to operate unprofitable smaller routes by the DGCA
  • Finally, that Air India is being bailed out by the taxpayer, and it undercuts everyone on price.

Now, Kingfisher does fly abroad and still lost money (surprise!) — the last quarter saw a loss of Rs. 76 cr. on the international operations alone. So that excuse can’t be applied to Kingfisher, and the rest of the pack seems happy to be losing money on local operations.

ATF prices are as much a problem as petrol is for us — petrol prices are unreasonably high, and are taxed heavily by states. But we, the petrol car drivers, will not get a bailout, regardless of how much debt we have.

The unprofitable route problem is an old one — and they aren’t entirely unprofitable. The hugely travelled sectors — between metros — are classified as Category I, while the less profitable routes are Category II and III. Much of the North East is covered in Category II, which needs air transport because of the long trek around Bangladesh that would hamper road connectivity. Now if there was no obligation to fly unprofitable routes, these areas would not be served, and they won’t develop; which was indeed the situation when only Indian Airlines used to fly there, and people had to book months in advance. Even now, all airlines don’t need to fly the other sectors — an airline that flies in excess of its own requirement can sell such excess to another airline, which makes it less stressful. And such rural obligations exist in other situations as well — telecom operators, for instance, need to have a strong rural footprint.

The biggest issue is that of Air India. Our government will infuse more than 6,000 cr. into the ailing airline, which uses the money to fund losses that it makes by undercharging customers for their travel. This hurts the remaining players and in any other sector, is called "dumping" — an anti competitive act, deemed so purely because of the seemingly unlimited government support. This can’t be allowed to continue; with the privatization of India’s airline industry, we must have all players private as well. (And I want no stake of the government in any bank either)  Out socialist mentality forces us to think of all those poor people who work for Air India — where will they go? I ask them now — where will the employees of Kingfisher go? And Spice jet? And Indigo?

Air India won’t learn if it is bailed out. It will continue to undercut other players as long as there is an implicit taxpayer backstop. The answer could be to privatize them, at ANY price, in a transparent auction.  Or to let them die.

But either ways, the answer cannot be to help Kingfisher with public money. The "let them die" argument must apply to Kingfisher as well; which ironically became a public company after a merger with the ailing Air Deccan, a low cost airline that ran out of money before Mallya took it over. That was a private buyout — and surely, Kingfisher can find a private player to buy it out?

Public funded bailouts are bad. When America bailed out their banking system, they transferred public money to private hands — the grubby hands of the bankers. This is now causing outrage as part of an Occupy Wall Street movement. But bailouts continue in Europe where they are now rescuing banks, governments and nearly anything wearing a suit that screams for help. The standard threat is that if we don’t bail XYZ out, the system will suffer. But it’s now apparent that the system will suffer anyhow, in a much deeper way  — a few years down the line. The trade-off then is about whether you want some pain now, or more pain later; and given the age of people that seem to make these bailout decisions, they just want to postpone the pain until after they’re dead.

But all of us don’t have that luxury; we need to put a full stop at some point. The question is: is Kingfisher at that point?


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