Vijay Mallya is a man who is easily ridiculed. A flashy billionaire, he wears diamond studs in his ears and calls himself “King of India”. His private Airbus has his initials inscribed in gold on the wings and the engines, as well as its leather seats and china crockery. His fortune is based on Indian whisky, which bears much the same relationship to its Scotch counterpart as the Royal Challengers, his Twenty/20 cricket team, does to traditional cricket.
But the brash Mr Mallya is no fool. His United Breweries group sells 60 per cent of the spirits drunk in India, and half the beer. And he is not to primarily to blame for the financial calamity that threatens to overwhelm Kingfisher Airlines, India’s second-biggest carrier by market share, which he chairs and controls. Indian domestic aviation is suffering from a serious market failure, caused by misguided government policy, and ministers need to step in quickly to fix it.
The scale of the problem became clear last week, when Kingfisher, which carries just under a fifth of domestic passengers, cancelled 50 of its 340 flights a day. Amid revelations that the airline had been delaying payments to creditors and salaries to staff, it asked the government to help persuade its banks to keep it in the air by extending credit limits.
That looks a tall order. The airline, founded in 2005 and named after one of Mr Mallya’s featureless lager beers, has a debt burden of $1.4bn and is in desperate need of fresh working capital. The Sydney-based Centre for Pacific Aviation, an industry consultancy, estimates that it needs $400m just to stay airborne for three months.
Kingfisher has already restructured its debt once this year, and is under pressure from its banks to raise fresh cash from investors before they will reopen the credit tap. However, plans for a rights issue have repeatedly been postponed as the group’s competitive position has worsened, along with market sentiment.
Losses hit Rs4.69bn ($93m) for the quarter to September 30, the airline said on Tuesday, compared with Rs2.31bn in the comparable period of the previous year. That was in spite of higher revenues, which rose from Rs13.8bn to Rs15.3bn. The shares rose 1.9 per cent after the announcement, but are still down 67 per cent for the year.
Kingfisher is not suffering alone. Jet Airways, the market leader with 26 per cent of passenger traffic, reported a loss of Rs7.14bn for the most recent quarter, while SpiceJet, the fifth biggest carrier, lost Rs2.4bn in the same period. Air-India, the fourth biggest, has not made a profit for four years. Only low cost Indigo, which carries roughly as many passengers as Kingfisher, remains profitable.
There are four main reasons why Indian airlines are in so much pain. One is rising fuel prices, common to every airline in the world. The second is a fall in the rupee, which is down 11 per cent against the US dollar this year, making fuel and foreign currency financing more expensive in local currency terms. The third is the high cost of landing fees and airline taxes, which reflect an old fashioned view of the industry as a luxury service for the wealthy rather than a key element in a modern economy.
In a normal market, the airlines could raise prices as costs rise. But they cannot do that because of the fourth reason: aggressive price cutting by Air-India, which is flush with capacity due to a fleet replacement programme launched in 2005. In its latest move, Air-India cut domestic fares by 15-20 per cent despite expectations that it will lose $1.5bn this year.
The state-owned airline is able to slash prices because it has access to frequent infusions of taxpayers’ funds to finance its operating losses and the high costs of servicing Rs400bn in debt. The airline, which in September was strongly criticised for reckless management by India’s comptroller and auditor general, is currently seeking Rs65bn from ministers, according to Indian media reports.
The paradox is that the airlines’ losses are being built up against a background of soaring demand. Domestic passenger numbers rose by 19 per cent in 2010 to a record 52m, followed by a further increase of 18.6 per cent in the first nine months of 2011. Without the distorting effects of the state airline’s behaviour, this is a market that could be very healthy indeed.
For the government, there are two possible strategies. One is to shut Air-India. That would be politically painful for the Congress-led administration, for which the airline is an icon of state sponsored development. The other is to recapitalise the industry by lifting a ban on foreign investment, which might draw in expansion-minded carriers eager for a share of Asia’s fast growing markets.
Either way, the government must act quickly to stop Air-India distorting the market, before other carriers find themselves in the same dire straits as Kingfisher. That really would be ridiculous.
Kevin Brown is the FT’s Asia Regional Correspondent.
* From http://www.ft.com/cms/s/0/b0678242-0f40-11e1-b83c-00144feabdc0.html#axzz1dq4zGlAb
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