A bailout for Kingfisher Airlines?

In view of the use of taxpayers’ money, if I were asked the question whether the Indian Government should bail out the airlines, I would say ‘yes’. This way the taxpayers’ money would be put to better use than the current use in funding corruption activities of the politicians.

However, keeping the facts in view, the airline would not need a bailout. Mr. Vijay Mallya himself has reportedly said that he has not asked ‘the government to dip into the taxpayers’ coffers to bail out Kingfisher’. He has further added, “We’ve never done that; we will never do that.” Source: http://tinyurl.com/bwl3k6j

Having been a Banker, I have seen through many restructurings for various big names in the industry. There have been crisis earlier and various industries have suffered and the Banks have restructured debts to help the companies sail through these situations. This time around it is the airline industry which is suffering because of India’s slow growth, high inflation and high fuel costs. The crisis has hit Kingfisher harder because of its heavy debt burden and possibly higher interest costs. Still, a restructuring is definitely possible and as is known Kingfisher’s 13-member consortium is considering it. A word of caution could be stricter covenants in view of the fears that Mr. Mallya may have mismanaged the airline (which remains to be proved!).

Kingfsher airline is a part of the UB Group, a group that has access to deep pockets. On a personal front, Vijay Mallya himself (also referred to as India’s Richard Branson), who is worth US$ 1.1 billion according to the Forbes magazine, has the credibility to get the airline back on track. If the Banks were to restructure Kingfisher’s debts and put a covenant of a significant promoter’s contribution, Mr. Mallya who owns an IPL team and a Formula 1 team could easily bring it in. Mr. Mallya can raise enough money if he wishes to and coupled with the in-principle approval of 24% FDI in the airlines sector, he has yet another route to solve the cash problems.

I feel that the entire issue of Kingfisher being cash-strapped is blown out of proportion partly due to the involvement of its promoter, who is a sought-after public figure for the media. Kingfisher, in my view, does not need a bailout; all it needs is a restructuring of its outstanding debts which is the normal course of action that the Banks take for any company hit by temporary trends in the industry. Instead of debating on whether or not to bail out Kingfisher, the Indian Government would benefit from rationalising fuel prices. Cost of fuel as a percentage of operating costs is apparently 40% for Indian airlines compared to 20% for foreign airlines. A question here: how cruelly this affects the competitiveness of the Indian airlines?

I also read on the internet that airlines cater to the top-end of the population and therefore is a luxury and in this era when the focus in India is apparently ‘aam-aadmi’ (general public); Kingfisher should not be given any help. I completely disagree! Airlines are no more a luxury for the top-end of the population but equally caters to the middle income group (the ‘aam-aadmi’). Moreover, the airlines are mainly used by all business travellers, which definitely fuels the economy of the country.

With the State Bank of India and the consortium giving approval for restructuring, Kingfisher shall hopefully bounce back soon. But, even if it does bounce back, will Kingfisher be able to sustain it or will the Banks get into a debt trap? As I finish this piece, I read news quoting Jet Airways’ auditors warning the company to raise funds or generate cash flows to meet its future obligations!

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Sovereign CDS are dead! Long live sovereign CDS!

Sovereign CDS are dead! Long live sovereign CDS!.

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The US crisis and the EU crisis

I have recently visited the United States and heard some learned people talk on the 2007 financial crisis vs. the more recent EU crisis. It has been an interesting to explore this subject while on this trip.

I was definitely taken by surprise when I heard that America’s crisis was only event driven (housing bubble and the two wars are the events referred here!) while the EU crisis was a classic debt problem! America’s problem can be solved easily. This, given the fact that US is still reeling under its problem of recession & unemployment and that it will take approximately 10 years to achieve 5% growth, was interesting to note!

Quoting from the Economist:
‘Americans nervously ridiculing Europeans who may profoundly influence their economic fortunes. One thing I do want to note is how the euro-zone crisis has changed the flavour of much American “oh, those silly Europeans” criticism—not so much Mr Drum’s, my colleague’s or Mr Krugman’s, but the kind of stuff you encounter in conversation. The standard critique used to be: “Oh, those silly Europeans, when will they overcome their separate working cultures, labour markets and fiscal policies and come together in one big monetary and economic union like we have in America?” Now, the critique has shifted to: “Oh, those silly Europeans, how could they have thought they would ever be able to overcome their separate working cultures, labour markets and fiscal policies and come together in one big monetary and economic union like we have in America?” Countries will obviously never stop finding ways to make fun of each other, but it’s interesting from an intellectual-history point of view to watch how the ridicule can shift polarity over time.’
-M.S. June 17th 2011

Should I call it sheer pride or competition?

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Corporate Responsibility- Is it a farce?

In the last few months, I have attended a lot of discussions on Corporate Responsibility and I keep wondering on the importance of this topic in our lives. Corporate Responsibility is an interesting topic and I have got very keen on the subject. However, I fail to understand why the topic has become all that important in the last few years. I have been told that the topic of Corporate Responsibility in its modern form has  existed since the 1920s, if so, why has it gained its importance only in the last few years?

Yes! One obvious reason is the advent of social media and the information overload. But there is one more reason which I feel is not discussed. It is the growth of the developing world which probably makes the developed world insecure about their position. A very interesting point raised by a colleague during a discussion was in the developed world, people can easily talk about abolishing child labour while in the poorer developing countries where the poor have to decide whether to spend money on providing education to their child or to employ the child to earn money, the need for money wins and results in child labour. Its not their will but their need.

Another question that I keep wondering about it whether Corporate Responsibility is the means or the result? The Corporate world talks about being responsible and doing things to adhere to their Corporate Responsibility Charter. But is it really done for the betterment of the society or for their own competitiveness? Are these measures not taken as innovative measures to stay competitive and low cost producers? When the main objective is profitability, why is it window-dressed and marketed as Corporate Responsibility? I agree that their are firms who strongly follow their Corporate Responsibility charter but if these same firms were to lose their profits tomorrow, would they still follow the Charter and stay Corporately Responsible? – A question I would like to explore more about!

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