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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About Prachi Khare

A professional with strong interest in finance, strategy, change management and corporate responsibility.
This entry was posted in My Perspective and tagged , , , , , . Bookmark the permalink.

2 Responses to A bailout for Kingfisher Airlines?

  1. Parul Shah says:

    Hi Prachi, nice article but I do not fully agree with you. Though entire Aviation is in trouble due to many reasons. You may be aware in the past Kingfisher debt has been restructured. Bankers need to be more strict towards stipulated covenants. Tax payers need not be used to bail out Kingfisher. I think if need it should be auction out.

    • Prachi Khare says:

      Hi Parul, thanks for your comment. I agree with you on the point that Banks need to put stricter covenants, if at all they restructure the debt, and have highlighted this in the article as well. As regards taxpayers’ money, I am completely against a bailout using taxpayers’ money but would any day prefer that it be used for bailing out an Indian company (Kingfisher or any other) rather than the purposes its being used currently!

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