Mallya may be trying to save himself rather than Kingfisher

It’s time to put the lights out for Kingfisher Airlines. All the evidence points to the airline becoming unrescuable, and Vijay Mallya is in danger of not only losing the airline, but his core liquor business as well.

It is crystal clear that Kingfisher is afloat only because of Mallya’s political clout rather than any economic logic. According to a report in The Indian Express on Thursday, as early as last November, the Director General of Civil Aviation (DGCA), the aviation regulator, had found good enough reasons to cancel its flying permit. But, strangely, a negative financial audit was buried and replaced with something less damaging to the airline’s ability to fly.

Apparently, in a November 2011 audit, the DGCA found that the airline had cancelled more flights that what it reported to the regulator, that more pilots had resigned than disclosed, that the airline had announced a flight schedule based on 57 available aircraft when 20 of them had been ground (some for two years), and that lots of flights to the north-east had been cancelled without disclosure.

More from Business

Hyundai India’s Rs 27,870 crore IPO oversubscribed by 2.28X, largely driven by institutional investors How Indian fintech startups are driving Malaysia’s UPI-like digital payments revolution

But a December re-audit made less damaging observations. Among these changes: there was no mention of flight cancellation data; the duration of grounding of the 20 aircraft had been excluded from the report; and cancellation of flights to the north-east was not mentioned.

The Express report also says that former DGCA EK Bharat Bhushan was not aware of the first report, and this points to the possibility of a cover-up.

[caption id=“attachment_412110” align=“alignleft” width=“380”]  Kingfisher’s debt and accumulated losses are higher than the most valued company in the Mallya stable - United Spirits, with a value of over Rs 11,000 crore. PTI[/caption]

Impact Shorts

More Shorts

Tata Harrier EV vs Mahindra XEV 9e: Design and road presence compared

As Trump weaponises tariff, Fed sees a bigger worry: Not jobs, but rising prices in America

Quoting unnamed sources, the Express says: “This (first, and more damaging) report, however, was not forwarded to then DGCA chief EK Bharat Bhushan. The second (more benign) report was forwarded to Bhushan but not shared with the team which conducted the first audit.”

Read along with the fact that Bharat Bhushan was given his marching orders (allegedly because he had issued a negative report on Kingfisher’s safety aspects), this revelation suggests that Kingfisher is surviving only due to its promoters’ reputation or clout.

A Business Standard report on Thursday notes that Mallya’s holding company, United Breweries Holdings, has now begun to face the heat. Lenders have begun to call in the guarantees to Kingfisher given the UB.

The pink newspaper notes that UB Holdings is up to its neck in trouble with its Kingfisher exposure, which includes “investment in equity of Rs 2,114.28 crore, corporate guarantees to banks/aircraft lessors of Rs 8,919.86 crore, loans and advances of Rs 1,814.14 crore and other receivables of Rs 165.62 crore.”

That’s an exposure of Rs 13,000 crore for a holding company with a market value of less than Rs 600 crore, in which Mallya has a controlling interest of 51.5 percent.

Worse, with Kingfisher’s own market value at less than Rs 700 crore (the share prices in now a measly Rs 8.46) it is clear that the Kingfisher share is not worth the paper it is printed on. Of course, in a dematerialised world, there is not much paper shareholding left, but Mallya has dematerialised shareholder value to zero anyway.

Since 90 percent of Mallya’s 36 percent holdings in Kingfisher have been pledged to lenders, it means it is the bankers who effectively own Kingfisher. And with each passing day, there is less and less chance of Kingfisher being able to repay them fully.

Once again, this proves that it is Mallya’s connections that are helping him ward off a more hostile attitude from bankers.

Even though Business Standard reports that some of the guarantees given by UB Holdings are being invoked, bankers have not moved to seize full control of the airline, sell the assets and try and recover at least a part of their loans. If they did, Mallya would lose control of a big chunk of his empire, since a lot of these shares have also been pledged to banks.

Here’s why Kingfisher cannot really be rescued.

With loans of Rs 7,500 crore and accumulated losses of a like amount, any investor will have to take on a burden of nearly Rs 14,000 crore. This is more than double the market value of the entire listed airline stocks in India. For less than a third of that money, an investor would be able to buy the far-more-profitable Jet Airways group. With that kind of money, it would be easier to start a new airline instead of being stuck with Kingfisher and its negative image. So FDI in aviation won’t help Mallya - unless some investor has a death-wish.

Kingfisher’s debt and accumulated losses are higher than the most valued company in the Mallya stable - United Spirits, with a value of over Rs 11,000 crore. But Mallya owns only 28 percent of this company. Selling it would not bring him even half the money he needs to save Kingfisher.

On Wednesday, Mallya talked unconvincingly about recapitalising Kingfisher, “ FDI or no-FDI”. This shows him as either a poor businessman or a bluffmaster. Using his own money to recapitalise Kingfisher means jeopardising more group resources at a time when the lenders are already asking UB Holdings to fork out more on behalf of Kingfisher.

Under a UB Holdings-Kingfisher agreement, the latter has to pay UB Holdings Rs 13.48 crore as commission for providing corporate guarantees, but Kingfisher is hardly in a position to pay anything. UB Group is sitting on dud IOUs from Kingfisher.

To save Kingfisher, Mallya will have to sell almost all his other businesses. The question he has to ask himself is whether Kingfisher is worth so much to him.

However, there could be a perverse logic to Vijay Mallya’s madness. Maybe he has pledged most of his other viable businesses to keep Kingfisher afloat; keeping it alive with political clout may be his best bet to keep himself afloat.

Maybe, Mallya is not trying to save Kingfisher. He is trying to save himself.