Why Kingfisher Airlines is right in asking for a bailout

The public indignation on Kingfisher Airlines asking for a bailout is unwarranted.

Firstpost.com’s consensus is clear: Do not bail out Kingfisher. Newspapers, blog sites, comments on the net etc. are all about why the airlines should not be bailed out.

Let the market do its work, they say. Many have become personal, bringing the man behind Kingfisher Airlines, Vijay Mallya’s flamboyant lifestyle, into focus.

Kingfisher Airlines is deep in the red and does not have money to pay for aircraft fuel or its own staff and has cancelled flights due to the cash crunch. The company has approached the aviation ministry for help and this is causing the public outcry.

The markets have already punished Kingfisher.The market capitalisation of the company is down 78 percent over the past one year, and its shareholders have suffered for remaining invested in the company.

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[caption id=“attachment_131023” align=“alignleft” width=“380” caption=“The market capitalisation of the company is down 78 percent over the past one year, and its shareholders have suffered for remaining invested in the company. Krishnendu Halder/Reuters”]  [/caption]

Its lenders, including large banks such as SBI and ICICI Bank, are assessing the impact of Kingfisher going bankrupt on their balance sheets and, by all indications, the impact is very minimal - at less than 0.15 percent of total assets.

The company can very well close down operations and declare bankruptcy and no one will be the worse for it except passengers who have booked their flights and will have to pay higher airfare to rebook them on other airlines.

Kingfisher’s employees too will suffer as they will lose their jobs and not be paid their dues.

Presenting the case for a bailout

The question, is why should Kingfisher not be bailed out?

India and the world are living in an era of bailouts. India bailed out many sectors hit hard by the market collapse in 2008, including the financial sector.

The EU (European Union) is bailing out Greece, Ireland and Portugal as these countries are sinking under debts. The US bailed out banks and investment banks, as well as automakers in 2008. The UK bailed out banks and mortgage lenders in 2008 as well.

Kingfisher will be right in feeling that it’s being made a scapegoat when everyone has been bailed out. Banks are continuously restructuring loans either of their own free will or due to pressure from politicians.

The Reserve Bank of India will never let any bank fail in this country as seen in the case of GTB (Global Trust Bank). Satyam Computer, when it declared its fraud, was not abandoned to sink. The government got involved and made sure that it got taken over.

If the government does not bail out Kingfisher, it should have a clear-cut policy of not bailing out any company that is in trouble.Then letting Kingfisher die will make sense.

However, letting Kingfisher die and then bailing out the next company in trouble that has close political connections will leave the public fuming.

Yes, bailouts are morally wrong in a free enterprise economy, but are economies really fully ready to let markets take their own course? Of course not.

Arjun Parthasarathy is the editor of www.investorsareidiots.com, a web site for investors.