Is Kingfisher worth saving? Or should it be a 'bali ka bakra'?

Is the bleeding Indian civil aviation sector worth the candle?

The question assumes significance because of the sharp fall in Kingfisher’s share price (last close: Rs 19.65, resulting in a Rs 3,200 crore destruction of investor wealth in the last one year), and the public anger over the cancellation of so many Kingfisher flights in an effort to rejig its operations.

With Jet reporting a humongous loss of Rs 714 crore in the second quarter, and SpiceJet another Rs 240 crore, the airline’s industry’s woes have landed up at the prime minister’s door.

The accumulated red ink sloshing about is mind-numbing. As at the end of 2010-11, Air India’s losses had added up to well over Rs 20,000 crore. Kingfisher’s were said to be in excess of Rs 4,300 crore, Jet’s Rs 1,850 crore, and SpiceJet’s Rs 720 crore - and they are still racking up losses like never before.

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[caption id=“attachment_129584” align=“alignleft” width=“380” caption=“Vijay Mallya was once famously quoted as saying that there are no low-cost carriers, only low-fare carriers. AFP”]  [/caption]

Civil Aviation Minister Vayalar Ravi has said that he will be talking to the prime minister to re-examine the aviation sector’s problems and also request banks and oil companies to extend any assistance they can to Kingfisher.

While no one can argue that the industry needs some kind of a short-term lifeline, the real question is this: should the government be offering help when most of the industry’s problems are the result of management follies, bad business models and poor strategy ? Should taxpayers and public sector banks be asked to carry the can for their mistakes?

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The answer must be a clear no - and all rescue efforts should be left to bankers who have to decide on the industry’s viability, given that they are carrying most of their debts. Getting the government into the business is not only wrong, but ruinous to both the fiscal situation and the health of banks- which have already been downgraded by Moody’s.

Let’s first dispel a few myths about why our airlines are bleeding.

One, the industry is into a tailspin because of high fuel charges. Not quite. While Indian aviation turbine fuel (ATF) is much costlier than in other countries, this is true for all domestic airlines, and not only the loss-makers ( Indigo is making money with the same fuel costs, having posted its third year of profits). Moreover, the price of ATF is lower than that of petrol at around Rs 60 a litre against Rs 70-74 for petrol in major metros.

Two, airport landing, parking and other charges are very high. Again, the answer is the same as above. If the cost is the same for everyone, you can’t complain since it was so even before you entered the business. Either you are doing something wrong, or you should not be getting into the business at all.

Three, low-cost carriers (LCCs) like Indigo and SpiceJet are undercutting full service carriers (FSCs) like Air India, Jet and Kingfisher. This is true to the extent that increased competition will always dent margins in any business. But the difference is that the low-cost carriers have a well-thought-out business model, and the FSCs don’t. This is where the problem is.

The truth is simple: given the reality of high airport charges and high fuel costs, the only way for any airline to be viable is to look at costs unsparingly and focus on segmenting the market. This means the FSCs had to address the needs of the high fare-paying, upper-end business segment of the market separately from the no-frills travellers for whom only the fare counts.

This is what all the FSCs failed to do. Consider the series of missteps they all did between 2007 and now.

In 2007, both Kingfisher and Jet - under pressure from the LCCs - decided that they must have their own LCCs to combat the latter. Jet bought Sahara and Kingfisher Deccan, and Air India merged with Indian Airlines.

But they didn’t live happily ever after. In what must go down in the annals of branding as acute myopia, Jet called its LCC JetLite and Kingfisher renamed Deccan Kingfisher Red. They broke the cardinal principle of market segmentation and differentiation by reducing the perceptional difference between FSCs and LCCs.

This is the prime reason why red ink is spattered all over their balance-sheets.

The second bloomer was on costs. Vijay Mallya was once famously quoted as saying that there are no low-cost carriers, only low-fare carriers. That was a terrific insight, but partly untrue. There are no cheap airports or cheap fuel sources, but aircraft lease rentals, engine efficiencies, and turnaround efficiencies then became the key low-cost factors determining success. The LCCs got this; the FSCs didn’t.

Moreover, Mallya himself forgot his low-cost versus low-fare insight. If you can’t keep costs as low as a SpiceJet or an Indigo, it follows that you should not compete on fares, but on service. But both Jet and Kingfisher did the exact opposite in their main FSC brands. The fares here were seldom significantly higher than their own LCCs, and given the low differentiation in branding, their LCCs probably cannibalised their higher fare passengers with irrational pricing. In short, Jet and Kingfisher fought on both fares and service - and took enormous financial hits. This is as asinine as it gets.

Clearly, both Jet and Kingfisher are paying the price for their flawed business models and poor strategic thinking. Kingfisher did the right thing by abandoning Kingfisher Red . But one is not sure if this is enough to bring supply and demand for airline seats in balance where fares can be pushed to more viable levels.

The most important thing all promoters forgot was that the airline business is a business. It is not a badge of honour, a flag-waving exercise. Unfortunately, businessmen and governments everywhere have linked flag-carriers to national pride instead of treating them as just a business. This is why most airlines the world over lose money. Even businessmen run airlines like some kind of trophy: Vijay Mallya has pledged everything but his undergarments to keep Kingfisher afloat.

According to The Times of India, apart from Kingfisher shares, Mallya has mortgaged the Kingfisher brand (which includes his best-selling beer), two helicopters, most of his shares in Mangalore Chemicals, a huge chunk of his holdings in flagships United Spirits and McDowells, several group buildings and aircraft, apart from giving his own personal guarantees. He is trying to raise more loans. Is the airline worth writing off your key businesses?

As for Jet, it has pledged its entire holdings in JetLite to banks.

As for the government, it is still holding on to Air India as a family heirloom. The only thing it should worry about is Air India’s employees. The airline itself it seems is beyond redemption, and when last heard of was rattling the begging bowl for a bailout of Rs 43,000 crore.

There’s little doubt that the airline industry needs a bali ka bakra. Since the government is stupidly holding on to Air India despite its non-viability, we need one or two exits to make the rest of the industry healthier. In the past, we have seen East West, Damania and ModiLuft going under.

Now, it may be Kingfisher’s turn. Unless Mallya is so much in love with his airline that he is willing to bet the farm on its revival.