Poster boy of bad loans: Why Vijay Mallya is partly right in playing the victim

New Delhi - Vijay Mallya can play the victim well. After months of being on the run, post the Kingfisher Airlines fiasco which lead to unpaid salaries of staff, dues to state-run banks and other liabilities, Mallya has once again accused the government of making him a “poster boy of bad loans and financial crime”. He has also assured shareholders of United Breweries, where he continues as chairman, that he would fight legally to recover assets seized by agencies over unpaid loans taken to run KFA. [caption id=“attachment_3027750” align=“alignleft” width=“380”]  Reuters[/caption] There is nothing new in what Mallya has said but it bears repetition simply because what he makes out to be regulatory issues leading to the demise of Kingfisher Airlines remain till date. Other airlines continue to complain – in vain – about the unusually high-cost environment which suffocates profitability. In India, aviation turbine fuel attracts the highest taxation anywhere in the world and since ATF accounts for up to half of any airline’s operating costs, running an airline in India is anyway an expensive business which needs large investments and generates meager returns. On top of that, restrictive policies in foreign investments till very recently tied up India’s airlines in a knot since their fund raising and overseas expansion plans were stymied by the government. So the question that begs answers even now, four years after Kingfisher’s demise, is this : Could a more benign policy and regulatory environment have helped arrest the steep decline of this airline, perhaps prevented its demise? At a time when anyone and everyone has been cursing banks and their tardiness in preventing Mallya from allegedly sinking up to Rs 9,000 crore of cash in the airline business, it is hard to even think if the government of the day could have done more to help Mallya destroy public wealth. The popular sentiment is that banks crawled when asked to bend, that the UPA government (under whose rein the Kingfisher demise saga played out) bent over backwards to help Mallya. It is true that Kingfisher would have suffered even if these hurdles had been negotiated since it lacked an efficient management team and decisions were taken arbitrarily. Nevertheless, here is a look at how the harsh policy, regulatory and competitive environment also contributed to Mallya’s ruin. 1) During the UPA regime, there were several discussions within the government over doing away with the 5/20 restriction but this rule has been relaxed only earlier this year. This restriction did not permit airlines to fly overseas unless they had completed five years of domestic operations and had a fleet of 20 aircraft. A dream to launch overseas flights pushed Mallya to make the disastrous acquisition of Air Deccan in 2007-08. Air Deccan would have become eligible to fly overseas in 2008 while KFA would not be eligible even then. After the acquisition, of course Mallya made strategic mistakes which further hurt the combined airline entity. But had the 5/20 restriction been restricted or relaxed earlier, perhaps Mallya may not have considered Air Deccan buy and the KFA saga may have ended differently. 2) Foreign airlines were allowed to invest in Indian carriers with a 49 percent cap in September 2012. Kingfisher had to shut operations just three months later – had this restriction on foreign airline investment been lifted earlier, KFA may have been able to get critical funding from a foreign partner. Several people aware of developments at that time say that Mallya was shocked when a Gulf based prominent airline signed up with a large Indian airline in 2013 despite holding extensive talks with him for funding KFA and picking up some equity in his airline. Mallya was close to signing the term sheet for this deal when his Indian rival steered the Gulf airline and swung the deal in a matter of hours. Earlier this year, the cap on foreign holding (not by foreign carriers though) in an Indian airline was finally lifted but no new FDI proposals have come in since. 3) The NDA government extended more than a helping hand to another private airline, SpiecJet, when was in dire need of cash in December 2014 and had no money to even pay oil marketing companies for jet fuel. Its promoters had indicated they would have no choice but to shut down the airline. The government of the day asked stakeholders like the Airports Authority of India and some oil marketing companies to extend credit to the moribund SpiceJet till it was in a position to make payments. It also quickly reversed an order of aviation regulator DGCA which had banned fresh bookings, realizing that this would generate much-needed cash for the airline to at least pay its fuel bills. If NDA could prevent another Indian airline going bust and leaving thousands of people without jobs, should the previous government not have extended a lifeline to Kingfisher and done the same? 4) Competitive intensity also pushed along KFA towards a demise. By 2007, LCCs were commanding a dominant share of the market and had begun offering tickets at throwaway prices. This eroded players’ profitability. Costs incurred rose sharply but companies were unable to hike fares due to intense competition. This led to pressure on realizations, and profit margins of most airlines slid into the red. Consolidation followed - JetLite (erstwhile Air Sahara) was acquired by Jet Airways, Kingfisher bought Air Deccan and Indian Airlines was merged with Air India to form a new entity. But by 2009-10, continuous fleet expansion by LCCs put further pressure on airlines like Jet and Kingfisher so that the share of the top three players (Jet Airways, Kingfisher and merged Air India ) dropped. Then Jet and Kingfisher introduced low-fare operations under the Jet Konnect and Kingfisher Red brands, respectively. For both airlines, this further complicated matters and worsened their balance sheets. Mallya made many errors of commission as well as omission in the Kingfisher saga but his biggest mistake may have been withholding employee salaries. He was operating in a negative environment but so were other airlines. Policy, regulatory and pricing factors together cannot atone for Mallya’s sins of mismanagement.