Vijay Mallya quits United Spirits, gets Rs 515 cr: 5 business lessons from the baron's rise and fall

(Editor's note: This is an updated version of an article published on 27 September 2012. The article was written when Kingfisher Airlines was on the verge of collapse and Vijay Mallya was learnt to be in talks to sell United Spirits stake to Diageo.)

Vijay Mallya, the man who lost a lucrative liquor business in pursuit of an airline mirage, is trying belatedly to insulate himself from further losses for his follies with his grounded Kingfisher Airlines, now that many banks have declared him "wilful defaulter".

Mallya has resigned as chairman of United Spirits, now owned by UK major Diageo. He will be paid $75 million (Rs 515 crore) as separation fee. In his resignation announcement, Mallya has also revealed his plans to move to the UK.

"Having recently turned 60, I have decided to spend more time in England, closer to my children," he said.

The announcement comes just days after two state-run banks - State Bank of India and Punjab National Bank - declared him 'wilful defaulter', which makes him ineligible to financial assistance from banks or any other financial institutions.

Mallya has served as such a wonderful example of how not to run a business, that one has to set scruples aside. There are larger lessons to be learnt from his failure with Kingfisher Airlines.

Jim Collins, management guru and author of several best-selling books on corporate success and failure (Built to Last, Good to Great) examines the reasons for why good companies fail in another book (How The Mighty Fall). This book gives five broad reasons why top-performing companies lose their way and collapse to either mediocrity or even bankruptcy.

 Vijay Mallya quits United Spirits, gets Rs 515 cr: 5 business lessons from the barons rise and fall

Vijay Mallya. Reuters

Of the five reasons, the first two relate to the causes of failure (management hubris, leading to over-reach and expansion beyond the core) and the other three to how managements respond to crisis when things start going wrong (denial of risk, grasping at straws for salvation and capitulation to irrelevance).

In Mallya's case, he has not only managed to qualify on all five counts, but has added several bits of foolishness of his own. Jim Collins will have to add a few chapters when he learns about the Mallya mishaps.

Let's begin with Collins' five reasons.

Hubris: Mallya's Kingfisher foray had all the wrong reasons for entry and staying the course to disaster. He entered the business for the glamour it brought to his portfolio (which is why, in any Kingfisher flight, Mallya talked to you directly on the video), rather from any special understanding of competitive advantage. He wanted to be India's Richard Branson, forgetting the success is not easily copied.

In India, given high fuel prices and related costs, success in aviation depends on reducing costs all the time. In contrast, Mallya ratcheted up his costs wherever he could - from handing out earphones to all passengers to serving high-cost gourmet meals in business class.

When he bought Air Deccan, he failed to see that running a low-cost carrier is different from a full service airline. He made the mistake of calling it Kingfisher Red - another pointer to hubris ("my brandname") - and reduced his full-service brand to the level of a cut-price carrier despite much higher costs.

In an interview to the Business Standard in September 2012, much before he sold United Spirits stake to Diageo, Mallya said, "I am a businessman and my businesses are for sale at the right price."

He said that in the context of his flagship United Spirits, not Kingfisher. In the case of Kingfisher, which then had Rs 7,000 crore in accumulated debt and a further Rs 7,000 crore in losses, he missed the bus for getting the right price years ago. As is evident now, he has failed to get the any worth while value for Kingfisher.

Overreach: Mallya's prime folly, which again flowed from hubris, was overreach. The overreach happened at several levels.

First, he failed to understand the difference between running a business with 25-35 percent margins (booze) and one with 1-2 percent margins, or even losses for long periods of time (aviation). He failed to see his managerial limitations in this new business where he didn't have a clue on how to run it.

As we noted before, in the US, the last 30 years have seen nothing less than 50 airline bankruptcies. In India, we have seen at least 10 failures since aviation was opened up to the private sector in the 1990s. But Mallya does not seem to have noticed any of this. He assumed that since he was so successful in liquor, the airline business should be a breeze.

Trying to run an airline like the liquor business was his first mistake. It was also a case of unrelated diversification.

The second overreach related to his expansion with the acquisition of Air Deccan. Despite the odds, the fact is Mallya did create the best airline brand in Kingfisher. Business passengers were shifting from Air India and Jet in droves to Kingfisher, thanks to Mallya's no-expenses-spared approach to Kingfisher First Class. But when he suddenly decided that he wanted size and scale, he bought Air Deccan at a huge premium (Capt GR Gopinath's airline was roughly where Kingfisher was financially but Mallya didn't see that). Worse, he named it Kingfisher, too. Do you name a loser the same as a potential winner?

Mallya can be excused for running a lavish Kingfisher, but trying to run a cut-rate carrier like Kingfisher was folly dipped in red ink from day one.

This double overreach-from profitable liquor to an unprofitable airline and even further into a discounting airline-set the stage up beautifully for Mallya's ultimate failure.

Denial of risk: It is one thing to blunder into an unprofitable business, quite another to bet the farm on it. But this is precisely what Mallya has done. He has staked almost his entire liquor business to save a sinking airline.

In business you can succeed by doing one of two things: avoid putting all your eggs in one basket (and so spread the risk), or you can put all in one basket (that is, focus on one business and stick to your core competence) and watch the basket like a hawk.

Mallya did neither. He put all his eggs one one flight to disaster - including his shareholdings and personal assets - and failed to focus on what makes an airline succeed.

Mallya sold United Spirits stake to Diageo largely because he had pledged too much of his liquor business and his personal assets to keep Kingfisher afloat. He threw away his good business to rescue the bad.

Did Mallya not understand, at least as late as 2010-11, when everyone knew how the aviation business was going down hill?

Did he not understand the risks involved? Like a gambler who thinks the next throw of the dice will get him his jackpot, Mallya bet the farm after his Titanic had already hit an iceberg.

Grasping for Salvation: Nothing exemplifies a bankrupt rescue effort more than Vijay Mallya's constant refrain (in 2012 when the airline was on stretchers) that he is talking to investors on Kingfisher. He talked about that more than a year, even while banks moved in on his properties and aircraft lessors were willing to pay Mallya's dues to the Airports Authority of India (AAI) just to repossess their aircraft.

When aircraft lessors pay somebody to repossess what is theirs, this is a telling indictment of what they think Mallya's chances of a rescue are. And yet, Mallya told his shareholders that he was in talks with foreign airlines to sell a stake.

Though this was factually true, why would any airline buy a stake in a company with Rs 7,000 crore in losses and an equal amount in debt? They would have bought only if Mallya kept his debts and sold the airline for Re 1. They would have bought his assets (the remaining brand value of Kingfisher and its airport slots) and let him keep his liabilities (debts, etc).

Clearly, Mallya was living in "cloud cuckoo land" - to use HDFC Bank CEO Aditya Puri's colourful phrase, used in another context.

Capitulation to irrelevance: Vijay Mallya was clearly going through the motions in talking about saving his airline when it did not have a snowball's chance in hell of being saved.

What he should have done was abandon the airline as a mistake, and save his shareholdings in the liquor companies, to the extent possible, from his creditors.

But he kept making vague and irrelevant statements on FDI in aviation, and how fuel costs are so high - as though a reduction is fuel costs will help him in anyway.

If fuel costs fall, they fall for everybody, and the resultant fare war would have damaged Mallya more than his rivals. (A fare war was already on then, but Mallya seemed to be thinking salvation lies just after the next mirage.)

Vijay Mallya has gone by the textbook-Jim Collins' textbook-to show he can fail successfully.

There is nothing in the script so far to show he is not a member of India's Worst Businessmen's Club.

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Updated Date: Feb 26, 2016 11:55:01 IST