It is perhaps ironic that i am writing this column on board a Delhi–Bangalore Kingfisher flight. A lovely lady has served me a tomatomozzarella sandwich on beautiful white cutlery. Her earnest smile makes it impossible to guess that the airline she works for might be in trouble.
I don’t know if she realizes that the airline lost over Rs 1,000 crore last year, has never really made money and owes its lenders over Rs 7,000 crore.
These are mind-boggling numbers. Surely, this level of debt and losses were not accumulated overnight . How did Kingfisher reach this point, where caterers don’t upload sandwiches and airports won’t let its flights take off until it pays cash?
Didn’t the stakeholders involved (lenders, directors, vendors and others) express concern when the losses and the debt were at, say, half the current level? What kept it going? Or for that matter, what’s keeping it going even now?
Financial analysts across the world will agree, the airline sector is one of the worst sectors to make money and has the poorest returns. The business requires huge capital investments upfront, competition is intense and customers are price-sensitive. These factors affect the Indian airline sector even more, where interest rates are high, customers extraordinarily price sensitive and the government regulations/taxes cripple you.
And yet, there are plenty of entrepreneurs who want to have their own airline. One wonders why?
Well, let’s face it, there are few businesses as sexy as owning an airline. You could be making hundreds of crores as a fertilizer manufacturer, a packaging plant owner or garment exporter. Yet, at one level all these businesses are boring. Who cares if you have a 30-acre , money-spinning industrial plant in a remote town? However, if you have a dozen planes (on borrowed money, of course), you are the new man in town. The fine-looking pilots, the charming flight attendants , flight schedules, exhilarating takeoffs – all make the 30,000 feet-in-the-sky business ‘oh so sexy’ . It is almost as glamorous as Bollywood.
And due to this sexiness, everyone wants to be a part of it. Public sector banks line up to give an airline thousands of crores. This, for a mere couple of points more interest than if they had invested in risk-free , but oh-so-dull RBI bonds. Netas (even our super-elusive PM felt the need to make a comment about helping Kingfisher!) and babus love to get involved in airlines. Incidentally, that is the main reason why another money-burner , Air India is still alive.
The airline industry is seen as a glamour industry, when in reality it is anything but that. It is a dull, horrible , never-ending quest to cut costs, meet demanding schedules and keep the planes busy. It is not much different from a logistics, courier or other transportation company. Most of the profitable airlines in the world are cost-cutters . Some have scraped off paint from the planes to reduce the weight. Others have shaved inches of legroom to add an extra row.
The winners have the lowest cost, are thus able to offer the lowest prices, which fill the maximum number of seats. Indigo does this in India, and is still profitable, despite the draconian tax structures (which definitely need revision). A few luxury airlines do exist, but they serve extraordinarily affluent markets with a high number of senior business travellers. They also serve cities that are global business hubs (SIA in Singapore , Cathay Pacific in Hong Kong and Emirates in Dubai).
Even these airlines run a very efficient economy class. Kingfisher’s business model, in hindsight, was flawed from the start. A focus on flamboyance and opulence in a super price-sensitive industry was extremely unlikely to work. And it never did in financial terms. Banks could have spotted this years ago and pulled the plug on it, leading to a far more manageable situation. However , who cares about a few thousand crores of depositors money when the party is so much fun?
Kingfisher management’s claim that the government tax structure led to the decline is only partially correct. The tax structure for airlines does need reform. However, all airlines have the same onerous taxes. Kingfisher’s fundamental business model has a problem too, and all stakeholders involved need to face up to it.
Despite what the people involved and the government say, it is not easy to fix Kingfisher. The debt levels and current losses are too high to engineer a quick turnaround. Someone has to take the pain, and most likely it will be the banks that were stupid enough to lend so much money in the first place (and might just lend some more).
Some of these banks are public sector banks –so , indirectly, the Indian people will pay for the extravagance and the bad business judgments of a few people.
Meanwhile, the flight attendant comes with dessert, and i cannot resist asking if she knows about the airline’s problems. She says she doesn’t know much, but her salary has been delayed and some people are scaring her about the airline’s future . I ask what she thinks will happen; she says, “This is just like turbulence. Sit tight with your seatbelts, and it will pass.”
For the sake of all hardworking people at Kingfisher who did not cause this, i hope it does.
November 20, 2011 (The Times of India)