Kingfisher Bailout
By CA Parag V. Kulkarni
+93702 23957
parag0488@icai.org
Table of Contents
Introduction
Kingfisher bailout is the current issue which captured almost 2 hours of every Indian News Channel since last week. We are watching experts and many more bureaucrats expressing views and commenting on the topic. But the question is how much a common understand from these discussions. What exactly the issue is. What a common man knows is there is some difficulty in running the business of Kingfisher Airlines and that’s it! A common man has many questions like how come a person who puts himself always in the glamour world is facing money crunch. As a public image we saw Vijay Mallya promoting IPL, planning to enter into new business, promoting F-1 and certainly a man with lavish life saying he needs money. What exactly it implies?
Understanding the Scenario
On 11th November, 2011; Over 50 kingfisher flights were cancelled and the company’s stock plunged to a lifetime low of Rs.17.55/- before recovering a little close at Rs.19.65/- on BSE. Kingfisher’s actual number of flights is way lower than the 418 daily domestic departures the airline scheduled for winter season. Operations are getting increasingly difficult for kingfisher
Difficulties
1. Airports Authority of India (AAI), which has dues of about Rs.200 crore from the airline, is going to consider putting it on cash-and-carry from 19th of November, 2011.
2. It means Kingfisher will have to pay Rs.1 crore every day to AAI.
3. GMR group (which runs Delhi and Hyderabad airports) is also thinking of policy on cash-and-carry basis.
4. Oil Companies, which have dues of over Rs.200 crore, have already put airline on cash-and-carry.
Honourable Vyalar Ravi, civil aviation minister expressed his views on assisting the airline and controversy begin.
History
Kingfisher on 2nd November, 2011 needed:
1. Additional working capital or short terms loans to improve its working capital cycle and also to reconfigure aircraft.
In simple terms Working Capital represents funding for day to day requirement.
2. It seeks help from banks to substitute high-cost rupee borrowings with lower cost foreign currency debt to the extent that can be supported by its international operations.
Today International borrowing rate is much lower than average borrowing rate we have in India. International borrowing rate is usually nominated as “LIBOR + ___%”.
3. It wants a release of cash deposits held with lessors against maintenance reserves for which bank guarantees are being sought.
Cash Deposit represents amount lying with lessors.
4. The company has lined up Rs. 2,000 crore Right Issue (Share Issue to existing members of the company) to raise more capital and wants all shareholders, including banks, to participate in the fund-raising exercise.
Right Issue is a right given to existing shareholder to subscribe to share of the company. Related guidelines are governed by SEBI. A shareholder can either subscribe the share or he may renounce it.
SBI and ICICI converted their debt on March 31, they agreed on a conversion price of Rs.64.48 each, which was 60% higher than the prevailing market price of around Rs.40. From the conversion price, the shares are now trading nearly 70% lower.
Bankers are in process of hypothecation of the Kingfisher brand. Whether bailout package is to be given or promoters should infuse their funds.
Privatization
In early nineties it was the prestige to travel by plane. Then whenever I used to ask for a black tea, beautiful lady used to come to me with already filled cup of tea and I never knew; what was the content of sugar, content of water and content of tea.
But after privatization in the sector, things changed. Now when I travel the same beautiful lady comes to me and with smile she asks me “Sir, will you prefer tea or coffee, how much tea you want, how much sugar you will have...” Privatization definitely helped consumer in getting quality service and that was the end of monopoly of public sector. Government promoted private airlines for a cause of good, and now when the aviation industry is in trouble; question is whether it’s the job of government to help?
As an individual tax payer I have basic doubt. Is it my responsibility as a tax payer to save Vijay Mallya? Question raised is absolutely right but government should consider the issue in broader aspect. It should not be about helping an Individual airline but the industry.
Is it Bailout?
You said bailout for Kingfisher? Hold on…. Is it bailout? Or it’s the same thing which happened with Air India? Kingfisher has got the loan and it is paying interest on it. It’s the genuine business. Now it’s just the emergency for which it applied to banks. The most important thing is Kingfisher never applied to government for bailout.
So let’s not put it as a national problem but simply the business difficulty. What about lending risk to banks and account holders? After all its public money which will be diverted to kingfisher if additional loan is granted.
Key Problem
Bankers put the condition of infusing promoters funds and here comes the key problem. Promoters raised their hands saying sorry to further contribute and asking entire help from the banks.
Do Oil Prices impact Kingfisher Business?
The argument is “considering the oil prices hike and other costs government should help”. Whether oil prices are affecting only Kingfisher Airlines? Why other airlines are doing good business? Indigo is earning good profits. The right answer to the failure of Kingfisher Airlines is not the hike in oil prices but the wrong business model the airline adopted.
How much the experts commenting Kingfisher playing role of developing the nation is valid?
Many say aviation industry needs government help as we stand nowhere in Infrastructure Development as compared to China. Aviation industry facilitates transportation and directly promotes growth of the nation. I am surprised to listen to so called Experts contesting on behalf of Kingfisher Airlines converting debate by focusing the airline as a charitable organization helping poor people to grow. The Kingfisher Airline is considered as elite class airline and you cannot argue on helping needy people and facilitating transportation.
Critical Examination: My Opinion
I feel pity when you talk of hike in oil prices as a reason of difficulty to run this business. Today common man pays more per liter than what airlines pay per liter for their fuel and that too without credit. We don’t ask for credit to fuel our business but we manage the resources.
I know you are diverting the focus of common man from the key issue of Brand and let me address this in this article. We consumer paid premium price when we travelled by Kingfisher Airline. Let me ask you question why we paid that premium? It was for the brand – “Kingfisher”. Kingfisher Airline is always known for elite class which promoted the brand “Kingfisher” and not the brand “Kingfisher Airlines”. The brand “Kingfisher" is actually used by the liquor company of Vijay Mallya and it is doing absolutely doing great business in India and many African countries. Brand for which we paid for is en cashed by Liquor Company and that’s the business gimmick. Now it’s our right to ask the Liquor Company to infuse funds if required by Aviation Company. But then you will say trademark cannot be objected! You will again argue on problems aviation sector is facing.
Conclusion
Some said let the dying patient die his natural death. Some argued why the government should interfere in private business? Some said let there be hostile takeover and it will be all set to robust again. Some opined on FDI and some backed the problems of Kingfisher Airlines.
Don’t tell me that you have a problem, everyone has a problem but we try to get things done and not wait for getting things done with someone else help. I strongly believe that getting Foreign Direct Investments is the great way to help sector by further liberalizing the investment regulations and Honourable Dr. Manmohan Singh will definitely give right solution to the patient.
By CA Parag V. Kulkarni
+ 93702 23957
Parag0488@icai.org
Also read Economic times dated 23 November, 2011 which says opinion of Sir Rahul Bhatia, Cofounder; Indigo Airlines: "Just because certain airlines have issue with their business, the government is prepared to back them? or ready to change FDI policy? It's almost like sponsoring inefficiency."
ReplyDeleteFDI is poslitical at this stage. We can also look at internal options like Tech Mahindra took over Satyam when in crisis. The government bailout is definitely risky proposal as it has not worked in the past. It rather worsens the situation. Cheers, Jagdish Avachat
ReplyDeleteI agree on the solution to FDI by takeover or rather hostile takeovers in aviation sector. It gives altogether different dimension to look into the subject. But question is how many business giants are ready to enter into aviation through such takeovers? History says Aviation Sector ends in loss for most of the USA companies. I am sure that Inflation is going to hit the country(India) soon and it is too optimistic to go with choice of investment in such inflationary economy, specially for existing giants. It is time to invite investment and not to invest. Believe me or not, if right policies are not implemented at right time, economy will undoubtedly face hard time. Its all about a judgement which will affect the mass of the country.
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