King Of Good Times

Every single newspaper and TV channel is talking about the bad times the King Of Good Times is going through. Yes, I am talking about Kingfisher Airlines and its owner Vijay Mallaya.

I read through some of the articles right from investor banker turned novelist turned columnist to genuine financially evolved beings like Swaminathan S. Anklesaria Aiyar, though each one tells us that the airlines are in big trouble and is guzzling money faster than you and I can guzzle a bottle of beer from the factories of Mr. Mallaya, who has very smartly built his multi-billion dollar empire almost by his own enterprise.

So how come such a smart businessman is not able to figure out the business of airline?

Well, I guess the answer lies in the fact that airlines business is one of the toughest in the world and profits for airlines keep on fluctuating due to various factors like ATF price, taxes, interest rate, strikes by pilots and political unrest in various parts of the country and the world. 

With all its brand new planes and not so plain Jane air hostess's airline business is still a commodities business and that too of perishable commodities ( that's what the airplane seats are if not filled before the take off it is gone forever)

Since I have traveled by Kingfisher airlines many times and experienced the superb service that only a very few in the world can match. When Kingfisher arrived on the scene Jet was the gold standard in Indian Aviation industry and Air/Indian Airlines were shining examples of how not to run an airline (they still are by the way), Kingfisher arrived on the scene with a big bang and made Jet look like a poor country cousin.

Today however both airlines are bleeding badly while Indigo continues to make money.

Nobody is complaining about the service of Kingfisher, their planes are new, air hostess well groomed and efficient, fares are not much higher than Low-Cost Airlines and their plane was arriving on time till the airline hit turbulence.

So why is the airline making losses and is at the brink of being auctioned or shut down if no viable alternative appears? One wonders if the issue is then.

In my opinion, the biggest culprit is the huge amount of debt on the balance sheet of the company which needs to be serviced regularly. Now as the debt pile and losses have been growing,  the banks have been forced to convert the debt into equity at a premium so the banks now have shares bought at a premium but now selling at a discount the current market price of the airline. While the banks have lost money all other shareholders including Mr. Mallaya are losing money due to dilution of equity.

I think the biggest problem in front of Kingfisher is its huge pile of debt that is growing and making everybody nervous. Same is the case with Air India, but Air India has the forced backing of poor taxpayers like you and me and we are being forced to continue to bail out Air India for the sake of saving the national carrier (whatever that means).

Alas, Kingfisher has no such luck and has to fend for itself and can not ask for a bailout from the taxpayer’s money, though the management would love that to happen.

So what am I learning here? Simple, too much debt is not a very good thing, especially when you are in a low margin and uncertain business like aviation. 

Playing with debt is a dangerous game better left to the LBO specialists. While there may be other problems troubling the airline in my opinion huge debt is one of the biggest reason for the airline's downfall.

We will talk more about debt and its implications in our lives in the next post.

Do send me any comments or questions.