The King Of Good Times- Part II

So what can we learn from the case of Kingfisher airlines? I guess a lot. Let me quote Charles Dickens below:

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result -happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result- misery."

Well, Mr. Dickens in his classical style tells us that it is important to live within our means and if you are going to live outside of your means it will lead to misery. So does that mean that debt is a really bad thing? Actually far from it debt plays a very important role in our life, one need to remember that there are a lot of good reasons one can take debt for e.g. buying a house, pursuing higher education, starting a new factory etc. but in all these cases one has to be very careful to not to take so much debt that one will drown in interest payment and any negative impact on ones income and cash flow leads one vulnerable and clueless as to what to do.

So the real challenge comes when one takes more debt than one can service or most of the income is going in servicing the debt. 
This means that even a minor fluctuation in the one’s income or expenditure will upset the apple cart, and that my friends is the challenge with debt. It is like playing with fire but if it goes out of hand it can burn down your hand.

 This is what is happening in case of Kingfisher, most of the money that the company is earning is going in paying the debt (or is actually suppose to do the same) and just crumbs are left to run the business. 

And whenever such a situation arrives nobody is willing to give you more debt unless you are a lender who has his skin too deep in the equation and is willing to take one more debt. But let us not forget that this is possible if you are a big borrower then only your lenders are willing to lend you further hoping that they will be able to recover some money out of you once you are solvent again.

 But if you are retail customers the banks will be sending their Goondas to your home if you do not return the banks money.

Remember the old saying: If you owe the bank a 10,000 RS and can not pay you are in trouble, but if you own the bank millions of dollars and cannot pay then the bank is in trouble. :) 

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.