‘Kingfisher Airlines hurt by Vijay Mallya’s over enthusiasm’

Updated: Mar 09, 2012, 11:10 AM IST

With bank accounts frozen, pilots quitting en masse, no government bailout in sight, analysts apprehensive of airline’s revival, Vijay Mallya’s dream bird, Kingfisher Airlines - popularly known as The King of Good Times - is witnessing its worst phase.

In an exclusive interview with Zeenews.com’s Biplob Ghosal and Shruti Saxena, aviation expert Harsh Vardhan, who has comprehensive experience of setting up and running large airlines in the country, gives a detailed view of how Kingfisher and other airlines in India have turned into loss making ventures.

Harsh Vardhan specialises in areas of aircraft selection, route planning, online computerisation, financial controls, engineering and operations set-up. He has handled wide range of aircraft including DO-228, F-27, HS-748, Boeing 757, A300, Boeing 707, 747. He has also worked with Air India in early eighties and played an important role in its turn around.

Ques: What has pushed Kingfisher Airlines to near bankruptcy? What will be the impact on the aviation industry in case the airline shuts down?

Harsh Vardhan: Global aviation industry is passing through challenging times due to unprecedented fuel price hike during the last 4 years, turbulent financial markets and economic recession. In India, most of the upcoming airlines added a large number of aircraft since 2005 and deployed them mostly on metro sectors resulting into suicidal price war. Every airline in India is currently suffering from operating losses. Besides the hostile industry environment, the merger of Air Deccan has been the main reason behind Kingfisher crisis. Substantial liabilities and recurring losses of Air Deccan and the failure of Kingfisher management in synergising and rationalising the two entities is one singular factor mainly responsible for the current Kingfisher crisis.

Closure of Kingfisher would result in revenue and yield improvement for surviving airlines in India for a brief period. Fares would show upward trend for a short time before settling down. I do not foresee a high fare regime in Indian aviation sector due to the fact that every operating airline is constantly adding new aircraft to its fleet and with the Indian market being price sensitive, there is a risk that higher fares may result in significant drop in number of passengers. Therefore, fare levels should hover around current levels.

Ques: How do you view Corporate Affairs Minister M Veerappa Moily’s statement that Kingfisher Airlines was "not professionally managed"? Should the government bailout Kingfisher?

Harsh Vardhan: These are Veerappa Moily’s personal views and I would not like to comment. To me it is a case of Vijay Mallya’s over enthusiasm to rule the Indian skies before evaluating its cost and cash flow implications. Unfortunately, Kingfisher’s problems multiplied with downward spiral of the aviation industry due to escalating fuel prices. Every private airline in India has followed the same philosophy and is suffering the consequences, but Kingfisher ran out of cash faster.

I don’t find any case for the Government of India to bail out Kingfisher since private enterprises should succeed or perish on their own capabilities in the market place. During the last 3 years, Kingfisher was given relief by banks, oil companies and airport operators, but it couldn’t come out of its crisis. In 2010, a consortium of banks approved an extraordinary revival package for the airline, which should have given them enough opportunity to streamline their organisation but they simply wasted the money in funding higher losses. At the moment given the debt servicing cost, unless there is a substantial equity infusion to reduce the debt level, any more infusion of cash would go into funding additional losses. Kingfisher till date has failed to establish viability of its operations and promoters’ refusal to provide their personal guarantees reflect their own doubts about the viability of the airline.

Ques: There have been reports of other airlines facing Kingfisher-like situation. Is the government responsible for the crisis in the aviation sector? If yes, what steps does the government need to take to save the aviation industry?

Harsh Vardhan: All airlines are suffering huge operational losses due to intense competition, low fares and high cost of operations, but this situation to a large extent is of their own making. The government has limited options; it can at best reduce taxes on ATF and airport charges and some steps have already been taken in this regard. The industry and individual airlines would have to bring in self discipline and enforce strict cost control measures otherwise the weak operators will meet the fate of East West, Modiluft etc.

Ques: Is Foreign Direct Investment a feasible option and how much will it help the aviation sector?

Harsh Vardhan: FDI upto 49 percent in scheduled airlines in India is already in existence except that it restricts foreign airlines to invest in Indian airlines. Even with proposed policy change of permitting foreign airlines at the behest of Vijay Mallya, I don’t find any immediate respite. To begin with prospective investors will take time to evaluate their options and undertake due diligence exercise. Most of the international airlines themselves are suffering from same economic factors which are affecting the Indian aviation sector. Very few airlines have cash reserves and they are all adopting cautious approach due to the Eurozone financial crisis and simmering geopolitical tensions like Iran, Syria etc. Any business venture can attract investment only when the industry and its major players show capability of profit generation which is not the case with the Indian aviation sector at present. It is simple logic that nobody gives you money to fund the ever increasing losses.

Ques: How will passengers be affected if Kingfisher shuts down? Some airlines have considerably hiked their fares following Kingfisher grounding a major chunk of its fleet. What action should the government or the DGCA take against such airlines?

Harsh Vardhan: To a large extent the impact of Kingfisher’s likely closure has already factored in due to their massive cancellations and erratic operations in the last few months. Most of the Kingfisher passengers have already switched over to competitors and market confidence in Kingfisher is at the lowest ebb. However, I believe that the fares would come down to reasonable level due to continuous induction of new aircraft by IndiGo, SpiceJet, GoAir etc and price sensitivity of low cost model.

In my opinion, in a deregulated market the DGCA has no role in price mechanism of airlines. It should concentrate its efforts on safety and other regulatory aspects of aviation sector.