Kingfisher is worth saving, but auction it

Swaminathan A. Aiyar 
20 November 2011, 06:21 AM IST

Kingfisher Airlines is deep in the red. Should the government organize its rescue? Critics say that it has already been rescued in the past thanks to Vijay Mallya's political clout, yet it has never made a profit since inception. When millions of small businesses are allowed to go bust when banks cut off credit to thousands of smaller defaulters, rescuing Kingfisher will smack of crony capitalism.

The airline has defenders too. Kingfisher has justly earned a reputation for excellent service standards. Quality is always worth preserving. We need to save Kingfisher without saving Mallya.

Its main competitor in quality, Jet Airlines, has frequently made good profits, while Kingfisher never has. So Kingfisher cannot claim that its problems are common to those of other airlines, many of which are also in the red today. There is a case for reducing burdens on the whole airline industry, but such general relief will not suffice to pay Kingfisher's enormous overdues.

India's airlines suffer from high taxes on fuel, rising world prices and an obligation to service some uneconomic routes to destinations like the Northeast. Yet this did not prevent them from making profits in the past. Even today, Indigo is profitable.

So are many global airlines. Top US carriers like United , Delta and US Air reported good profits in the last two quarters. Indeed, in the quarter ending June, United Airlines turned profitable after losing money for six years, Delta reported the highest quarterly profit in history and Lufthansa doubled its profits. The quarter ending September has been only somewhat less profitable for them. So, Kingfisher and other Indian carriers cannot claim that global conditions are terrible.

Many global airlines have been rescued time and again. Political considerations have often dictated government rescues of national carriers (as has also been the case with Air India). Yet the three biggest US giants of yesteryear—Pan American Airways, TWA and Eastern Airlines—have ceased to exist. That should be the norm in any market economy.

Kingfisher has already been rescued. Banks converted unpaid loans to Kingfisher into equity at a very favourable premium of 62% to the ruling market price, a tribute to Mallya's political clout rather than company's future prospects . Even after that the company has sunk deeper into the red. Even after being restructured and slashed, its debts exceed Rs 7,000 crore. Government concessions to the industry may save other airlines, but not Kingfisher.

A failed management must be changed. That's normal in a market economy. Giving managements a second chance is often a good idea, but Kingfisher has already been given fresh chances through concessions and rescues , but in vain.

One way forward is for banks to convert a big chunk of their outstanding loans to Kingfisher into equity at the current market price, giving them a 51% stake in the company . This can then be auctioned to the highest bidder. This will be clean and quick, free of the crony capitalism that afflicts government handouts to business.

If Mallya really wants yet another chance, he must be told to bring in at least Rs 3,000 crore of fresh equity. If he cannot entice the investing public—which is probable--he must sell his other assets. Apart from liquor company UB Holdings, he owns stakes in the cricket team Royal Challengers, Bangalore; the Kolkata football teams Mohun Bagan and East Bengal; and the Formula 1 team Force India. In many other countries his bankers would force him to sell these.

Indeed, UB Holdings itself is reported to have provided bank guarantees of over Rs 16,000 crore to the banks. In many other countries, such bank guarantees would be enforced , obliging Mallya to hand over UB to his creditors too. Globally, rescues entail sacrifices by not just creditors but the owner too. If politicians ask banks and other creditors to go easy on the owner, that is called crony capitalism.

If Mallya will not sacrifice his other assets for Kingfisher , then he cannot ask others to sacrifice their financial interests for him. His creditors should acquire the company and auction it.

There will be plenty of bidders, even if the government keeps out foreign buyers. Ratan Tata will be among the keenest of these. Remember, the Tatas owned Air India before it was nationalized. Ratan Tata tried hard to acquire Air India in the 1990s but in vain.

However, hecould easily be outbid by many other Indian groups that have plentiful cash reserves. Many of them have started investing abroad for want of suitable opportunities in India. The auction of Kingfisher would be a very suitable opportunity.