Kingfisher Decline

By R. Rijith CSE

‘The King Of Good Times’

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Vijay Mallya-the owner of Kingfisher Airlines and United Breweries. The biggest showman of India Inc.is portrayed as the villain in the Kingfisher tragedy. Vijay Mallya was only in his 20s when his father Vittal Mallya, died in 1983, leaving behind an empire of more than 20 businesses. Under him the group revenues grew from $100 million to $4 billion.

      He spent his childhood in Kolkata. Studied at La martiniere and St. Xavier’s College. Married twice, he has a son (Siddharth, with his first wife Sameera) and two daughters (Leiana and Tanya, with his second wife Rekha).

      He owns 26 properties across the world, including houses in Monaco, Scotland, New York and South Africa and the ancestral mansion in Bangalore. Mallya is religious. He does not discuss business during Rahu and gets his planes blessed at Tirupati.

      He has an enviable collection of cars, curios, art and spirits. In 2004, he acquired the sword of Tipu Sultan for175, 000 euros at an auction in London. In 2009, he bought the personal effects of Mahatma Gandhi for $1.8 million at an auction in New York. Indian Empress, the 95-metre luxury yacht Mallya owns, is one of the largest private yachts in the world. He also owns a 48-metre motor yacht called Kalizma. He owns the 400-acre Kunigal stud farm in Karnataka. Started by Tipu Sultan, it is one of the oldest in India and breeds horses mainly for races.

      With losses of about Rs5 crore a day, depts. Of around Rs6, 500 crore and its bank account frozen by the tax authorities, the airline that he founded seven years ago using his family’s liquor fortune is on the brink. To add to his woes, other parts of Mallya’s business empire are also looking shaky, loaded up with nearly Rs 15,000 crore is further dept used to fund acquisitions such as the 2007 purchase of Whyte and Mackay.

“At the end of the day challenges come everybody’s way-business challenges, personal challenges”, says Mallya. ”You just have to cope and face them.”

TROUBLED KINGDOM

AIRLINES

Mallya started Kingfisher Airlines in 2003.It was the second largest carrier in India before trouble started brewing and owns 64 aircrafts. In 2007, it bought Air Deccan a low cost operator and rebranded it as Kingfisher Red. However it shut down the low cost operations in 2011, citing profit issues.

Liquor business

  UB Groups the largest liquor company in the world by volume. The group owns some of the best selling brands, such as Bagpiper whisky and Kingfisher beer. Under Mallya the company made a number of acquisitions, such of that of Scotch whisky maker White and Mackay, Shaw Wallace and Millennium Breweries, in an effort to connect the missing link in its large portfolio.

Formula One

In 2007 Mallya and a Dutch family bought the Spyker F1 team for 88 million euros .He rechristened it Force India. Mallya is the member of FIA World Motor Sport Council and a close friend of F1 supremo Bernie Ecclestone.

FOOTBALL

Mallya has investments in the Kolkata based football clubs Mohun Bagan and East Bengal.

CRICKET

Mallya bought the Indian Premier League team Bangalore Royal Challengers for 11.6 million dollars in 2008.The team features some of the biggest names in the game.

King-size blunders

Mallya’s flamboyant business moves came at the expense of sustainability.

Vijay Mallya’s admiration for things Italian is not limited to Ferraris. The liquor baron ,politician, airline magnate, owner of Formula One, football and cricket teams and breeder of Arabian thoroughbred is a fan of the Italian political system, too. The reason: Italy allowed Silvio Berlusconi, one of the richest Italians, to be countries third- longest serving prime minister.

       A decade ago, when he took baby steps in politics, Mallya envisaged a corporate –style governance in which the political system was not just tailored to the interest of big business, but also run by corporate honchos -essentially people like him.

       It is quite another matter that he could not communicate it to the voters in the 2004 Assemble elections in Karnataka when he campaigned for his Janata Party. Nevertheless, business man doing India proud, Mallya surmounted difficulties with uncanny bravado.

       However, even his business decisions came with generous scoops of flamboyance to the detriment of sustainability and profitability. Naturally, the world he created around himself carried the seeds of its downfall. Veritas Investment Research Corporation, a Canada based market research group, in a report dated September 12,2011  UB Holdings Ltd and Kingfisher Airlines Ltd, makes a case of liquidating both UB and Kingfisher. The report titled ‘A pie in the sky’ and prepared by analysts Neeraj Monga and Varun Raj puts blame squarely on Mallya for his omissions and commissions.

       The report says Kingfisher did not remit its employees state  insurance(Rs 75,000)provident fund(Rs 43.80 lakh),tax deducted at source (Rs 42,297.52 lakh),service tax(Rs1,047 lakh)and professional tax(Rs 2.46 lakh)from 2008 to 2011.Clearly Kingfisher Airlines is funding itself at the expense of its employees and the Indian exchequer,” says report.

       Mallya’s problems started with his ventures outside his core competency, the liquor business. Many of his acquisitions, such as the Force India F1 team, football clubs, the IPL team and the Asian Age newspaper, distracted him and drained the cash flow. Kingfisher, the biggest of them all, was a loss making entity from day one. High fuel costs and falling revenue resulted in a loss of Rs444 crore in the third fiscal of the current financial year alone.

      Kingfisher’s failure to capitalize on the acquisitions of Air Deccan, which had a well defined hub-and-spoke model (connecting small towns with large metros and then connecting them to larger destinations across India and abroad) added to Mallya’s woes. The eventual decision to shut down the low cost arm, Kingfisher Red(the re-christened Air Deccan),gave many market share to competitors, though Kingfisher justified the decision citing full-service aircraft garnering higher revenues.

       Mallya smelt trouble when Rs6, 000 crore of bank loans started eating into the profits of his liquor business. It is learnt that nine out of 10 shares of United Spirits are pledged as collateral to banks. With Mallya defaulting on repayments, banks restricted his dept by converting it into equity of Rs 1,300 crore.

Operational inefficiency and dept are pulling down Mallya’s liquor business  

It is not just Kingfisher Airlines which is on a downward spiral. A flawed business model, as many analysts see it, is threatening to pull down the foundation of United Spirits Ltd (USL), the cash cow of Vijay Mallya’s UB Group.

USL’S earning history shows that the company has been facing trouble when it comes to profitability. It is facing problems in three fronts-operational inefficiency, dept issues along with group liabilities and muted investments. The earnings of USL in the quarter ended in December plunged 62 per cent to Rs 47 crore. The only thing that seems to work in USL’s favour is volume. However, high volumes are not translating into high profits.

It is the huge dept which is pulling down the company. The interest paid in the quarter ended in December stood at Rs 139.2 crore. It was driven by the high cost of interest for working capital and capital expenditure to finance growth, apart from the increase in the interest rates. 

USL attributes the loss of sales in the last quarter to the highly regulated liquor market in Tamil Nadu and West Bengal. Its product suffered as a campaign was underway to push local brands in Tamil Nadu, bringing down the sales by 15 lakh cases in the quarter. ”A sharp increase in excise duty and sales tax in West Bengal pushed up end consumer prices by 45 per cent resulting in industry volumes  dropping by 48 per cent during the quarter,” said a statement from USL.

However, an IDFC report issued in 2011 says this excuse shows an inherent weakness in USL’s model. ”Lack of pricing power in 60 per cent of the markets and 70 per cent volume contribution from regular segment brands point to the inherent drawbacks in the USL’S business model.” said the report.

Mallya’s acquisition of Scotch whisky maker WHYTE & Mackay was hyped as a strategy by the Indian liquor baron to enter the tightly controlled Scotch segment. Four years down the line, the economic benefits of the acquisitions elude USL. ”The acquisitions of W&M were entirely funded through debt. Operational performances of W&M is expected to remain muted for the next 2-3 years and debt servicing cost for the remaining $600 million of acquisition debt would continue to drain profitability,” said the IDFC report.

Disregard to early warnings hastened Kingfisher’s free fall

Vijay Mallya’s niche airline has now got down to offering free dinners, wine club memberships and screw pull wine openers to its ’King Club’ members, who were left high and dry over for two weeks with constant flight delays and cancellations across the country. Though most members are still not able to redeem points against free flights and upgrades, the airline is upping the quotient with additional points for every file that doesn’t take off.

        Built around heightened customer experience and exclusive services, Kingfisher Airlines, it seems, has turned out to be a victim of its own flamboyant branding. ”In 2005, when Mallya launched the airline, he was absolutely new to the industry. He acquired another airline to grow and ordered [Airbus] A380s to expand business. He knew how to become big, global but he didn’t take care of the revenue generation and cost control. His larger than life image became synonymous with the airline, which was capital intensive and low on revenues,” said Jitender Bhargava, former executive director, Air India.

        Though Mallya has been blaming the “sudden” freeze on Kingfisher’s bank accounts by the income tax department for the current crises, the fact is that there is nothing unanticipated about the airline’s financial problems. Kingfisher, which was India’s second largest carrier until a few months ago, has never made profit in the past seven years.             

        The magnitude of the trouble came out when a Delhi-based aircraft maintenance engineer employed with the airline till 2009 filed a complaint against it for not paying the tax deducted from his salary. ”The income tax department demanded an amount of Rs2,88,480 from me for defaulting on tax payments when the company had already deducted tax from my salary. Later, I found out that I wasn’t the only victim, my colleagues were also being cheated,” he said.

 In September 2011, when Toronto-based Veritas Investment Research published a report saying United Breweries Holdings Ltd and Kingfisher Airlines Ltd were “teetering on the verge bankruptcy”, Mallya bluntly refuted the contentions and went ahead with his business model. Two months later Kingfisher was put on cash-and-carry mode. 

Aviation experts blame Mallya’s business hubris for the downfall of Kingfisher, which was otherwise a good brand. Unlike his rivals-Jet Airways’ Naresh Goyal and Indigo’s Rahul Bhatia, who had immense experience in the aviation industry-Mallya launched an ambitious airline without taking into account wafer-thin margins that the Indian airline industry operates on. ”Mallya’s liquor business was big and well-established but he had little experience in an intensively competitive service industry. The airlines business is highly competitive and competitive and capital intensive, with fairly low margins. His overconfidence and lack of professional management team with delegated functioning has let him down,” said Bhargava.

Presents state of Kingfisher Airlines

More than 300 pilots have quit Kingfisher Airlines in the past six months and the chances of its survival depend largely on a complete overhaul-cost cutting in operations, clearance of all outstanding payment and equity infusion. With the government refusing to make any direct intervention in terms of financial bailouts for private airlines, Kingfisher has clearly gone into a free fall. ”All the airlines are playing in the same field, then why should the government help Kingfisher in particular? Also, if an airline is undergoing financial crises, there’s every possibility that it might employ shortcuts in operations. So, the elements of risk can’t be avoided. The DGCA should ensure strict vigilance in this case.” says Kanu Gohain, former DGCA.

     Flying 198 schedules with 28 aircraft, Kingfisher is now being constantly monitored by the DGCA. ”We have a special safety audit in place for Kingfisher and I get the reports on its flight operations everyday,” said E.K.Bharat Bhushan, DGCA. ”We will not allow any of the safety aspects to be compromised. We are constantly monitoring, so that the airline doesn’t stretch itself to a position which leads to unsafe operations.”

     Mallya is reportedly pinning hopes on the new FDI policy in aviation and direct import of jet fuel to revive for his strapped-for-cash airlines. According to sources, he has held discussions with IAG, the parent company of British Airways, and Eitihad Airways for a possible 26 per cent stake sale.