ON AW­ING AND A PRAYER

India Today - - SIGNATURE -

Cap­i­tal­ism, much like bi­o­log­i­cal evo­lu­tion, is based on one fun­da­men­tal prin­ci­ple: sur­vival of the fittest. Death and de­struc­tion are as deeply in­grained in the law of na­ture as in the law of the free mar­ket. That doesn’t make ei­ther pleas­ant or ac­cept­able, even if in­evitable. Vi­jay Mallya’s King­fisher Air­lines, re­garded not so long ago as In­dia’s finest pri­vate car­rier, is in its death throes. The air­line has been brought to a vir­tual halt, with hundreds of can­cel­la­tions, by mount­ing losses, and a huge over­hang of ac­cu­mu­lated debt. It is des­per­ately look­ing for life sup­port.

The Govern­ment, no­tably the Prime Min­is­ter and the min­is­ter of civil avi­a­tion, has sug­gested that it is think­ing about a bailout for King­fisher. Vi­jay Mallya says that he doesn’t want a Govern­ment bailout. In­stead, he would like banks to lend him a help­ing hand. It so hap­pens that most of those in a po­si­tion to bail him out are govern­ment-owned. Bailouts of the kind that King­fisher needs in its cur­rent state are a ter­ri­ble idea. Why?

The first is a point of prin­ci­ple. Govern­ment-spon­sored bailouts of pri­vate com­pa­nies are an anath­ema in a cap­i­tal­ist sys­tem. En­trepreneur­ship is about tak­ing risk. If a busi­ness suc­ceeds, an en­tre­pre­neur earns hand­some re­turns: that is a re­ward for the risk taken. But if a busi­ness fails, the en­tre­pre­neur bears the cost. Those averse to the risk of fail­ure don’t be­come busi­ness­men. They cer­tainly don’t en­ter the very high risk busi­ness of avi­a­tion. The sec­ond is a point in prac­tice. Giv­ing King­fisher a bailout at this stage would sim­ply be throw­ing good money at bad busi­ness. King­fisher has al­ready re­ceived one gen­er­ous bailout. In the last fis­cal year, a con­sor­tium of 13 banks led by SBI and ICICI con­verted Rs 1,300 crore of debt into eq­uity. In­cred­i­bly, the banks bought each share at a price of Rs 64 when the pre­vail­ing mar­ket price of a King­fisher share was Rs 40. Bailouts don’t come more gen­er­ous than that. Sev­eral months later, a King­fisher Air­lines share is worth Rs 20. Some­one in the banks needs to ex­plain to their share­hold­ers the ra­tio­nale be­hind such a gen­er­ous bailout when the air­line clearly had no turn­around plan in place. Giv­ing a sec­ond bailout now would be an ex­tra­or­di­nary and coura­geous de­ci­sion for any banker.

There re­main a lim­ited num­ber of mar­ket­friendly op­tions which could give King­fisher Air­lines a new lease of life. The Govern­ment can ra­tio­nalise the mas­sive taxes that are im­posed on avi­a­tion tur­bine fuel. The cost of fuel alone ac­counts for 40 per cent of the vari­able costs of run­ning an air­line. The Govern­ment can per­mit for­eign air­lines to in­vest in do­mes­tic air­lines. That would be a good source of funds for a cash­strapped air­line. It would also bring bet­ter man­age­ment prac­tices to an air­line which is clearly be­ing man­aged poorly.

The pro­mot­ers of King­fisher also need to do their bit. Mallya must raise money from his prof­itable liquor busi­ness to in­fuse into the air­line. He must al­low those who in­vest in his air­line a greater say. Banks cur­rently own al­most one-fourth of the air­line but have only one seat on its board. Above all, the air­line needs to have a cred­i­ble plan to show that it can be prof­itable—it hasn’t made a profit since it started in 2005. Other­wise it would be best to with­draw life sup­port and let it die a nat­u­ral death.

THOSE AVERSE TO THE RISK OF FAIL­URE DON’T BE­COME BUSI­NESS­MEN. THEY CER­TAINLY DON’T EN­TER THE VERY HIGH RISK BUSI­NESS OF AVI­A­TION.

SAU­RABH SINGH / www.in­di­a­to­day­im­ages.com

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