ON AWING AND A PRAYER
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.