Lenders to Vijay Mallya-promoted Kingfisher Airlines have rejected the ailing carrier’s demand for a bailout package. The 13-bank consortium has said that any fresh support to the debt-ridden company could be considered only after its promoters meet their commitment to bringing in about $300 million fresh equity through global depository receipts. This is a fair and legitimate demand. These banks have already taken a big hit; they restructured the company’s debt in April by converting the loans into equity at a premium of almost 35 per cent to its share price prevailing then. That debt restructuring deal defied financial logic since the banks were left holding just about 19 per cent shares of a loss-making airline in lieu of their Rs 1,400 crore short-term loans. If only the banks had insisted on the conversion rate to be the share price prevailing then, they would have had a much bigger stake in the restructured company, giving them more say in the manner in which the airline was to be run. Worse, with no financial turnaround plan in place, the airline has run up more debt at Rs 7,000 crore and in 2010-11 reported losses worth over Rs 1,075 crore. It also owes Rs 1,000 crore to various vendors, Rs 300 crore to airport operators, Rs 200 crore to oil companies and Rs 250 crore to aircraft lessors. The airline’s share price has fallen by more than half between April and now, even as it has stopped operating 36 per cent of its total flights allocated for the winter schedule.
This is a fit case where banks should demand greater financial commitment from the promoters and even go a step further by insisting installing a new management that could put in place a plan to rescue the airline from its current financial mess. Early signals from the finance ministry and the civil aviation minister suggest that the government would like the airline’s financial problems to be tackled by banks on the basis of sound commercial principles. Hopefully, this approach would not be diluted after what Prime Minister Manmohan Singh said on board his Air India flight while returning from Male to New Delhi. If anything, the prime minister’s assurance that the government will explore “ways and means” to help Kingfisher Airlines is indicative of the government’s misplaced priorities. Instead of trying to fix Kingfisher Airlines’ problems, which the banks should be allowed to handle on a commercial basis, the government would do well to first set in order the finances of the airline it owns. Air India is facing a debt burden of Rs 43,350 crore, owes Rs 3,800 crore to suppliers of jet fuel, airports and vendors, and has accumulated losses worth Rs 20,000 crore. It needs both a management revamp and a financial restructuring, without which its future remains bleak.
This is not to say that there is no industry-wide problem in the civil aviation sector that needs immediate attention. Jet Airways made a loss of Rs 713 crore for the quarter ended September 2011. SpiceJet also reported a loss of Rs 240 crore for the same period. The loss-making airlines have argued that the business environment is bad because jet fuel and manpower costs have become unsustainable. There is some merit in this argument: crude oil prices are high and there is a huge shortage of pilots. But traffic growth remains strong. The average occupancy is 80 to 85 per cent, which, by global standards, is healthy. However, in the same adverse business environment, at least one airline, IndiGo, seems to be making decent money, though it’s not listed on the stock market and, therefore, need not make public its financial results. The question that Air India, Jet and Kingfisher need to ask themselves is: what has IndiGo done that they haven’t?
