Corporate Oct 23, 2012
Finally DGCA has suspended the licence of Kingfisher Airlines. It is a surprise the bankrupt airline was allowed to fly for so long, leading to unnecessary suffering of employees, lenders and shareholders of the company. Kingfisher should have been declared bankrupt a couple of years back and then started life all over again. That would have helped redistribution of scarce resources such as labour, airport slots etc. It would also have helped lenders to stay away from throwing good money after bad.
The airline industry is a leveraged game where assets are leased and shareholders and lenders understand the risk of the business. If an airline goes bankrupt, shareholders write off equity and lenders write off assets. The earlier the bankruptcy the better, as losses are contained. Everyone involved goes home with losses but with a good learning as well.
Unfortunately, inflated egos did not allow the airline to file for bankruptcy. Vijay Mallya, the flamboyant promoter of the airlines, felt that none of his ventures could fail. He pledged his own assets and gave personal guarantees to the lenders to prolong the inevitable. The end result is that he has been forced to consider selling off the cash cow of the group United Spirits to pay back part of the Rs 8,000 crore debt of Kingfisher Airlines.
The I-cannot-fail-talk prevented many employees from quitting at the right time. They face salary backlogs that are not likely to be paid and prospects of work in other airlines are low given the state of the sector in India, which is facing falling traffic due to high costs of flying. Bankers, fuel suppliers, airport operators and other related parties to Kingfisher Airlines have taken a hit on non-payment of dues. The reason for all this is inflated egos dominating sound business sense.
The government felt that a prominent airline couldn't file for bankruptcy as it will dent the image (what image?) of the country. It let things go out of control, which culminated in the airline losing its licence.
The government's ego has made it bailout its own airlines, Air India. Air India had to restructure Rs 40,000 crores of debt, which is four times the full market capitalisation of the airline industry in India and the restructuring was done on the back of government guarantee. The fact that the restructuring was not accompanied by a change in the management or with performance guarantees is a clear sign that good money is being thrown after bad money.
Air India's bailout has resulted in worsening the condition of the airline industry in India. A bankrupt airline that enjoys bailout facilities results in a demand-supply imbalance and forces better and more profitable players out of the industry leading to more troubles for the sector. Ego has resulted in Air India being allowed to fly again as no government entity can be allowed to fail is the mantra of the government.
The Kingfisher Airline and Air India fiasco are just examples of egos affecting sound business sense. India is rife with ego at work. Promoters cannot accept analysts who place a sell report on their stocks. Rating agencies that are giving poor ratings are sued in courts. Shares are pledged, financial statements doctored and politicians and bureaucrats bribed for the feeling that my company cannot go wrong.
The market does not have an ego. It embraces companies that have potential to deliver the returns and it kills the same companies when they do not deliver. Promoters who are placed on pedestals see their status falling with a thud leading to a huge deflation of egos. Promoters cannot accept this deflation and hence prolong their misery by trying to keep up to their inflated egos.
Message to investors is clear. Avoid investments in companies where managements let ego affect performance and this includes government-owned companies as well.
More From Arjun Parthasarathy.