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Corporate Mar 5, 2012

Should Mallya be removed from Kingfisher board?

By Firstbiz Editors

In an opinion piece in The Economic Times on Monday, Captain Gopinath, the founder of Air Deccan, presented his proposal to fix financially sinking Kingfisher Airlines: First, he said, banks that lent money to the airline must convert their debt into 100 percent equity at market value. They need to accept that they will only get back a fraction of their debt, and the balance, whatever possible, will need to be recovered through the sale of mortgaged shares and assets of the promoter and his holding company.

Second, he said banks also must "wrest complete control of the airline from the profligate promoter who ran amok and appoint a board that, in turn, can hand it over to professionals, stabilise operations and, at a right time, sell it to new investors."

Seven years into the business, Chairman Vijay Mallya and team have not found a formula for turning Kingfisher into a successful airline. AFP

It has been done before, he noted, giving the example of scandal-tainted Satyam Computer Services.

Irrespective of what you think of Gopinath, his suggestions are certainly valid. If the airline were to go bankrupt, everyone from banks to airport authorities to fuel suppliers and employees will be left out in the cold. It's nearly six months since the airline started making international headlines for its financial woes, and there's still no resolution in sight.

In any other market economy, Kingfisher Airlines would have simply shut down.

Yet, for some strange reason, the government seems unwilling to let market forces take over, and has even bent over backwards by changing policies (allowing direct jet fuel imports and mulling 49 percent foreign direct investment in local carriers) to keep the ailing airline afloat, never mind that it has never made a profit since it was launched in 2005.

But a challenging policy environment is not the only reason why Kingfisher Airlines crash-landed into this sorry mess; as this Firstpost story noted in September, it also had a bad business model to begin with.

Yet, that seemed to be of no consequence to the government as Civil Aviation Minister Ajit Singh declared last week: "You can't close down a company because they are making losses or banks are not giving them money. As long as passenger safety is not jeopardised, as long as they keep their schedule, why should we close down any industry?"

Really? And who exactly pays for the airline keeping its schedule? Certainly not the promoters.

Even now, Kingfisher has no money to pay any of its creditors or employees. Absolutely nothing has changed on that front. In fact, matters seem to just keep getting worse.

Some pilots of Kingfisher Airlines are threatening to go on strike today if they are not paid their outstanding salaries by 12 March.

It's unlikely their demand will be met, given that the service tax department on Friday sealed seven more bank accounts of the airline because of non-payment of dues, taking the total accounts frozen to 44.

According to a Mint report , Chief Executive Officer Sanjay Aggarwal met the pilots on Sunday but did not discuss the outstanding salaries; instead, he said the airline's priorities lay in paying its dues to Airports Authority of India, fuel suppliers and the income-tax department first.

Interestingly, an airline executive also told Mint that Kingfisher only needs 200 pilots against the current strength of 540 given its drastically reduced operating capacity (it operates just 170 flights a day from 340 earlier and is using just 28 of its 64 aircraft). That could probably mean the airline is alright with the idea of more pilots leaving, because that will cut its operating costs.

Seven years into the business, Chairman Vijay Mallya and team have not found a formula for turning Kingfisher into a successful airline. It's time they turned over the airline to someone who can come up with one.

If the airline can't shut down, then at least it should be given a chance at surviving in someone else's hands.

by Firstbiz Editors

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