Things fall apart for the King of Good Times

"Whatever the situation, do not neglect alcohol. No other refreshment will do. Yes, alcohol kills brain cells but it's very selective. It only kills the brain cells that contain good sense, shame, embarrassment and restraint," wrote, author P.J.O'Rourke in his book, The Bachelor Home Companion. 

This describes the paraphernalia of the situation the Indian liquor and airline baron, chairman of United Breweries Group (UB) and MP, Vijaya Mallya, often known as the King of Good Times (for whatever reasons), is in. 

While Kingfisher (KF) Airlines appears to be in a state of quandary, the liquor baron has come out openly seeking the government to bail out his airline. Responding to the Airline's request, though reluctantly at first, the government gave a nod for it. 

Now, why should the government help a private airline (financially)? What is its motive behind this? Will other airlines follow suit if government offers a bail-out package to KF? are few of the many questions lingering in our heads.

But, there is more to the crisis than meets the eye. 

The merger of Air India with Indian Airlines and that of Kingfisher prepared ground for the downfall of the Airline during 2007-08, unexpectedly. There was another merger of Kingfisher with Air Deccan, two humongous loss-makers, during the same time that contributed to further losses. The merger of KF and Deccan was hailed as a merger which would make KF Airline the largest player in the domestic aviation market and pave way for Mallya to fly his flights to overseas destinations.

Cuckoo Paul, associate editor at Forbes India, in her article, brings out the similarities between Deccan and KF Airlines: "The two are joined at the hip in many ways. Brand new planes combined with massive debt, cancelled flights, delayed salaries and frustrated lenders. All kinds of cookie-cutter solutions have been tried to revive them. Yet both remain on the flight path to perdition."

Similarly, in an article published in the DNA in 2007, an analyst from a foreign brokerage house said: "Mallya is taking delivery of the long haul Airbuses in 2008 and there is no way he would have allowed these high-cost assets to sit idle. With Deccan’s permits, Kingfisher will be able to commence international operations by mid-2008, as Deccan completes the mandatory five years of domestic service." 

This has, however, taken a severe beating on KF's brand image which has been treading a dangerous territory for the past few years.

According to a PTI story on official statistics : 

• The losses for the National Aviation Company of India Ltd (NACIL), which runs Air India, more than doubled from Rs 2,226.16 crore in 2007-08 to Rs 5,548 crore in 2008-09. 
• Similarly, Kingfisher’s losses rose almost four times from Rs 408.91 crore to Rs 1,602 crore during the same period, the figures have shown. The 2008-09 losses for liquor baron Vijay Mallya’s airline were recorded after its merger with low-cost carrier Air Deccan.

Besides merger, very high fuel costs, the global economic downturn and comparatively low yields due to heightened competition also contributed to the rise in their losses. However, the government has defended its decision for merging the two State-owned carriers saying that the combining their critical mass or size would be a key factor in helping them survive and prosper amid a fierce global and domestic competition.

Aviation industry's vulnerability

Despite incurring heavy losses, the government has offered to help the cash-strapped airline that is unable to pay its employees their pending salaries. Though most of them opine that the government's bail-out plan is not the right and the only solution  (because it, ultimately, involves taxpayers' money), the government (read: politicians) which has benefited and basked in the glory of KF's success, once upon a time, has to repay the former in some way or the other, if not there is a dire threat to the country's economy. Also, politicians have misused their power by having control over the aviation industry, making it more vulnerable than ever. 

The whole saga of Praful Patel, former aviation minister, exemplifies politicians' control over the industry. 

(Here's an article on the controversy). 
For example: A politician telephones Mallya and asks him to book a flight for the guests attending his daughter's wedding. And, why wouldn't the "King of Good Times" do it when he does not have to pay the tax, which is offered as a bait as part of their deal.

Now, why the State Bank of India (SBI), a state-owned Corporation, has to dole out another Rs15,000-crore package to save the limping airline?   

According to a report, despite the 19-bank consortium, of which SBI is a part, had serious misgivings over extending further credit to the sinking airline as their earlier loans have now been listed as non-performing assets, SBI had no option to to heed to KF's demands. As a result, SBI has suddenly broken ranks with the rest to push through the package on its own.

It also raises the question as to whether the norms have been followed by public sector banks in extending the fresh loan to Kingfisher which is on the verge of bankruptcy.

Credit Appraisal Committee Norms Violated

Proposals for such loans have to be vetted by the credit appraisal committee of the bank (a committee, before sanctioning a loan, looks into the company's repaying ability, its assets for security purposes and company's shares value in the market) and the Kingfisher case does not seem to be the type that ought to have easily passed muster. 

In April last year, Mallya got the country's public sector banks, including SBI and Punjab National Bank, to come up with a restructuring package which had them convert their debt into equity.

These banks had to buy shares of the loss-making company at a premium and reduce interest rates on loans. In the process,  the banks had to take a hair cut of Rs 500 crore when the value of Kingfisher shares plummeted to less than half the original value. (Source)

In both cases, SBI has clearly violated the committee's norms by offering a bail-out package.

After SBI offered the bail-out package, its shares plunged 8 per cent over KF's exposure concerns. Despite fall in shares and other woes associated in helping the Airline, the government is still shamelessly supporting it. This also brings to a point about where all the money is coming from. It is taxpayers' money. Here's a detailed analysis by Firstpost on how Mallya flew high on taxpayers money.     

Burden on SBI-affiliated branches 

That being said, there is also a side to the SBI which only its employees are aware of. On one side, this largest banking and financial services institution in the country offers a bail-out package to an ailing airline whose supremo is a billionaire and on the other, it pesters its employees even if there are Non-performing Assets (NPAs) worth Rs 40 to 50 crore (which they are not able to recover. The point, here, is not that it should let go off defaulters without repaying their loans, but to see where it is heading).

In the process, the parent bank (SBI) is not affected, but sub-branches and rural banks affiliated to the SBI bear the brunt. Often, rural banks are blamed for the losses incurred by the parent bank while the latter is excused.   

While the question about who will make up for the losses is open to guesswork, it is high time that Mallya realizes that sometimes "things fall apart" in life. 

P.S:  Here's an article that tells us something we did not know about Mallya.