Kingfisher Airlines mess and Bailout: Indian Government to use taxpayers money?

Last updated on: November 15, 2011 at 6:34 pm by Desh Kapoor

Kingfisher Airlines mess and Bailout: Indian Government to use taxpayers money? 2011-11-15T18:34:25-06:00 Desh Kapoor

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India’s Kingfisher Airlines – started by the Liquor tycoon Vijay Mallya – is in trouble. Massive trouble. The losses from operations have been huge, such that the Networth of the company has been eroded.

The Company has incurred substantial losses and its net worth has been eroded. However, having regard to improvement in the economic sentiment, rationalization measures adopted by the Company, fleet recovery and the implementation of the debt recast package with the lenders and promoters including conversion of debt into share capital, these interim financial statements have been prepared on the basis that the Company is a going concern and that no adjustments are required to the carrying value of assets and liabilities. (CMD Vijay Mallya to BSE in Sept 2011)

Its not that all Airlines are in trouble. Some are making profits. LIke IndiGo reported a profit of INR 700 crores earlier this year. But to be fair, India’s aviation companies are facing a daunting scenario. They have three strikes against them:

Rising Fuel Cost: Accounts for 40% of the Operating Cost of an airline, and it didn’t help that Jet Fuel prices rose by 28% since Jan and 45% since last year.
High State Tax on Jet Fuel: The Jet Fuel State taxes range from 0% in Andaman & Nicobar to 28-30% in states like Karnataka, Bihar, MP, Tamil Nadu and Gujarat. They are some of the highest in the world!
Fewer Repair Facilities: Accounts for 13% of the total costs of an Airline company. There is deficit of maintenance, repair, and overhaul units. Those that exist are very expensive because of high taxes.

So you see just between the Fuel Cost, Taxes and Repair Facilities cost, an airline company may be spending as much as 65% of the total cost! That’s a huge disadvantage. That is probably one of the reasons why SpiceJet, which made profits in the past quarter ran a loss in the latest one.

(Chart courtesy Center for Aviation)

Prime Minister to Kingfisher’s rescue

Now, Kingfisher did not do well because of the unimaginative management. But for some reason, India’s Prime Minister Dr. Manmohan Singh – the guy who ostensibly unleashed Capitalism in India – is now turning it off. He has raised the spectre of a Bailout plan for Kingfisher Airlines.

United Breweries, is the parent company for Kingfisher. So the relevant question is why doesn’t UB bail out Kingfisher? Why do the tax payers have to bear the burden of an over indulgent business tycoon?

It is very disturbing to listen to the Prime Minister saying that Kingfisher needs to be bailed out by the government. In fact the losses incurred by Kingfisher should be recovered from the earnings of UB Group, which is also owned by Mallya – asked Sharad Yadav, JD (U) leader.

If we bail out Kingfisher today, tomorrow it could be others. In any case, the Indian tax payers have been bailing out Indian Airlines and Air India for many decades now on the pretext of them being Goverment owned companies!

Thankfully, the Banking community is standing up to this blackmail by politicians – who denude the citizenry for their personal benefit of popularity and personal wealth. The All India Bank Employees’ Association has now opposed the proposed bailout by the Government.

AIBEA general secretary CH Venkatachalam said on Tuesday that, “we have addressed a letter to the RBI Governor expressing our opposition to any further loan to Kingfisher by any banks.”

He also said that the AIBEA has advised all its nominee directors on the boards of the banks to oppose any further bailout or credit facility to Kingfisher Airlines. Venkatachalam informed that the AIBEA has also demanded a parliamentary probe into the purchase of shares of Kingfisher by the banks.

Finally, someone is making sense in India!

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