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Hard times

16 November 2011 By Jeff Glekin

India’s self-styled king of the good times has fallen from his perch. For many, Vijay Mallya embodies the unsavory flamboyance of his country’s newly rich. Some see the problems at the Kingfisher airline he founded as comeuppance. But though grave dangers stalk the entrepreneur, the turbulence in Mallya’s flight path is not all of his own making.

It’s true that Kingfisher has expanded very rapidly and seems to have taken its eye off key financials such as margins and cashflow. Kingfisher’s costs are higher relative to its peers. Its interest expense to net sales ratio stands at 21 percent compared to 6.8 percent for Jet Airways, a domestic competitor.

Kingfisher’s balance sheet also needs urgent restructuring. With net debt at 2.8 times equity, the figure is above the Asian airline average of 2.1 according to JPMorgan – though it is lower than the equivalent ratio for Jet which stood at 3.8 times. Mallya’s Kingfisher has a problem with poor cash flow. On an aggregate basis each mile flown costs the company more than it generates in revenue.

Sure, some of Kingfishers’ woes are self inflicted. But also to blame is the fact that India imposes some of the world’s highest air fuel taxes. Ad-valorem state taxes make jet fuel 60 percent more expensive than the global average.

Kingfisher also has to cope with the cut-throat pricing policies – or under-pricing policies – of the state-run airline, Air India. The squeeze is made worse by the overcrowded marketplace. All airlines are finding it difficult to pass cost increases on to the consumer.

Of course, Kingfisher has to deal with the reality of the business environment whatever stresses it may bring. The vulnerabilities of airlines should hardly come as a surprise: whole shelves of business school libraries are taken up with cautionary case histories. Air India is finding life difficult too. Indeed, it has recently requested $1.3 billion in federal aid and won an agreement with lenders to cut annual interest payments.

But while competition is to be encouraged, this doesn’t look like a fair fight. As it embarks on what is probably the most challenging chapter in its history, Kingfisher – and Vijay Mallya – should be cut some slack. By investors and air-industry policymakers.


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