From good times to dreadful debt hangover: How Indian liquor baron Vijay Mallya’s Kingfisher airline dream fell from the skies

October 23, 2012
October 23, 2012

Indian billionaire Vijay Mallya inherited his father’s brewing business including the Kingfisher beer brand, then diversified into aviation.

Now his Kingfisher Airlines has been grounded and had its flying license suspended. The carrier, which launched commercial service in 2005, is in debt to the tune of $2.5 billion. Its staff, who are owed seven months of unpaid wages, have been holding angry protests, brandishing placards with slogans such as: “Is your party over, Mr Mallya?”

Kingfisher has offered staff three months worth of back pay, which they just rejected. India’s aviation regulator has said it is unlikely Kingfisher will take to the skies again. (Mallya and Kingfisher did not immediately return Quartz’s calls seeking comment.)

Selling bling to budget shoppers: How Kingfisher’s high-flying prices fell flat.

One of Kingfisher Airlines’ business errors was to offer higher-end services to the mass Indian market. The 56-year-old Mallya is a legislator, a legendary playboy, and a Formula One backer who the India media nicknamed the “King of Good Times.” The billionaire’s advertising campaigns (video) revolved around the idea that flying with his airline allowed passengers temporary membership of his own exclusive and luxury-filled world. Kingfisher offered cocktails and gourmet food.

“India’s mass market customer cannot, or will not, pay for this kind of premium service,” says Captain G.R. Gopinath, founder of Deccan Charters, which operates small aircraft in Gujarat, in an interview. “You can sell high-end services to a small number of wealthy people. But economy passengers shop based on price, and Kingfisher’s economy class service is often not as cheap as a budget airline.”

Gopinath sold Mallya a controlling stake in his low cost carrier Air Deccan in 2007.  Mallya renamed it Kingfisher Red and made other changes Gopinath was upset about. (Mallya closed Kingfisher Red last year.)

Others share Gopinath’s analysis. “Kingfisher has the business model that tries to cater to the elite segment when India is quite [a price] sensitive market,” retired Air India executive director Jitendra Bhargava recently told India’s Economic Times.

Mallya did cut costs at his airline eventually, removing trimmings such as masks and toiletries from coach. Still, Kingfisher has never made a profit.

Billionaire superpowers backfire?

One of Mallya’s political slogans is “the power of a billion.” That refers to India’s vast population, of course. But the tycoon’s own billionaire superpowers could have backfired on Kingfisher. His lenders were likely too soft on him.

“If the banks had acted aggressively a year ago, perhaps the airline could have been saved,” muses Gopinath.

Kingfisher restructured its loans back in January 2011. The banks agreed to a lower interest rate and took preference shares in the airline on the condition that it would list securities in Luxembourg at a later date. That deal was shelved.

It raised questions about why India’s state owned banks chose to rely on the future good grace of equity markets instead of pushing Mallya to restructure or rescue the company earlier. Lenders are now conceding that while their loans to Kingfisher Airlines were backed by collataral or guarantees, according to India’s Business Standard, they “had little option to either sell the assets or securities, or invoke guarantees.” Kingfisher shareholders should query whether the restructuring terms could have been tighter.

A medicinal dose of whiskey money could fortify the airline, which could yet be saved. Mallya has been extremely successful in the drinks industry. His United Spirits company is valued at over $3 billion, owns India’s best selling whiskey, McDowell’s, and has caught the eye of Britain’s Diageo. As BreakingViews points out, Mallya could raise fresh equity for Kingfisher Airlines by striking a quick deal to sell part of United Spirits to Diageo.

That would be the best outcome for staff and creditors. But it’s unclear that Mallya is committed to resuscitating his airline dreams at the price of carving off other parts of his business empire.

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