Kingfisher’s Mumbai Office To Be Auctioned

Kingfisher-airlines

The headquarters of the bankrupt Kingfisher Airlines (KFA), which is in Mumbai, will soon be auctioned as the airline failed to pay back the money to its lenders. SBICAP Trustee Company Limited, a subsidy of State Bank OF India (SBI) took over the head office on August 10 and will soon put it up for auction.

KFA has a total debt of more than 6,027 crore rupees.  And among the consortium of 17 banks that the company owes money to, SBI has the largest share of 1,600 crore rupees.

SBICAP, on behalf of the lenders, had issued a notice to KFA under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act on May 3, 2013.

“The Act says that if the borrower fails to repay within 60 days of the notice, lenders can take possession of assets and dispose of them,” a bank official who is among the money lenders to KFA told Times of India.

The launch on the rocks

KFA had been reporting losses ever since its launch in the year 2005. After acquiring Air Deccan, the airline suffered a loss of  over 10 billion rupees for three consecutive years. And by early 2012, they were under a loss of 70 billion rupees.

Consequences

Due to shortage of funds, KFA had to ground half of its fleet and more than half the staff was deprived of their salaries.

With a staff of 6,000 members, KFA spent a total of 58 crore rupees on their salaries per month, but then there was a delay in the salaries in August 2011 and again from October 2011 to January 2012. As a result, the staff members went on strike.

The crises at KFA escalated further when the Income Tax Department froze as many as 40 bank accounts of the already crippled airlines. By January 10, 2012, KFA owed a service tax of 60 crore rupees. Thus proving that the service tax it collected from its passengers was not being paid to the service tax department.

Meanwhile, oil companies stopped supplying fuel to the airlines. In July 2011, Hindustan Petroleum Corporation Limited (HPCL) refused to supply Aviation Turbine Fuel (ATF) for two hours due to non-payment of dues. And in 2009, Bharat Petroleum Corporation Limited (BPCL) filed a case against them for the same reason.

In February 2012, Airports Authority of India (AAI) sent them a notice regarding non- payment of dues of 255.06 crore rupees. To tackle the crises, KFA decided to turn the debt into share capital in the form of Debt Recast Package (DRP). Banks contributed in this package by buying shares of KFA, but they later declared KFA as a non-performing asset as they did not make any profit. Therefore, even the banks suffered heavily.

Analysis

Should the government  come up with a bailout plan to save the dying airline?

Honestly they should not because even the banks  that tried to do so ended up in losses of  more than 500 crore rupees.

Getting more loans would make no sense unless Vijay Mallya, the owner of KFA, is willing to invest the money that he earns from other businesses.

However, its is not only KFA that’s suffering from losses.

SpiceJet Limited reported a loss of 10 percent  in the months of April, May and June. They suffered a loss because of the increase in fuel prices and the fall in the value of the rupee. Even their net profit declined from 56 crore rupees in 2012 to 50 crore rupees in 2013.

You will be surprised to know that even Air India is under a debt. It has a total debt of 42,000 crore rupees and has suffered a  net loss of 7,000 crore rupees as against KFA’s debt of 7,057 crore rupees and net loss of 1,027 crore rupees. But how is it  surviving? Why hasn’t its services been shut down like KFA’s?

That’s  because Air India is owned by the government and thus receives enormous subsidies. Therefore, the government bears both the profit and the loss.

But the government does not give any subsidies to private companies. Because if it did it will have to do so for all companies, and bailing out a loss making entity with the tax payers’ money is not justified.

Furthermore, the case of KFA gives an overview of the aviation industry in India. It is indeed shocking but true, that all the airlines, except Indigo, are incurring losses.

So, where are we lacking?

One of the problems is the declining value of the rupee, which affects sales because all transactions are carried in dollars. So if the rupee keeps depreciating, then we shall end up paying more money for fuel.

Therefore, the government needs to come up with policies that will help to keep the depreciating value of the rupee in check. And if inflation continues, and then commodities will become way too expensive for us to buy.

Another problem is the increasing salaries of pilots and technicians. This is due to shortage of trained and experienced staff in the aviation sector.

Solution

According to International Air Transport Association’s (IATA) special report on the Indian aviation industry, there are various other sectors which are evolving and could boost the Indian aviation industry. And obviously, tourism is one of them.

The Indian Tourism Industry aims to double the tourist inflow in the country. It is targeting to attract 10 million tourists by 2017 which is double the number of tourists (5.7 million) we had last year. 89 percent of the international tourists, who travel by air, contribute around 9.8 billion dollars (548 billion rupees) every year.  Therefore, if we provide them with better services, our tourism sector will become stronger which will in turn improve the Indian economy.

This is true in the case of Indian exports as well. The commerce industry aims to double India’s exports to 500 billion dollars in 2013-14. Now that the government has allowed 49 percent Foreign Direct Investment (FDI) in the aviation sector, it should be ensured that the investment is effectively implemented.

FDI should not only be used to buy shares but should also be used for the development of infrastructure. Proper measures should be taken to prevent excessive ticket pricing and fuel taxes should be reduced.

Establishment of an Essential Air Services Fund (EASF) to enhance connectivity to second and third-tier airports is also essential. Not to mention that setting up of a world-class National Aviation University and training academies would produce trained and experienced professionals.

Conclusion

If we are able to implement this plan, then the Indian aviation industry could become the best in the world.  And if we don’t, and then our situation would be worse than that of the KFA, which seems to be breathing it last.

Kanchan Monga

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