To be told about a bail-out for his firm should in the least raises the public ire. Mr Mallya himself has denied any appeal for a bail-out for his firm. The ministry has denied too, which was reported to have recommended such a course of action. Since then, the ministry has proposed allowing 24% foreign direct holding in airline companies to allow more funds into the industry. Mr Mallya himself has announced his decision to sell off part of his stake to a wealthy Indian private investor without disclosing any names. Additionally, he is reported to be working out deals for some more working capital loans from banks.

Kingfisher’s problems have caught the public sector banks between two cleft sticks, if not Mr Mallya. Look at their predicament. The banks have provided Rs7,000 crore to the company of which Rs4,000 crore are in term loans. Even if they confiscate the assets and sell them, these will be at a discount and will hardly cover their dues. It might not be possible to recover the dues from Mallya himself as for all practical purposes the loans might be to the company and not personal loans. Even if that can be overcome, at the pace at which court cases are disposed it might take twenty years to bring the books to a close.

No wonder, the latest reports indicate that the banks are softening their stance on KF and might agree to some more funding. But in the end, the causes which plagued functioning of Kingfisher Airlines are hurting all Indian aviation companies. Typically Kingfisher’s problems are out in the open. The others are somewhat hidden from public gaze. Even at the cost of saying something which is politically very incorrect in the current situation, all Indian airline companies are more or less in the same situation. These will face the same fate as Kingfisher some time or other, unless the basic problems are reversed.

And what are these problems? Domestic airlines were started with aplomb and their market share soared in the wake of deregulation of the sector in the late eighties. Airlines mushroomed overnight and already India has seen many airlines start and close down their operations. The situation is somewhat similar to what it was before the entire aviation industry was nationalised. Even the United States which has several times bigger market, does not have as many airlines as India. And when that country saw a similar mushrooming, the end result was regulation and closure of shops by many or mergers and acquisitions. Competition is good. But when competition drives prices down to rock bottom level when most are not able to cover costs, industries go sick. Along with that public money in the form of bank loans and other facilities.

Something similar is happening to the aviation industry. Ticket prices have come down heavily in the face of fierce competition in the market place. In a press conference the troubled Kingfisher Airlines chief has referred to this trend. In this context, you can say how come some are making profits. This is because of cutting corners. No frills airlines have entered the scene which for a time are making some profit. Aviation experts point out that at the present level of undercutting, no airline can eventually earn decent enough margins.

The second woe for the airline industry is the price of aviation fuel. As such, price of oil is rising and with that price of aviation turbine fuel. On top, the state governments feel aviation is still a luxury and put almost punitive local taxes. A major chunk of the operating costs of airlines is that on aviation fuel. You cannot possibly make that up by being efficient when huge taxes are slapped on it anyway.

The Kingfisher chief has given a wild suggestion that airlines should be allowed to buy oil directly from overseas. This is simply ludicrous. An airline is a company for offering air services which is complex enough. If it has to operate a trading arm for purchase of oil, storing it appropriately and then build up facilities for filling up the fleet at all the airports it services, the company might just as well do that. The solution surely lies not in an airline doing all this other activities, but rather in having some economic sense in input taxation.

There are other issues relating to the aviation industry which militates against even common sense. Imagine for example the stipulation that foreign direct investment is allowed but not from airline companies. This has stalled all attempts to bring into the country one of the most efficient and well run airline companies in the world, Singapore Airlines, from investing in an Indian outfit. The Tatas had long time back roped in Singapore Airline for a joint venture. But what good if the policy bars such an investment. It is an open secret of the Indian aviation industry this stipulation was introduced at the instance of one of the early entrants into the industry to protect the turf for himself.

Airlines industry is typically heavy on investment. Aircraft cost money in huge amounts and these are raised on loans. Interest costs have a critical bearing on their survival. No frills airlines, full service airlines and variations of the types finally have to meet the stringent laws of economics. If there is too fast proliferation of airline companies –all funded on bank money—it is time to be careful. Regulation is needed. Ultimately, the funds come from banks and we have to be careful about funding such ventures. If the Kingfisher Airlines today flounder, the principal loser might just as well be the financing banks. Meanwhile, the industrialist might just as well continue to enjoy the good times. (IPA Service)