How to lose customers and alienate stakeholders...

Nov 12, 2011

In this issue:
» IIP sinks to a two-year low
» Oil prices may continue to be in 3 digits
» Buy bonds if you love your country
» Higher inflation = higher paycheck
» ...and more!
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India's booming aviation industry seems to be filled with a plethora of badly managed companies. Or maybe it suffers from sheer bad luck. Despite the slowdown in the economy, the number of domestic air passengers rose by 18.6% YoY in the first nine months of 2011. However airline companies have not been able to profit from the same. They have been badly hit by rising fuel costs and price wars. And now the life of the second largest carrier is at stake.

Kingfisher Airlines (KFA) has been in business since 2005. Yet all it has to show for itself since then are mounting losses and destruction in shareholder value. The airline has amassed nearly US$ 1.4 bn (Rs 70 bn) in debt and is in no capacity to pay it back.

Promoter, United Breweries (Holdings) made an ill-conceived move to the aviation space. And now every single one of the company's stakeholders has been affected by its value destruction. Jet fuel suppliers have stopped giving the airline fuel credit and have asked it to make payments on a daily basis. It has also piled up unpaid fees to airport operators and other agencies adding to its financial pressures. Customers have been struggling as the airline grounded more than 120 flights over the past few days. Pilots and cabin crew have left the cash strapped airline as it hasn't been able to make timely payments to its staff. Shareholders have also dumped the stock, causing it to slump to an all time low in trade on Friday.

With problems galore, billionaire owner, Vijay Mallya made a request to finance minister and the civil aviation minister to help bail out the airline. It is requesting for bank funds at concessional interest rates and is expected to seek between Rs 2.5-3 bn as working capital loans in order to continue operations. But, just some time earlier, KFA won as much as Rs 12.1 bn in new loans after banks agreed to convert Rs 13 bn of existing debt into preferred shares. Top banks like SBI and ICICI Bank now have an over 5% stake in the carrier. So does KFA really deserve more money to squander? Or should it be left to flounder? Declaring bankruptcy may be one of the best options for the carrier.

We believe it doesn't make sense for this company to receive a bailout, unless a complete overhaul of operations is undertaken. Plus, there are far more important sectors in the economy that require lower rates of interest. Last minute solutions like allowing foreign carriers in the domestic aviation sector could prove to be a lifeline. But, since FDI in insurance and retail are still waiting for a green signal, the opening up of the sector may not happen any time soon.

So is bankruptcy the best option for Kingfisher Airlines or does it deserve a bailout? Let us know your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day

It seems like rising interest rates have finally taken a toll on the industrial output of the country. Today's chart of the day shows the link between the repo rate (rate at which the Reserve Bank of India (RBI) lends to banks) and the IIP (Index for Industrial Production) growth in the country. As per the latest data, India's IIP (Index for Industrial Production) has slumped to 1.8% in September 2011. This is the lowest in the past 24 months. The manufacturing sector grew by 2.1% while electricity grew by 9%. However, the mining sector, the third major segment of IIP, witnessed a sharp decline of 5.6% during the month. As a result of this decline, the industrial growth for the half year period (April to September 2011) was just 5% as compared to the 8.2% seen during the same period last year. Higher interest rates and growing global uncertainty is expected to dampen investment and business sentiments. The declining IIP is a further testament to this.

Data source: RBI, MOSPI

You would have thought that the prolonged recession, worsening debt situation and high unemployment in the developed world would have automatically dampened demand and led to lower oil prices. But that does not seem to be the case. In fact, the International Energy Agency (IEA) has warned that the oil market supply and demand balance remains tight, supporting prices above US$ 100 a barrel despite deteriorating conditions in Europe and elsewhere. According to the IEA, oil inventories in rich countries in September stood below the five-year average for a third consecutive month for the first time since 2004. Also they are at their lowest level in 9 years. For starters, although weak economic conditions are expected to put some pressure on demand for oil, the IEA does not expect it to fall substantially the way it had at the start of the global financial crisis in 2008-09. Meanwhile, production is not expected to increase substantially either. Already, production outages in the North Sea, China, Syria and Yemen have put pressure on oil supplies. Meanwhile, the OPEC, which controls 40% of the world's oil output, is most likely to keep its production level changed. All of which points to a tight balance between demand and supply making a case for firm oil prices going ahead.

Inflation is proving to be a double-edged sword for India Inc. Sustained price rise is upping input costs and squeezing margins, but the employees of the companies may be happy with high inflation. This is because waking up to the rising inflationary pressure on day to day life of their staff, a majority of Indian companies plan to dole out double digit hike in the employee salaries and bonuses this fiscal. This comes at a time when a survey shows that on an average two out of three employees are actively looking to switch their jobs. As per the survey, conducted among senior executives such as CEOs, CFOs and HR heads, about 86% of the companies in India are planning to increase the salaries and annual bonuses of their employees in the current fiscal. The salaries at Indian companies are usually determined by factors such as performance of employee and employer, the available budget and the payouts at other peer group firms. However, for the first time employers in India have also considered the impact of inflation in determining employee salaries.

Global markets have been swinging like a pendulum every time there is a slightest hint of deterioration or recovery of the debt laden European economies. However, probably it is time that markets stop looking for short term cues from the Eurozone. For the long term prospects of the economies are clearly sealed. Any temporary improvement in sentiments therefore will be unsustainable. Investors thus need to factor the more realistic assumptions of growth rates in developed economies and the consequences thereof.

Economies in the euro zone are bracing themselves for bitter consequences of their economic excesses. While the likes of Spain, Portugal and Italy are staring at a GDP de-growth in 2012, the relatively stable ones too will hardly see any economic expansion. As per the European Union, the Eurozone's inflation adjusted GDP growth would be just around 0.6% in the coming year as against the earlier projection of 1.9%. Most of the bleak economic outlook stems from possibility of high unemployment rates and low consumption spending. Hence once the biggest buyers of consumer discretionaries stop spending, it is left to the emerging economies to keep up the demand.

Think for a moment that you are a citizen of a nation that is knee deep in debt and you are urged by one of the top politicians to part away with some of your money in order to repay the debt. You would be appalled at the audacity of the person making the plea, isn't it? After all, why should you pay for the excesses committed by someone else? However, would you behave in a similar manner if you are told that your motherland is in danger and if you are a real patriot, a true son of the soil then you should do your bit to save the nation? Chances are that you would readily give in to the plea and open your purse strings far and wide.

Well, this is the exact same tactic being used by some of the countries to help them crawl their way out of the enormous debt that they have piled on. As per the Wall Street Journal, European Governments and banks are increasingly turning towards their citizens and customers and selling them bonds in the name of patriotism. And it goes without saying that the interest rates that citizens would earn on these bonds would be less than what the Government would be willing to pay to their other lenders like professional investors. So, what is the crux of the story? It is that whoever brings the Government finances to ruin, eventually it is the public that is left holding the baby.

It was a mixed week for the world stock markets. While the developed world with the exception Japan closed in the green emerging markets ended the week in a negative territory. The US stock markets were up 1.4% during the week. Signs of stabilization in Europe with Italy's senate approving austerity measures buoyed markets. Further, measures from Greece to form a national unity government also provided some relief to the investors.

It was a truncated week for the Indian stock markets. Weak Index of Industrial Production (IIP) data and continued selling pressure in the banking space amidst Moody's downgrade overweighed markets, closing the week 2.1% lower. Weak corporate earnings by index heavyweights also dented investor sentiments.

Source: Yahoo Finance

 Weekend's investing mantra
"I deal in facts, not forecasting the future. That's crystal ball stuff. That doesn't work." - Peter Lynch

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32 Responses to "How to lose customers and alienate stakeholders..."

Harshad Sheth

Nov 14, 2011

I feel no hard earned money of poor tax payers should be spent for Bailing out such companies. Mr. Mallya has spent millions of rupees on cricket etc. He should be able to manage or close down the company or go in for filing Bankruptcy application.

Many people though that Air Lines industry is very lucrative and hence jumped into the fray there by creating unduly severe competition leading to spoiling the aviation market. It is better such industry, be it aviation or any other industry, close down.
I only hope some financial institute or Poitician does not et involved in bailing it out.


Chandresh Bhatt

Nov 14, 2011

First of all, the management should have the understanding of the business as airline business is highly cost-sensitive sector. Secondly, India is a growth story, which will continue over the next 10-15 years and during this period such occasions will keep coming. New companies will keep emerging and many will die and many will mark their success globally. So I think govt. should not bother for such cases.

The role of lending bankers is also raising a big question. IN SUCH A LOSS MAKING BUSINESS, WITH WHAT SENSE THEY CONVERTED THEIR LOANS IN PREF. SHARES. They are also playing with the public money. It doesn’t make any sense to convert debt into pref. shares in a loss making entity.

Lastly, this one-off case should not be a precursor for policy initiative for opening up of the sector for FDI. Depending on the sector requirements govt. should open it for FDI.



Nov 13, 2011

whatever we discuss, its all money, bribe, commission, influense, threating, which stands first in the line. our corruptive polical and beurocratics will act in favour of faudulent industrialist.



Nov 13, 2011

No! This company does not deserve a bailout considering the kind of flamboyant and lavish style of management under Vijay Mallya. I strongly believe that this company is not capable of repaying loans already taken. So where is the justification for further loans for a bailout ?



Nov 13, 2011

allow it to go kaput.....
It will be a warning bell for all others too. Let the politicians not waste tax payers money in such huge waste.


gs prasad

Nov 13, 2011

Kingfisher Airlines must not be given bailout by banks, after all its the depositors money in the banks, it should not be plundered to get bad money from good money. Let the Government do something, because its guidelines to private airlines to mandatorily fly in uneconomical routes have contributed to some extent for the current status of KFA



Nov 13, 2011

If Government or the banks think of bailing out Kingfisher Airlines to save Vijay Mallya, then they are definitely the promoters of SCAMS. Vijay Mallya inspite of knowing the difficulties faced by the Airlines had ventured into the business to get fame and prestige for his brand now let him handle it. He is a successful business man. Tomorrow Ambanis, Ruias, Tatas will also come forward. It is better to save country than to save Mallya.


B K Sinha

Nov 13, 2011

I find it surprising that we should be discussing about bail out.No one forced Kingfisher to enter into aviation sector. Once into the business, it indulged in senseless acquitision and flamboyancy.Its management is grossly inefficient, visionless and made no realistic plan of action for survival in the competitive business environment.Bank and fin institution have already done it a favour. It should be allowed to die now to give signal to everyone that inefficiency does not pay.



Nov 13, 2011

In India we all i.e. Politician and Political Parties Policy Makers, Industrialists & Corporate Bodies, Banking & Financial and Economists advisers need rethinking on “ the steps taken after 1992 onwards in giving/bring relaxation in relation to Agriculture, Industries, Service Sectors and Trade. After nationwide discussions and debate in respect of benefits and shortcoming rather drawbacks of the relaxation which is main cause of corporate corruptions and increased in corruption of politician which is now day today features in our Country resulting improper utilization of already available limited resources. If we did not do this now then we will very soon falter in every field and sectors of economy resulting unrest and uncertainty all over the country. The case of KFA is good example of failures in the Private sector in India. Further, The Steps taken by RBI to tame inflation has completely failed. Few months back I had pointed out that the real cause for food inflation is bottleneck in PDS in India. The government could not controlled the hoarding or put certain restriction on Food Merchants and Middlemen in the systems and therefore the steps of RBI dampened the spirit of Entrepreneur Class those whant to invest in India of both Indians and Foreigners willing to come in India. After AIR INDIA now KFA next will be MTNL, BSNL, SAIL COAL INDIA and so on. Do we have sufficient fanatical resources to bailout each and every Private or Public sector Companies when Govt. itself is struggling to control increasing deficite in budget .Please note what is happening in Europe and America. I fear the uncertainty prevailing in these area will be a Global Phenomena worst than 2008.


hiroo alimchandani

Nov 13, 2011

Yes in my opinion bankrupcy is the best solution.It is not too big to go bankrupt.
Why bail out,when companies like King fisher are so tricky who keep on misusing loans to promote other liquor businesses,let them face the problems and pass on to another buyer who could prove efficient if he has to inject his own funds.

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