Who is to blame for KF Airlines' blunder?

Mon, 18 Feb Pre-Open

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Suppose a friend of yours works as a free lancer in a particular industry. As such, he does not get a regular paycheck. To meet his daily expenses, this friend takes the help of bank credit (credit cards). Now, he also wishes to buy a new car, which would require fuel and maintenance (additional expenses). Given the banking limits, he comes to you for financial aid.

Would you lend cash to your friend? If he fails to repay you on time (or at all for that matter) wouldn't you blame him for the same? Well, the answer would most likely be yes. However, despite knowing all the caveats, it would not be wrong to say that the fault is equally yours.

If you think about it, the debacle between banks and Kingfisher Airlines was of similar nature.

A difficult operating environment - with high level of intervention from the government in the form of regulations, coupled with cost pressure in the form of high, volatile fuel costs in a highly competitive market are all factors that make it difficult to gauge the impact on cash flows of an airline company.

As per the Economic Times, the total debt on Kingfisher's books stood at Rs 77.2 bn. The collateral on the banks books stood at Rs 52.4 bn. Clearly, the banks did not take adequate collateral to cover the loans. Not to mention that Kingfisher was reeling under losses to the tune of about Rs 11 bn.

It all started with the Air Deccan acquisition, which led to the start of the debt spiral. Not to mention that banks continued to fund the Kingfisher's airplane acquisitions. Further, obvious signs of trouble also seem to have been ignored. We are referring to the many flights cancellations (in October 2011), delayed payments of salaries, all developments that were widely covered by the media. As per the business daily, banks failed to even take legal action a year (December 2011) after company failed to pay dues as well. Also, it suggested that banks should have used stricter conditions such as asking the promoter to infuse equity in a timely manner and that the banks should have refrained from settling for conversion of their debt into equity, despite being done so at a premium (seemingly because of the overall difficult operating environment).

As the Mint reported recently, the banks with the highest exposure to Kingfisher Airlines include State Bank of India (Rs 16 bn), Punjab National Bank (Rs 8 bn), IDBI Bank (Rs 8 bn), Bank of India (Rs 6.5 bn), Bank of Baroda (Rs 5.5 bn), amongst others. While the banks and the airlines continue to play the blame game, it seems as if all the parties involved are equally at fault.