Some of you must have read stories of the Scarlet Pimpernel written by Baroness Orczy. Set in the Reign of Terror, these are about a foppish English baronet, Sir Percy Blakeney, considered a worthless idiot by all including his wife. But he is actually a superhero called the Scarlet Pimpernel with the singular mission of dashing off to France at the drop of a hat to save its nobility from the guillotine.

The original piece of work was a play that opened in London in 1905 to huge success, which prompted Baroness Orczy to write several highly popular Scarlet Pimpernel novels and short stories, and eventually retire in great luxury. The Scarlet Pimpernel spawned many dual-life superheroes, such as Clark Kent-to-Superman, Bruce Wayne-to-Batman, and Don Diego de la Vega-to-Zorro.

Sir Percy had many witticisms. My favourite, which the Pimpernel used in difficult situations was, “Demmed tricky business this!” This morning, it kept coming back at me as I was thinking of Kingfisher Airlines.

Here is an airline which belongs to a business group that makes money hand over fist from selling booze, leasing out prime property in the heart of Bangalore and from its chemicals and fertilisers business. Its promoter, Vijay Mallya, also owns a cricket franchise, has interest in football teams as well as the Indian Formula 1, owns prime properties all over the world, throws lavish parties, wears diamond earrings, hob-nobs with all who matter and many curvaceous ones that don’t, and is probably the richest member of the Indian parliament. He is an extrovert who gets cold feet in coughing up the additional equity needed for the banks to restructure its huge exposure to Kingfisher Airlines.

And he runs a “Demmed tricky business”. Would you like to start a business that requires astronomical amounts of capital to buy machines which guzzle giga-gallons of fuel, need large numbers of mostly overpaid people per aircraft, carry huge overheads including expensive inventory and pay fat parking fees — all to sell unknown quantities of perishables? After all, that’s what airline seats are. Each seat that remains empty once the doors are closed is bereft of value, as is a rotten apple, onion or tomato. The fruits and vegetables are better off: they carry lower fixed cost and can even be sold at a deep discount. Not an empty seat of a flying machine.

That is why the history of airlines in any competitive milieu is strewn with bankruptcies. In the US since 9/11, there have been major Chapter 11 bankruptcy restructuring for US Air (in August 2002 and September 2004); United (in December 2002), Northwest (September 2005), Delta (September 2005), and several other local carriers. Internationally, think of Sabena, Swissair, Ansett, Japan Airlines, Mexicana. The list is long.

The notion that airlines need to be ‘saved’ comes from an era when these were often government owned and ‘flying the flag’ was equated with nationalism. That’s passé. Like any other business, airlines need to fend for themselves. Rahul Bajaj was right in asking whether the government would consider bailing out Bajaj Auto if it went bankrupt. The answer is “No”. So too for airlines.

The solution is straightforward. If the economics are right — which I doubt — the banks should ask for a hefty increase in promoter’s equity contribution before doing any re-scheduling. If Mallya wishes to turn around Kingfisher, he should put a sizeable wad of real money on the table — extra risk capital to underwrite his faith in the airline’s future.

If UB equity is forthcoming, there could be a worthwhile restructuring discussion. If not, the banks should convert a sizeable part of their debt to equity, grit their teeth and take a haircut, and the pool their equity in search of a new bidder. In the meanwhile, if the country wishes to increase the heft of international investors in the industry, so be it. I couldn’t care less where the extra capital came from, so long as it is equity.

Unfortunately, this may not happen. Mallya is far too well connected to behave like an over-leveraged small or medium scale entrepreneur. He will bring all his credit chips to bear, and the public sector banks may well be ‘persuaded’ to hand out another dole.

It’s a pity. Because Kingfisher’s service is outstanding, as I can vouch being a Platinum card frequent flier. The problem is the model. Fancy seats, comely cabin crew and three course meals don’t work in India. To understand how airlines work, Mallya needs to look at how Indigo runs its business. But he won’t. Because he thinks in terms of an ultra-luxurious experience which can’t pay for itself. So, brace for two ineffective restructuring plays. One for Kingfisher. And the second, therefore, for a far worse airline — Air India. With a larger outflow to boot. “Demmed tricky business, this!”
   
 

Published: Business World, December 2011