Friday, 9 March, 2012

What ails the Airline Sector - and what should the government do about it?

What ails the Airline Sector - and what should the government do about it?

There has been a major hue and cry over whether or not to bailout Kingfisher.

There are two parts to the entire Kingfisher saga:

  • Macro issues pertaining to the airlines sector

Obviously, there is much that ails the sector - not just locally, but globally. After all, other than a rare Southwest Airlines, virtually no airline across the globe makes profits consistently, year after year. This can only be due to two reasons:

  • Improper pricing - If all the players of the industry choose a suicidal pricing strategy which makes their business model unviable, there's little that can be done about it
  • Cost management - Considering the glamorous nature of the industry, the players don't focus enough on the cost structure.

Considering the above, every government across the world has to take a call on whether the sector is a strategically important one for their respective country. If it is deemed to be strategically important, the concerned government should either provide enough fiscal incentives, subsidies, etc. to keep their airlines alive. Or they should nationalise their local airlines and run it themselves. If airlines are viewed as just another business which is not strategically critical, they should simply let go of any idea of micro management. Instead, they should encourage free entry of all global airlines into their country and enjoy the fruits of crazy undercutting by all the players. Just restrict their own roles to collecting reasonable taxes, ensuring passenger safety, enforcing rules for connectivity for the entire country in lieu of licences for operating in key business centres, etc.

  • Micro issues pertaining to Kingfisher

We must remember (and insist on remembering) that nobody forced Mallyas to start Kingfisher Airlines. If Vijay Mallya wanted to spend his money on running an airline, that's his choice. If shareholders chose to invest (or punt) in Kingfisher shares, that's their funeral. If banks have chosen to lend money, that's their headache.

If PSU banks have been "pushed" to lend, however, the government may consider protecting the banks in a manner that would be appropriate without any element of a moral hazard. For this purpose, the government may perhaps appoint an independent panel led by a banker of impeccable repute like a Deepak Parekh or KV Kamath. Ideas and recommendations generated by this panel could perhaps be used for protecting the interest of the PSU banks - to the limited extent of safeguarding loans that were given to Kingfisher under duress.

So far as Kingfisher is concerned, there should obviously be no bailout of Vijay Mallya. All shares belonging to the promoters should be taken over by the lenders at a mutually agreed valuation as part/full repayment of their debts. A professional management directly reporting to an independent board should run the new Kingfisher. The lenders should get a veto power on

  • Top managment compensation including variable pay
  • Dividend declaration by Kingfisher Airlines

Employees of Kingfisher should not be artificially protected or "propped up" in any way whatsoever. We must realise that unlike landless labourers working in farms or construction workers employed in the unorganised sector, at least 98% of Kingfisher employees will be well-educated employees who have consciously chosen to be employed by the airline. Kingfisher employees are obviously reasonably well-paid white collar employees. They are not innocent victims by any stretch of imagination. They will all have a well-studied employment contract which will provide the terms of their employment and termination. Any emloyee who is terminated should simply be "taken care of" in accordance with his/her employment contract. No tears should be shed for them beyond this. We must remember that we are not living in the days where the maximum corporate salaries are pegged at artificially low levels. If the employees have chosen to be part of Kingfisher, just like they enjoyed the benefits of a "full-sized life" during its heydays, they must bear the brunt of the logical downside when the company goes under. Sad, but that's the reality of life in a market economy.

The government's role??? Certainly not to protect Vijay Mallya. Just ensure that the law of the land prevails, as the laws exist today. If at all any laws are being changed to accommodate Kingfisher, the changes should be applied only prospectively and should be applicable for the entire sector. In fact for all other sectors as well. I'm sure that people like employees of all BIFR cases would gladly join the queue for a bailout.

We must certainly not have a situation that encourages private profit and let the taxpayer bear the losses. Not even once.



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