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King of good times weighed down by woes of India's aviation industry
For Vijay Mallya - India's self-proclaimed "king of the good times" - launching an airline in India three years ago seemed like a no-brainer.
- By Amy Kazmin, The Financial Times
- Published: 00:04 November 24, 2008
New Delhi: For Vijay Mallya - India's self-proclaimed "king of the good times" - launching an airline in India three years ago seemed like a no-brainer.
His UB group, which dominates the Indian liquor market with an estimated 55 per cent share, was barred from promoting its flagship beer, Kingfisher, by a local ban on advertising alcohol.
But with Kingfisher Airlines, Mallya circumvented the restrictions and tied his brand to an industry signifying the aspirations of India's new generation.
Airlines appeared to have limitless potential - at that time, India's 1 billion people generated just 16 million domestic trips a year. "The fundamentals for aviation in India are fantastic," Mallya told the Financial Times last week. "How are people going to get around in this country? Air connectivity in India is crucial."
Yet these days, the king of the good times is having tough times. However bright the long-term prospects, sharply declining passenger numbers, rising costs and a severe capital crunch is hitting all local airlines hard. India's fledgling private airlines, such as premium carrier Jet, low-cost carriers SpiceJet and IndiGo, and the bloated state carrier Air India, are all struggling to stay aloft.
Due partly to this year's dramatic oil price shock, Indian carriers are forecast to register combined losses of $2 billion this financial year, after higher fares led to a double-digit drop in passenger numbers. And there is no quick rebound in sight, despite the recent drop in fuel prices, given the current global crunch.
"The next 12 to 18 months are going to be very tough," says Kapil Kaul, chief executive for India for the Centre for Asia Pacific Aviation. "It's going to be a very crucial time for these airlines. Everybody would be looking for cash to survive. That is the name of the game."
With overdue jet fuel bills to state oil companies piling up, Kingfisher and Jet, the two biggest carriers, have been given a six-month reprieve by the government to repay their debts. They are also in negotiations with airports over phased repayment of outstanding usage fees.
Yet airline executives and independent analysts say India's government still needs to do more to create a healthy climate for the long-term prospects of the industry. Most urgent, industry players say, is the need to slash punishing state sales taxes of up to 26 per cent on jet fuel, and replace them with a 4 per cent rate.
"The government is responsible to a large extent for the current troubles of the industry because of over-taxation," Mallya says. "It is entirely in the hands of the government to change it ... If that happens, the whole Indian civil aviation industry as we speak today, goes from red ink to black ink."
Restrictive policies
The flamboyant tycoon, who patterns himself after Richard Branson, said New Delhi may act on such a cut within three weeks, although other analysts are more sceptical about the prospects for the government to make such a move in an election year.
Mallya has also called for India to ease its restrictive investment policies, which now prohibit foreign airlines from holding stakes in domestic Indian carriers - even though other kinds of foreign investor can hold up to 49 per cent equity.
"I feel very strongly about this," says Mallya. "A private equity investor would not have as much interest as an airline would." However, other carriers have traditionally opposed such liberalisation.
For their part, Indian carriers are trying to navigate through the current problems by paring their fleets. So far, they have cut their combined capacity by about 17 per cent this year, Kaul says, and another 20 planes are likely to be removed from use in the months to come.
Yet even trimming capacity is a process fraught with tensions. This month, Kingfisher went to court and obtained an order to prevent GE Commercial Aviation Services from repossessing four A320 planes, amid a dispute between the carrier and GECAS over whether Kingfisher should pay punitive fees for breaking the lease.
Kingfisher has since returned three of the planes and the two parties are now in talks.
Kaul also says carriers can only achieve a limited amount without greater government support. "I would expect the government to bring some sanity or stability to the industry to bring the high structural costs down," he said. "Unless the government plays its role, we will head for a very negative period for the industry."
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