It’s time the king of opulence brewed a different concoction

It’s time the king of opulence brewed a different concoction

It is early to write an epitaph for Kingfisher Airlines; but Vijay Mallya may have to pause, heed warnings and tread cautiously

 

Jojo Puthuparampil 

 

Those Bangaloreans who believe Vijay Mallya’s United Breweries (UB) group embodies the ‘spirit’ of the garden city are disheartened by the trouble brewing at Kingfisher Airlines (KFA). But those who are less empathetic feel the turbulent weather the airline has landed in is the result of feckless exuberance, or euphemistically fiscal indiscipline, at a time when the markets have been besieged by a spate of contagions—from sub-prime mortgage crisis to the spectre of defaults by once bellwether countries to shrinking fund flows and growth domestically, triggered by scams, policy paralysis, stratospheric inflation and a weak currency.

 

Importantly, the airline has hit an air pocket at a time when the group is facing tough competition elsewhere. For instance, though United Spirits (USL), the group’s flagship, exports liquor to over 37 countries and is the largest spirits company in the world by volume, selling 114 million cases a year and owning 21 millionaire brands (selling more than a million cases a year), it has already lost the coveted stature as the most profitable liquor maker in the country to Pernod Ricard India (PRI), the privately held local arm of French beverages major Pernod Ricard. Though USL’s beer brands still have nearly 50 percent market share in the domestic market, which is the second biggest in the world and the largest for whisky, with debts worth Rs 6,000 crore on its books, it rivals KFA (debt of around Rs 7,000 crore and accumulated losses of about Rs 6,000 crore) as a drag on UB’s financials. Rubbing salt in the wound, Kishore Rajaram Chabbria-owned ABD Distillers’ Officer’s Choice is expected to unseat USl's flagship product, Bagpiper whisky, as India’s largest selling spirit brand.

 

Decades of efforts to drive volume, overlooking margins and profitability, have taken its toll. A relentless focus on the low-price, high-volume segment where USL is the undisputed leader has also been proven to be wrong—while the premium segment has been growing at 25 percent over the last few years, the low-price segment has grown less than 16 percent.

 

Chinks began to appear in the king of good times’ armour much early. The group’s market cap has been eclipsed by the combined debt of its six listed companies—UB, USL, KFA, UB Holding, UB Engineering and Mangalore Chemicals—most of which has been spent on a spree of acquisitions, including Shaw Wallace in June 2005 for Rs 1,500 crore and Scotch whisky firm Whyte & Mackay (W&M) in May 2007 for Rs 4,800 crore. In addition, operating cash flow has been negative year after year; investment banks have swallowed words many a time after promising to infuse funds; aircraft leasing companies have reclaimed leased jets; oil companies have threatened to stop supplying fuel; tax bills have ballooned; and pilots have deserted KFA en masse. But Mallya, for whom risk-taking is a way of life, seems to brush these aside as minor roadblocks in his group’s ambitious journey to be a global major, by surpassing the likes of Diageo, the world's largest liquor maker, in scale and grandeur. 

 

Living ambitiously is a characteristic that distinguishes Mallya from most new-age Indian business magnates. For the same reason, he continues to fascinate most Indians who see him as the apotheosis of what they aspire to achieve in life. Zealously living up to his image of the flamboyant booze baron, Mallya, who placed the winning bid of £175,000 for the sword of Tipu Sultan at an auction in London and brought it back to India in 2004, has always excelled erstwhile rajas of the subcontinent when it comes to living in affluence—more than 20 residences across continents, including a $60-million villa on the picturesque island of Sainte Marguerite, half a mile off the French town of Cannes and those in Scotland, South Africa, New York City and California; three exotic yachts, one of which (Indian Empress) is among the world's larger (95 metres long) and most expensive (worth $89 million) cruisers; four private jets one of which is bedecked by a priceless Picasso; a 240-strong vintage car collection that includes Porsches, Bentleys, Maseratis and Ferraris; cricket and Formula One teams; and a stud farm at Kunigal in Karnataka whose history dates back, again, to Tipu Sultan.

 

Mallya shouldn’t be deprived of the credit for his larger-than-life accomplishments just for being his father’s son. Youngest child of an army doctor, Vijay’s father Vittal Mallya became the first Indian director of UB at the age of 23 in 1947. Founded by a Scotsman, Thomas Leishman, in 1915, UB was initially supplied liquor to British colonial troops in India. Vijay kept alive his father’s legacy by taking over the group’s reins at the age of 28 in 1983 when Vittal Mallya died of heart attack when he was only 59. While Vittal Mallya set the tone for expansive growth for UB by acquiring a slew of breweries and companies, including McDowell and Kissan, Vijay transformed the group in to a vast conglomerate of over 60 companies, spanning varied industries such as brewing, distilling, real estate, engineering, fertilizers, biotechnology, information technology and aviation.

 

All's well only if what one does ends well. Mallya, whose biggest ambition is to pilot an Airbus A380, burnt his fingers when UB group forayed in to civil aviation in May 2005. KFA, which envisioned to be ‘the biggest and the best’, was meant to be everything other domestic carriers were not—efficient and glamorous. Initially, Mallya personally picked cabin staff and instructed them to treat passengers as if they were guests in his home. And KFA loyalists relished hitherto unheard frills like goodies, valet service at check-in, live in-flight satellite television, and ‘the prettiest air hostesses’ in the sky.

 

But the going got tough very soon. And roughly six years after its flashy launch, KFA is a meek shadow of what it was supposed to be. The latest numbers are hugely disappointing—losses of Rs444.26 crore in the quarter ended December 31, 2011 and Rs1,027 crore in 2010-11.

 

However, KFA is not the lone loser in the domestic airline industry, mauled by rising fuel prices, a depreciating rupee and cut-throat competition. While IndiGo has remained an aberration (a net profit of Rs650 crore in 2011), KFA’s arch rival Jet Airways has been bleeding profusely and state-owned Air India has accumulated a debt of Rs42,570 crore (as of March 2011). The plight of domestic airlines is only a reflection of civil aviation industry’s perilous predicament elsewhere. For instance, in US alone, airlines have shed more than 130,000 jobs and lost close to $33 billion since 2000.

 

But all is not lost. A consortium of banks led by State Bank of India is ready to provide more funds if KFA arranges fresh equity of Rs2,000 crore, to help the airline maneuver near-term headwinds. Mallya has also received recapitalisation offers from two domestic investors for Rs800 crore in return for a 24% stake in KFA which will enable the airline to regain breath after tax authorities froze its accounts. And, considering the inherent strength of some of the group companies, Mallya’s personal wealth (more than $1.4 billion) and his uncanny ability to turn challenges into opportunities, no one is writing an epitaph for KFA yet.

 

But the close to one million who follow Mallya on twitter would expect him to pause, heed warnings and tread cautiously. After all, frugality is not a dirty word in India where a large chunk of the population still considers having a mingy meal of rice and lentil twice a day is opulence.

 

(This piece was written when mounting debt forced Kingfisher Airlines to ground half of its fleet)