Airline: WARNING!

It’s about time Michael O’Leary relocated to Mumbai.

I have this slightly crazy picture in my head, probably formed during boozy breakfast meetings in Wetherspoons, drinking  pints of lager with my fried eggs and bacon, that if I booked a flight on Kingfisher Airlines, India’s troubled and sometime second largest domestic carrier, I would get a pint of Kingfisher lager handed to me as I boarded the plane.  I guess that is just my little fantasy and, no, I have never done the Wetherspoons breakfast meeting either, but wouldn’t it be fun? Anyone out there up for it? Let me know.

Kingfisher Airlines is owned by the United Breweries Group, a diversified conglomerate; its Kingfisher beer brand dominates beer drinking in India, and is the drink of convenience in many Indian restaurants in the UK too: it has over 40% of the Indian brewery market and 79 distilleries and bottling plants around the world. Whilst the beer keeps flowing I bet it rues the day it, like so many other deluded souls over the years, decided to get into the airline business.

Kingfisher suspended all of its flights on Monday after staff went on strike because they hadn’t been paid since March; I think they have been pretty patient, even by Indian standards.  The company has $1.4Bn of debt, little cash flow, striking workers and now concerns that the Indian government may not renew its certification until they are confident about safety. It really needs UBG to put some cash in but, is that wise, in the circumstances? I’m not sure I’d be that brave. No one wants what, to me at least, seems inevitably going to happen here, as the debt is all held by Indian public-sector banks and, although trifling by our incompetent bank-lending standards, politicians are worried about the effect on the Indian banking system if (more likely when) Kingfisher fails.

The problem is that it takes more to build a successful and profitable business than you might think at first; you need to get several things right and, alas, in spite of UBG’s longevity and commercial success at diversification over the years, many things have conspired against it when it comes to its airline.  The most fundamental is that, lacking the sophistication and protectionism built into more developed economies, the Indian government have opened up the industry so that anyone with five leased planes can have a go: the barriers to entry are too low. This has encouraged all sorts of people to think that the time is right to get into this immature market that will undoubtedly grow considerably over the next few decades, but demand isn’t there yet to justify all this competitive enthusiasm.

Also, in the absence of that free pint of beer, or some other sensible differentiating offer, there is absolutely no scope for charging a premium price, or more pertinently perhaps, even filling all of the low cost seats, a la Ryanair. All pretty hopeless really and basic mistakes, from regulators, investors and operators on the speculative trail hoping for mugs to leverage their balance sheets long enough for them to muddle through.  I’m sure Michael is just biding his time before he does move, at least some of his attention, if not his abode, to this promising future market.

Why do folk keep on making the same mistakes?  Because people with spare cash just aren’t discerning enough; nor are they able to manage risk, as they really don’t understand what is needed to build and sustain a successful business; it is quite amazing just how few people do: do you?

I’d happily tell you if you ask; perhaps over breakfast in Wetherspoons.

Mark

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