(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jeff Glekin
MUMBAI (Reuters Breakingviews) - India's self-styled king of the good times has fallen from his perch. For many, Vijay Mallya embodies the unsavory flamboyance of his country's newly rich. Some see the problems at the Kingfisher airline he founded as comeuppance. But though grave dangers stalk the entrepreneur, the turbulence in Mallya's flight path is not all of his own making.
It's true that Kingfisher has expanded very rapidly and seems to have taken its eye off key financials such as margins and cashflow. Kingfisher's costs are higher relative to its peers. Its interest expense to net sales ratio stands at 21 percent compared to 6.8 percent for Jet Airways, a domestic competitor.
Kingfisher's balance sheet also needs urgent restructuring. With net debt at 2.8 times equity, the figure is above the Asian airline average of 2.1 according to JPMorgan -- though it is lower than the equivalent ratio for Jet which stood at 3.8 times. Mallya's Kingfisher has a problem with poor cash flow. On an aggregate basis each mile flown costs the company more than it generates in revenue.
(For story, "King of Good Times" Mallya slips off throne, click here)
Sure, some of Kingfishers' woes are self inflicted. But also to blame is the fact that India imposes some of the world's highest air fuel taxes. Ad-valorem state taxes make jet fuel 60 percent more expensive than the global average.
Kingfisher also has to cope with the cut-throat pricing policies -- or under-pricing policies -- of the state-run airline, Air India. The squeeze is made worse by the overcrowded marketplace. All airlines are finding it difficult to pass cost increases on to the consumer.
Of course, Kingfisher has to deal with the reality of the business environment whatever stresses it may bring. The vulnerabilities of airlines should hardly come as a surprise: whole shelves of business school libraries are taken up with cautionary case histories. Air India is finding life difficult too. Indeed, it has recently requested $1.3 billion in government aid and won an agreement with lenders to cut annual interest payments.
But while competition is to be encouraged, this doesn't look like a fair fight. As it embarks on what is probably the most challenging chapter in its history, Kingfisher -- and Vijay Mallya -- should be cut some slack. By investors and air-industry policymakers.
-- Kingfisher Airlines chairman Vijay Mallya called a press conference Nov. 15 to address investors' fears about the strength of his company. The conference followed release of results for the three months to Sept. 30 which showed losses rising to $92 million from $47 million the year before.
-- Mallya said Kingfisher had not asked its bank lenders to "take a haircut" but was looking for ways to reduce the interest paid on its $1.3 billion debt. Rates have risen to 14 percent from 11 percent last year.
-- Kingfisher, named after Mallya's best-selling beer company, cancelled scores of flights last week as it abruptly shut some routes. It has also been late paying salaries.
-- The stock has lost two thirds of its value this year, shrinking its market value to about $213 million.
-- Kingfisher, which has been asked by creditors to raise $160 million in equity, aims to launch a rights issue for up to $397 million shortly after its end-March financial year-end. It is also considering an issue of global depository receipts.
-- Mallya is worth $1.1 billion, according to Forbes magazine. His flamboyant lifestyle has fascinated many Indians, including the nearly 700,000 that follow him on Twitter.
Editing by Robert Cole and David Evans