In the excerpt from his 2014 book, ‘The Vijay Mallya Story’, K Giriprakash recounts how, in order to crush competition, Vijay Mallya set his own airline on a path to self-destruction
By trying to ‘kill’ Air Deccan, Vijay Mallya had unwittingly started to finish off Kingfisher Airlines itself. Even as Mallya was dismantling Air Deccan and Captain Gopinath’s dream, there was enough turbulence inside Kingfisher Airlines itself. Initially, the money to fund the airline had come from several companies in the UB Group itself. The group also diverted excess staff to the airline as well as recruited some of the top officials from Jet Airways and Sahara.
By 2006, Kingfisher had the full team in place and a year later, SAP AG’s enterprise resource planning software, perhaps the costliest such product in the market, was introduced into the system to keep tabs on inventories. With the staff in place, systems on stream, and the country’s largest fleet, it seemed just a matter of time before Kingfisher Airlines became the best-run airline in the country.
Hardly a hands-on CEO
Unfortunately, it didn’t turn out like that. Having everything in place was one issue, the other and more important one was the implementation of Mallya’s vision. As a leader, he had provided almost everything the board and the top management could ask for. He had worked hard, spent big dollars, hired the best people and given unlimited funds to his managers, but what was missing was a hands-on person from the industry to run the airline. Almost till the end of 2010, the airline did not have a CEO.
According to insiders, every vice-president in the company started acting as if he ran the airline. An ever-busy Mallya just didn’t have enough time to devote to the running of the airline. The fact that he hand-picked air hostesses and was always available for customers are just not good enough qualities to operate an airline. It needs a full-time, dedicated CEO, who not only implements the vision of the company but also keeps the herd together and ensures that the day-to-day operations run smoothly.
Kingfisher Airlines consisted of employees who were transferred from the UB Group companies and those who were directly recruited for the airline and had the required experience.
During the initial days, Mallya threw parties in star hotels for the staff, met their families and kept everyone happy. His officials would freely poach from other airlines, doling out double the salaries to new recruits. Unfortunately, not much thought went into such recruitments and it seemed that poaching employees from other airlines was more important than getting the right ones. The joke going around those days was that Jet would let go all those whom it didn’t want to retain and kept feeding rumours to the media that Kingfisher had poached some key executives from the airline.
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Kingfisher chose to hire executives from Jet for its sales and revenue team as it already had a large number of pilots with half of them coming from other airlines. When the two airlines were competitors, both Air Deccan and Kingfisher Airlines had signed a non-poaching agreement, but as it turned out, the agreement remained on paper.
Mallya was wrongly advised
In order to meet the huge expenses which the airline incurred for paying high salaries and building swanky offices, Mallya had started borrowing from several banks (including the government-owned State Bank of India), some of which extended the loan without adequate collateral. It looked as if some of the banks had extended loan to the airline based on Mallya’s popularity and charisma rather than the real worth of the airline.
When the airline started defaulting on repayment, some of the banks had very little as collateral to fall back upon. The only thing they could do was to have their outstanding loans converted to shares in the airline. But when the stocks sank, hitting new lows every day, all they ended up with was a piece of paper. But more on that later.
Initially, the loans were given in small tranches, about a few hundred crores once in six months for which some of the group companies of United Breweries would stand guarantee. Later, shares of the group companies like United Spirits and UB Holdings began to be pledged to get additional loans.
It increasingly began to look as if Mallya was wrongly advised on launching an airline. Unlike the liquor industry, margins from the airline industry are as low as 3 per cent and hence it is extremely important to run a tight ship.
Hence cost control is extremely essential. Almost everything, right from buying stationery to recruiting employees, has to be done with care and caution. Captain Gopinath was more than careful while spending money and could be a very hard bargainer even if it meant risking losing out on a big deal.
According to at least one employee, Captain Gopinath had once directed the sales staff to travel by bus for sales calls.
Extravagance galore
A few of them objected, stating that if they kept waiting for the bus, they would start losing out on bagging corporate accounts.
On another occasion, one of the top executives is believed to have told a journalist that the airline was toying with the idea of removing one of the two washrooms in the aircraft to make way for a few more seats which would earn them more revenues. The journalist went back shaking his head, repelled at the thought of something like that being actually implemented on Air Deccan flights.
Mallya, though, was the exact opposite. He hired or poached employees from other airlines and gave them hikes which were as high as 75 per cent. He was either being very generous or simply foolish when he decided not to fire even a single employee from Deccan Aviation after he acquired the airline. The move earned him the eternal gratitude of the staff, but the airline itself was burdened with excess manpower which meant the salary bills went through the roof.
The airline also became top heavy because of not rightsizing the staff. At one time, there were about forty officials working as either general managers or vice presidents and drawing salaries amounting to lakhs per month.Some of the employees who were interviewed for this book but did not want to be quoted said that everything the airline implemented bordered on extravagance.
For example, if a passenger turned up late at the check-in counter, he would not be turned away. Instead, one of the counter staff would buy him a ticket in another airline. All airlines work on dynamic pricing as far as tickets are concerned. Hence, tickets bought just before the departure of an aircraft are the most expensive. For example, if a passenger booked a ticket in advance, he would be able to buy it for as low as Rs 4000 and if the same ticket was bought on the day of the departure, it could cost as high as Rs 12, 000.
No wonder passengers loved the airline and still want to fly Kingfisher. It is another matter that a revived Kingfisher might turn out to be a different experience altogether, because in case the airline does get back on its wings, Mallya cannot afford such largesse.
Staying away from the price war
On other occasions, in case a flight was delayed and some passengers protested, they would be taken to the nearest five-star hotel and served unlimited quantities of snacks and beer. A pint of beer at a five-star costs as much as Rs 250, but the airline front desk at the airports would grudgingly foot the bill. Some passengers would point out that as Mallya was a liquor baron, the least the airline could do was to serve them liquor whenever their flights got delayed. It was an argument that the gound staff could have easily countered but for reasons best known to them, the ‘aggrieved’ passengers were accorded the royal treatment.
Even though he was never on time for any of his meetings, Mallya ensured that the flights took off on time. The ground staff had to send him a message the moment a flight took off and as soon as it landed in another airport. Even a five-minute delay was not tolerated and those responsible for the delay got an earful from Mallya himself.
It was actually a strange place to work for. There was hardly any accountability as far as spending money was concerned. At one point, it seemed that money was leaking out from every level and there were no checks and balances in place to run a tight ship.
“We weren’t sure if the money was being utilized properly,” an employee working with the finance department had once revealed to a journalist. For example, most of the newspapers and magazines, including international ones, bought for the passengers were left at the warehouse instead of being loaded on to the flights, though the bills for them were paid promptly. No survey was carried out to find out what kind of publication the passengers wanted to read in-flight. Some of the publications were bought from the news stands instead of taking long-term subscriptions which would have come at half the cover price.
It took a lot of effort and convincing on the part of the finance department to sell them to old newspaper vendors. But once the clearance was given, the sale of old newspapers and magazines alone fetched a few lakh rupees every month.
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The international operations was another story altogether. The first international flight was from Bangalore to London was launched on 3 September 2008 and soon after, the Bangalore-Colombo flight took off. It was assumed that Londoners would find the route attractive enough if they thought of holidaying in south India and in Sri Lanka as well. The flight would also cater to the needs of employees of IT companies based out of the IT capital, Bangalore.
According to the airline consultancy firm Centre for Asia-Pacific Aviation, the level of service on these flights was among the best offered by any international airline.
But what Kingfisher had not taken into consideration was that the introduction of its flight would unleash a price war among airlines. Several foreign airlines started offering attractive lower fares on this route. They were able to do it because they had enough money to burn to fend off the competition. Surprisingly, Kingfisher refused to join the price war, saying that its services were far superior. But it was quite obvious that an airline which was just a few years old and was launching its first international flight did not have enough spare cash to take on the well-entrenched foreign airlines.
Downsizing operations
Airline pundits will tell you that if you are launching a new service you should either have enough cash in the bank so that you can take on whatever is thrown at you by the competition or offer fares which are the lowest in the industry in the beginning itself. For example, Air Asia offers extremely low fares unmatched by other competing airlines for destinations in South East Asia. If you book tickets months in advance, the fares you get are at least 15-20 per cent lower.
Could Kingfisher follow suit? Passengers, especially those on holiday trips, are extremely cost conscious because they are paying out of their own pockets. They would rather splurge on touring more places than on transport. Kingfisher tried to stick around rather gamely in the ring for some time at least.
But its domestic operations were floundering —something it could ill afford at a time when it was expanding international operations which needed millions of rupees to stabilize. The funds from the banks were drying up and at least one senior official revealed that once the banks closed the tap, Kingfisher started defaulting on payments to everyone.
By late 2008, the first signs of trouble in Mallya’s airborne empire started showing. The US-based GECAS filed a complaint with the Indian aviation regulator, the Directorate General of Civil Aviation (DGCA), saying that Kingfisher Airlines had defaulted on rentals for four A320s, and GECAS was seeking to repossess the aircraft.
The complaint was duly received but Mallya wielded such clout in the corridors of power that other than sending a notice and a reminder, no action was taken. A frustrated GECAS then decided to drag the airline to court. It filed a case against the airline in the Karnataka High Court. But the airline managed to secure an 'ad interim' relief from the court to prevent repossession.
However, this piece of news was enough for intrepid reporters to begin sniffing around. Analysts tracking the company’s stocks smelt a rat and started going through the balance sheet of the airline with a fine-tooth comb.
The combined entity was bleeding. Deccan Aviation’s loss prior to the merger added to the losses incurred by Kingfisher Airlines was a whopping Rs 2000 crore. It was becoming obvious that, at least in this case, two negatives did not make a positive.
Unable to sustain large-scale operations because of its continued losses, the airline announced that it had deferred deliveries of thirty-two A320 family aircraft by two years to 2010-12 and planned to return fourteen narrow-bodied leased aircraft to downsize its operations.
(Excerpted from The Vijay Mallya Story by K. Giriprakash, with permission from Penguin Random House India)
