Never has the flamboyant Vijay Mallya been in such a tight corner before.

He took over the UB Group even before he turned 30 after his father, Vittal Mallya, passed away suddenly in 1983. Since then, he has consolidated the group holdings, shed those companies, including a car battery making venture, which didn't make sense to his business, won a corporate battle — and a war of words — with the pugnacious Manu Chabbria, wresting from him Shaw Wallace, once among the top companies in the liquor industry. Today, his beer business controls half the domestic market while the liquor business controls three-fourths of the market.

But as the saying goes, the quickest way to become a millionaire is for a billionaire to invest in the airline sector.

Kingfisher Airlines was set up in 2003 but hasn't seen a single year of profit since it got listed in 2006. Today, accumulated losses stand at about Rs 8,200 crore and the money to pay for fuel, salaries and airport fees is running out, prompting Mallya to approach the government for a bailout.

The company blames the government for its predicament — the high cost of aviation fuel, the requirement to service non-profitable routes — with a top UB Group official telling The Hindu that the politicians running the country should decide whether they want the transport sector to be robust or are happy enough with “continuing the bullock cart age.”

But market analysts believe flaws in Mallya's business plans and style of functioning lie at the root of Kingfisher airlines' woes.

In a controversial report on the airline, Veritas Investment Research analysts point out that Mallya should have never got into the airline business. “We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India's premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions,” two analysts with the research company said in a report in September this year. The report was hotly contested by the UB Group management which felt there was nothing wrong with the airline.

The problem, of course, lay in acquisitive excess. For Mallya, there was no ducking the temptation of getting into the airline sector. For one, there was the glamour, something he couldn't get enough of despite the yachts and islands. In time, the airline became a stepping stone for the pursuit of other adventures.

He acquired Whyte & Mackay, a Scottish bulk liquor maker amidst drama and glamour, holding a press conference in London to announce the deal. He bought newspapers (Asian Age was one such), fashion and movie magazines, bought and sold a TV company and added football teams to his ever expanding empire. He even added a cricket team to his list of acquisitions and called it Royal Challengers. Someone who was known for his distaste for politicians, he actually funded a party and became a Rajya Sabha MP as well.

The acquisitions wouldn't just stop there. He went on to own a racing team (Force India) which regularly competes in Formula One racing events, launched a calendar named after his brand, Kingfisher, in which the best of the models fell over each other to feature. He held New Year parties at his famed Goan palatial bungalow.

Of course, the biggest venture of them all was Kingfisher Airlines and because he was the big daddy of the glamour world, he promised flyers a class of service not usually seen among the domestic airlines. Jet Airways was good and on time, but was for busy executives; Air Deccan was for the aam aadmi, a sort of shuttle service, while the others either didn't matter or were too small.

Mallya didn't disappoint. He brought glamour into the business of running airlines. Each seat in his aircraft had a TV screen just like the international air carriers offered welcoming guests by appearing on the screen and asking them to write to him personally if they were unhappy with any service. He handpicked air hostesses, gave away goody bags to each passenger and the welcome at the airport counters had to be seen to be believed. He made you feel special. The corporate sector wanted all top executives to fly Kingfisher and they came back admiring the service.

Three key mistakes

It was when the good times seemed to last forever that Mallya made his first strategic mistake. Deccan Aviation's Capt G.R. Gopinath, who was desperately looking for a buyer for his airline, Air Deccan, had all but tied up with the Anil Ambani for a sell-out. Some last-minute delays eventually led to the collapse of the deal. That's when Mallya, who kept denying that he couldn't even think of buying an airline whose business model was different than his own, suddenly put in his bid, apparently offering more money than the previous one to clinch the deal.

It seemed a good deal in the beginning. Mallya got Air Deccan's huge market share and several aircraft as well, plus an immediate listing. Thrown in was another goody: the licence to fly on international routes as Air Deccan had been in the business for five years — a requirement by the regulator for any airline to fly overseas. But he also acquired the losses incurred by the airline.

Through a reverse merger, Kingfisher Airlines became Air Deccan and once the entire acquisition was completed with necessary approvals from the regulator SEBI in place, Mallya quickly changed the airline's name back to Kingfisher Airlines in 2008.

He spun off Air Deccan's fleet into a subsidiary called Kingfisher Red. So, Kingfisher Airlines had an economy as well as business class and flew on trunk routes including the metros, while Red did the rounds of tier-II cities' as well as some of the bigger cities. It was picture perfect.

It wasn't, actually. Mallya was not just into one business but several and each as different as the other. Normally, for such diverse businesses, one would appoint a CEO each to run it with a hands-on approach who would, in turn, report to the group chairman.

While the liquor and the beer businesses had an experienced set of officials running the show, the others needed the undivided attention of Mallya himself. More so for the airline venture. This was where his second mistake came in. The airline had everything going for itself: great brand visibility, loyal customers and a wide network. But as a former business partner of Mallya pointed out recently, he was more like an absentee landlord.

Mallya was seen everywhere and apparently took more than necessary interest in running the airline but it wasn't just good enough. The business model was coming apart and losses kept mounting. There was cannabalisation from the mother brand. “If two brands look alike, then obviously, passengers will opt for the cheaper priced,” the former partner, who did not want to be identified, said.

Industry analysts say the third mistake was that the airline should have first consolidated its domestic operations and then introduced international routes because on the foreign routes, the competition only gets bigger and with those who have deeper pockets.

Looking for a soft landing

The airline is today saddled with total debts of over Rs 6,000 crore. Mallya was forced to take loans from banks which now have a total exposure of about Rs 7,000 crore to Kingfisher Airlines, of which over Rs 1,300 crore had been converted into equity during the last fiscal as part of a debt restructuring exercise. Of the banks' total exposure, over Rs. 4,000 crore are in the form of term loans. The consortium, led by banking behemoth State Bank of India, also includes a number of other public and private banks.

But early this year, after the airline missed one of the milestones to raise Rs. 1,000 crore through global depository receipts because of the crisis in the Arab world, the lenders converted part of their loans to equity at a premium to market price. As a consequence, these banks now hold 23 per cent stake in the airline.

These loans for Kingfisher have also come at an enormous cost for the UB group. More than nine out of 10 shares of its crown jewel, United Spirits have been pledged as collateral to the banks.

Awash in liabilities, Kingfisher Airlines is today asking the banks for another debt recast and perhaps some easier terms to pay interest costs. What remains to be seen is whether the banks will agree this time because they are under extreme pressure not to do so. The government's view on the matter is, of course, the most important factor.

But in a recent interview to Business Line , UB Group chief financial officer Ravi Nedungadi pointed out that when the first debt recast happened, the price of crude was about $80 per barrel, which has now gone up to $100 per barrel while the rupee has eased past Rs. 50 per dollar from about Rs. 40 earlier. “It is obvious that the working capital requirements too has gone up,” says Nedungadi.

In its bid to reduce costs, the airline has started cancelling flights and has recently closed down its low-cost carrier Kingfisher Red which, according to one analyst, might prove to be another costly mistake. “Indian passengers are extremely price conscious and this measure may just lead the airline into a deeper mess,” he said.

The ‘king of good times' may just have to abdicate his throne some time soon if he wants to stay in business. It isn't always that you can pull off every business venture in your life time. Scotch on the rocks works. Kingfisher on the rocks doesn't.

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