By Adya Behera

Edited by Anandita Malhotra, Senior Editor, The Indian Economist

History is repeating itself. It was in October 2012, when Kingfisher Airlines shut its operation after a strike by its employees. The government subsequently suspended its license. Many fear that something similar is going to be the fate of the Sun group owned Spice Jet. The Low Cost Carrier (LCC) is facing stiff challenges and is driving itself towards a pitiful end which Kingfisher had to undergo two years back. So what actually went wrong with the King of good times?

The crisis-hit airline incurred a loss of around RS.7000 crore and also was blamed by the Income Tax department for tax evasion of around RS.2000 crore. There were numerous reasons for its destruction. Every big business needs an expert team of CEO and other officials to look into its day to day activities but Vijay Mallya tried to keep its administration only under his direct control, which was one of his biggest blunders. Raising fuel prices and slow GDP growth added to the woes of Kingfisher. It was then that liquor baron started cutting salaries and perks of his staffs. Another reason for its collapse is the takeover of Air Deccan, RS.550 crore acquisition and ended up incurring loss. Kingfisher Airlines was type casted as mainly the aircraft for the rich. Mallya started decreasing business class seats and routes to compensate the losses, but it all went in vain and backfired. Amidst all this turmoil, he started the service on international routes where competition was even higher with better facilities, which again made him run in losses. In order to compensate Vijay Mallya took loans from banks including SBI and many private banks with shares from its UB group as collateral. Even the brand name ‘Kingfisher ’was collateralised. While the airline was aggressively expanding, it piled up millions of dollar worth of debt. Also, starting 2008 there was a slowdown of demand. All these factors finally ended up with a total debt of more than $1 billion to a consortium of banks, mostly state owned. Eventually United Bank of India identified Vijay Mallya’s United Breweries Holding Ltd.  as a ‘wilful defaulter’ over non-payment of loans by his group’s grounded carrier Kingfisher Airlines. Amid such situations the airlines permit to fly was suspended in 2012 by the Directorate General of Civil Aviation due to financial concerns and labour problems. This is the story of a star service provider airline which had a disastrous end.

Kalanithi Maran led Spice Jet is experiencing a similar situation which Kingfisher airlines had to undergo two years back. But things are not that excruciating for Spice Jet as it was for Kingfisher as it is still paying its employees salary, has not grounded its fleet and has much smaller overdue payment problem. It is just in its initial stages, if Spice Jet takes a robust strategy of tackling the financial crisis it is undergoing right now it can manage to avoid Kingfisher’s fate. The main issue which threatens to ground Spice Jet’s operation is it’s due to Airport Authority of India (AAI). The Airline has bank guarantee of about RS.80crore and is outstanding near RS.200crores. The airline has been seeking a moratorium but its plea has been rejected. On the flip side AAI is seeking a higher bank guarantee, but the airline has been unable to do so. Spice Jet reported a loss of RS.1000crores in 2013-14. Now Spice Jet is looking for survival and is on a desperate hunt for investors but is unable to do so because of its financial conditions. Sun group’s relative inexperience in aviation business saw Spice Jet fumbling along. The LCC model of flying only one type of aircraft like Airbus A-320 used both by IndiGo and GoAir was breaches by Spice Jet by owning 15 Bombardier Q400’s for $450 million. As a result Spice Jet’s maintenance cost ballooned to over 50 percent.  Lack of support centres in India further ruined the case. Another aspect which hurt the interest of the LCC was its habit of taking Fare War to last minute. Travel portals have revealed that Spice Jet offers the lowest fare than its competitors actually half their prices in order to sell as much tickets as it can. Responding to it the Aviation Regulator has barred Spice Jet from taking bookings more than a month before so as to protect the interest of its customers because of the uncertainty lying on the airlines future. But for now it seems Spice Jet has averted the crisis as its promoters have guaranteed to put money into the airline and have also stated to come back with a strong financial plan very soon. Also the civil aviation ministry pushed for a bailout of Spice Jet calling on banks to give the cash-strapped carrier up to RS.600 crore in working capital loans and help it tide over the crisis until the airline can tie up long-term investment.

Spice Jet should definitely learn from the fate of Kingfisher Airlines and do accordingly so as to avoid a disastrous end. It should work smartly and must come up with a strategy to tackle such problems and should follow the golden rule of business- never let the firm’s problem reach the customer.

Posted by The Indian Economist | For the Curious Mind