Beer vs Aviation

If reports are to be believed, Vijay Mallya is considering shedding part of his stake in his beer company United Breweries to raise cash for the ailing Kingfisher Airlines. If the news is indeed true, it is hard to fathom what Mallya is actually gambling on. United Breweries holds half of the Indian market for beer, and it is a hugely profitable business. Last year, its PBDIT (profits before interest, depreciation and taxes) was Rs 434.8 crore. Its profits after tax was Rs 197 crore.  It is also growing rapidly. And beer is a good market to be in – there is no fear of the growth slowing down in the near future.

On the other hand, Kingfisher Airlines is in a terrible shape. It has around Rs 7,000 crore of debt and is losing money hand over fist. It has not had enough cash to pay its vendors properly or even its staff. It has had to ground a lot of its fleet, and cancel hundreds of flights. Its bankers don't want to lend any more – and indeed ICICI Bank has asked for more collateral to cover even what it has loaned. The chances of Kingfisher Airlines turning around anytime soon is fairly remote. Meanwhile, despite trying his best, Mallya hasn't been able to bring in a strategic investor into the airline. Not too many investors – even deep pocketed ones – want to buy into an airline that is in such deep financial trouble. In fact, it is easier to start a new airline from scratch. And starting a new airline will probably be easier for any deep pocketed businessman than buying Kingfisher simply because a new airline will not have to deal with the brand baggage of an airline that has had to ground most of its flights and cannot guarantee flight schedules any more.

But the real issue goes deeper. In general, the aviation business is a terrible one globally. Only the best players make any sort of money – and that during good years. In India, the business is even worse because of a range of other problems – including taxes and the high cost of aviation fuel.  Currently, there is just about one airline in the country making money – Indigo. Everyone else – Jet, Indian Airlines, Go etc are losing money.

Thus to sell a highly profitable firm (United Breweries) in a great market (Beer) to fund a loss making company (Kingfisher Airlines) in a lousy business  (aviation) makes little sense.

There is no reason to believe Mallya is a bad businessman – his successes outnumber his failures. He has made great moves to consolidate his position in the liquor empire. He has seen off successive challengers – both Indian and from outer shores. His grip on his overall spirits empire as well as the brewery market is very strong. More importantly, there is nothing to believe that Mallya is exceptionally sentimental about any company or business. In the past he has got into businesses and then got out of them if he felt that the effort was not commensurate with the rewards. He had made a foray into telecom very early – long before the mobile revolution started in earnest – but exited it after a point. So it would be naïve to believe that Mallya will continue to pump money into Kingfisher Airlines at the expense of his other businesses.

There is a chance of course that Mallya is actually thinking of shedding some stake in his beer empire to pump funds into the airline. If that is true, it would be a calculated gamble taken by Mallya in order to get outsider investors. Sometimes, strategic investors agree to put money only if they believe that the promoter himself will stay invested in the business and has enough commitment. On the other hand, it could also be that these are mere rumours – and more wishful thinking on the part of his debtors than reality. Either way, one should not think that Mallya will continue throwing good money into a loss making business – just because he started it with great fanfare.