Kingfisher

Kingfisher debacle to United Spirits row: Charting out the great fall of Vijay Mallya

vijay-mallya1Vivek Kaul

Vijay Mallya is too much of a stiff upper lip to have ever read the Urdu poet Mirza Ghalib. But if he has, he would know, that one of Ghalib’s most famous couplets, fits the current situation that Mallya is in, very well.
Sometime in the nineteenth century Ghalib wrote:

Nikalna khuld se aadam ka soonte aaye hain lekin
Bahot be-aabru hokar tere kooche se hum nikle

(We have heard about the dismissal of Adam from Heaven,
With more humiliation, I left the street on which you live…

Source of translation: https://medium.com/@herahussain/poetry-in-the-east-a-journey-of-discovery-of-urdu-poetry-6197767f41b4)

The board of United Spirits Ltd, India’s largest liquor company, has asked Mallya to step down as the Chairman of the company. The liquor baron may have been involved in financial irregularities as per an internal probe carried out by the company.
In a press release dated April 25, 2015, the company said: “The inquiry covered various matters, including certain doubtful receivables, advances and deposits. The inquiry revealed that between 2010 and 2013, funds involved in many of these transactions were diverted from the Company and/or its subsidiaries to certain UB Group companies, including in particular, Kingfisher Airlines Limited…The inquiry also suggests that the manner in which certain transactions were conducted, prima facie, indicates various improprieties and legal violations.”
Mallya in true Indian style has refused to bow out. ““All I wish to say is that I intend to continue as chairman of USL in the normal manner. This includes chairing monthly operating review meetings and board meetings,” he told the Mint newspaper.
Where does this confidence come from? Mallya personally holds 0.01% shares in United Spirits. United Breweries Holdings Ltd (controlled by Mallya) holds 2.90%. Other investment companies controlled by Mallya own around another 1.18%. So Mallya’s holding in United Spirits is down to a little over 4%.
Diageo, the British company to which Mallya sold United Spirits, owns 54.78% of United Spirits. Mallya’s confidence stems from the fact that while selling United Spirits, Mallya and Diageo entered into an agreement, as per which Diageo has to endorse Mallya as the Chairman of United Spirits. This, till Mallya has a stake in United Spirits.
Given this, the stage is set out for a messy legal battle, which will continue for sometime to come. Nevertheless, the question is how did Mallya end up in the mess that he has? One reason was that he took his flamboyant style a little too seriously and ended up starting Kingfisher Airlines in 2005.
Airlines are huge cash guzzlers. As Warren Buffett has said in the past: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
Kingfisher Airlines became Mallya’s bottomless pit. Mallya was in a rush to buy planes. He had plans of buying one Airbus A-320 every month until March 2012. All this needed a lot of money. Mallya loaded up on debt from public sector banks. At the same time, Mallya being Mallya could not have run a low cost airline. In a October 2012 article, Tehalka quotes an aviation sector CEO as saying: “Food served in KFA[Kingfisher Airlines], recalls an aviation sector CEO, was about Rs 700-800 per passenger compared to Rs 300 of Jet’s.”
Other than this Mallya was in a hurry to fly Kingfisher to international destinations. A domestic airline was allowed to do that only once it had completed five years of operation. That meant that Kingfisher would be allowed to fly abroad only by 2010. Mallya did not have the patience to wait for that long. He bought Air Deccan in 2007 to get around the regulation. He ended up overpaying for the low cost airline.
Further, he rebranded Air Deccan as Kingfisher Red. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer. The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a low cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake.
So in the end this did not work and Mallya decided to close down Kingfisher Red. He explained it by saying that “We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers.”
It is very difficult to run a full-service airline as well as a low cost airline at the same time. The basic philosophy required in running these two kind of careers is completely different from one another. The full service Kingfisher also soon ran into trouble leaving Mallya with a lot of debt. He had got terrible publicity for not paying the salaries of employees of Kingfisher Airlines.
Other than running the liquor and the airline business, Mallya also has interests in real estate. Over and above this, he also indulged in expensive hobbies by buying a formula one and an IPL cricket team. Running an airline is a full time business and can’t be done in a part-time sort of way which Mallya did.
The best Indian companies in the last few decades have made money by concentrating on one line of business. Airtel made money in telecom. It did not make money trying to sell us insurance and mutual funds. The same stands true about DLF. Tata, Birla and Ambani, all lost money in the retail business. Businesses over the years have become more complicated. And just because a promoter has been good at one particular business doesn’t mean it will be good at another totally unrelated business. Mallya did the same with his main liquor business, which he is now losing control of.
Over the last few years, Mallya has been battling the banks which have been going after his assets, for all the debt that is unpaid. To conclude, Mallya has always been too busy living his flamboyant lifestyle and that seems to have caught up with his businesses in the end.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on www.Firstpost.com on Apr 27, 2015

KFA and Sahara: How they have damaged capitalism

saving capitalism
Vivek Kaul
Capitalism is a bad word these days.
And who made it a bad word? The communists? The trade unionists? Those fired from their jobs? Those who fear they might be fired from their jobs? The politicians? Or simply put you and I?
Well, actually none of the above.
Capitalism has been given a bad name by those who practise it i.e. the capitalists. And the capitalists in this have been helped by the politicians and the other insiders.
In India this role has been played to the hilt by Vijay Mallya of Kingfisher and Subrata Roy of Sahara.
As Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”
Lets look at this statement first in the context of Kingfisher and then Sahara. The Kingfisher crisis has been on for sometime now and the firm has not been allowed to fail. In fact last year there was a lot of talk of even the government of India stepping in to rescue the airline. But thankfully, the government which continues to blow up the taxpayer’s hard earned money on Air India, chose not to do so with Kingfisher.
Before that as per an announcement made in April 2011, the banks which had loaned a lot of money to Kingfisher agreed to convert Rs 1400 crore of it into equity at a premium of more than 60%.
Of course with the benefit of hindsight one can clearly say that what were they thinking? At the time of conversion of debt into equity Kingfisher shares were priced at Rs 39.9 and the debt was converted into equity at a price of Rs 64.48. As I write this the share price of the former airline is at Rs 9.56 on the Bombay Stock Exchange (BSE). Interestingly, there are sellers willing to sell the share at this price but there are no buyers in the market. So this price doesn’t really have any meaning. A stock market like any other market needs sellers and buyers to function.
If there are no buyers there is no market. As of December 31, 2012, the State Bank of India, IDBI Bank, ICICI Bank and Bank of India owned 8.78% of the shares of the company. This was down from the 18.78% that these banks along with Punjab National Bank and UCO Bank held as on March 31, 2011, after the banks had converted their debt into equity. So these banks have managed to whittle down their holding in the airline but even with that they may have been left holding onto a stake which is worth next to nothing now. Since the latest numbers as on March 31, 2013 are not available it can’t be said with clarity what stake banks have still left in the airline.
Also, this is only the part that was converted into equity. Over and above this there is Rs 7,723 crore of debt that Kingfisher Airlines still owes the banks. The banks have a collateral worth Rs 5,237 core against the outstanding loans of Kingfisher. Experts remain sceptical on how much collateral, which includes Mallya’s bungalow at Candolim in Goa among other things, the banks will be able to sell to recover their loans.
The basic question that remains is that why would banks convert debt into equity at a premium of more than 60%, for an airline that even then had never made money? The answer probably lies in the fact that most of the banks that had given loans to Kingfisher, with the possible exception of ICICI Bank, were public sector banks. It can be safely said that political pressure was at play. The fact that Mallya is a member of the Rajya Sabha must have helped.
Hence those who Rajan and Zingales call the incumbents i.e. the promoter, his financiers and the politicians kept Kingfisher going, when it clearly was in no position to continue. And we have now ended up with a situation which is clearly messier.
No one in their right mind will now buy the airline given that it would be cheaper and easier to start a fresh airline than clear up the mess inside Kingfisher and re-launch it.
The moral of the story is that while capitalism creates, it is very important to let it destroy as well, otherwise there are costs for the society to bear.
In the aftermath of Kingfisher going bust the Ministry of Civil Aviation does not seem to be in the mood to issue fresh licenses, such is the fear of another airline going bust. Also, when Spice Jet recently cut ticket prices, the Ministry went out of its way to ensure that other players did not match that price. The logic being that if tickets are sold at a lower price there would be more losses, more airlines getting in trouble (read Air India) and so on.
In the process the prospective consumer i.e. you and me, lose out on cheaper tickets and perhaps better service, which would be the case with more airlines in the fray.
And more than anything the employees of the airline who had gone back to work on the assurances of the top management, continue to remain largely unpaid.
If the process of trying to rescue the airline had not been prolonged for so long, things would have been better for everyone concerned, except perhaps the promoter.
Now lets come to Sahara. Sahara is an even more blatant example of why you need to save capitalism from the capitalists. Here is a firm, which has been directed by no less than the Supreme Court of India to hand over more than Rs 24,000 crore to the Securities Exchange Board of India (SEBI) to repay its investors and is not doing so. In fact as an earlier column pointed out Sahara is probably even going against the decision of the Supreme Court. This cannot happen without political support.
In fact till date, politicians who jump at every opportunity to be seen as messiahs of the masses, haven’t spoken a word against Sahara. This is probably also linked to the fact that most politicians run cricket in India by controlling the state boards and the district cricket associations and Sahara remains the biggest sponsor of what was once called the gentleman’s game. As the old saying goes, you don’t bite the hand that feeds you.
Meanwhile the unsuspecting poor of the country continue to handover their hard earned money to Sahara. It is safe to say that Sahara has inspired a whole host of other firms to raise money from the unsuspecting public in India, knowing fully well that even if they do not follow the law of the land, things would just be fine. It also explains to a large extent why pyramid and Ponzi schemes continue to flourish in India. Nobody ever gets punished.
Rajan and Zingales point out that “Those in power – the incumbents – prefer to stay in power.” And in order to do that they tend to go any extent possible. In the process things get messier.
Hence, it is important for firms which are no longer viable to be allowed to fail, and if they are not in the mood to do it themselves, then they the law of the land should ensure that they do fail. As a certain Frank Borman once said “I’ve long said that capitalism without bankruptcy is like Christianity without hell.”
The article originally appeared on www.firstpost.com on February 16, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])



Biyani, Mallya, Suzlon, DLF: Easy money screwed up India Inc


Vivek Kaul
George Orwell the author of masterpieces like 1984 and Animal Farm once said “whoever is winning at the moment will always seem to be invincible”. The big Indian businessmen went through this phase between 2003 and 2008. They were invincible and the world seemed to be at their feet.
One impact of this was diversification or entrepreneurs following the age old adage of not having all the eggs in one basket. And so the Indian entrepreneurs went on a diversification spree. Vijay Mallya thought running an airline, a cricket team and an FI team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cake walk after they had created India’s biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel. Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business.
Banks were more than happy to lend money to finance these expansions. And if money couldn’t be raised domestically it could always be raised internationally by issuing foreign currency convertible bonds (FCCBs). The beauty of these bonds was that the rate of interest on these bonds was almost close to zero. Hence, the companies raising money through this route did not see their profits fall because of interest payments.
So everybody lived happily ever after. Or at least that’s how it looked till a few years back.
In the prevailing euphoria these entrepreneurs did not realize that all the money they were raising in the form of debt would have to be returned. Even if they did, they were confident that all these expansions into unrelated territories would soon start making money and would generate enough profits to pay off the debt.
Other than unrelated diversifications companies also borrowed to fund their expansion into their core areas at a very rapid pace. As Nirmalya Kumar, a professor of marketing at the London Business School explained to me in an interview I did for the Daily News and Analysis a few years back “capacity never comes online at the same time as demand because you have to add capacity in chunks, whereas demand goes up as a smooth function. Capacity comes in chunks and people generally add capacity at the top of the cycle, rather than at the bottom of the cycle because at the bottom of the cycle, everybody is hurt and nobody knows when things will turn around.I cannot set up a cement plant every time there is a 100-tonne more demand in the country, because when I set up a cement plant, I set up a 2 million tonne cement plant. There will be times when there will be a shortage and there will be time when there will be lots, right? So this boom and bust always takes place.” (You can read the complete interview here).
Telecom companies raised a lot of debt to establish their presence all over the country only to realize that the consumer had too much choice leading to the telecom companies having to cut calling and smsing rates to ridiculously low levels(I have a sms pack which costs Rs 25 and gives me 15,000 messages free per month. If I exhaust that limit one sms costs one paisa). At one point of time the Mumbai circle had a dozen odd operators competing.
The wind energy company Suzlon raised a lot of money through the FCCB route to expand at a very past pace and became the darling of the stock market. DLF raised a lot of debt to build a land bank.
So during the boom businesses just expanded into related and unrelated areas. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine. It lost a lot of money on it and finally sold out. Even the selling out did not help and the channel has since been shutdown. Peter Mukherjea a successful manager launched News X, which he had to sell off. Satyam, an IT company tried to diversify into real estate and infrastructure as Maytas (Satyam spelt backwards).
With all the easy money going around Biyani soon had major competition in the organized retail space with the Tata group, Birla group, Ambani group and even Sunil Bharti Mittal deciding to enter the organized retail space. Then there was also Subhiksha which expanded so fast that it soon had 1500 stores all over the country. This was also the era where media companies got into the real estate business. They also wanted to set up power and cement plants, and buy coal mines.
And most of this expansion was funded by companies by taking on more and more debt. Banks also got caught on to the euphoria that prevailed and gave out loans left, right and centre. The boom period has now run out. What we are seeing right now is the bust.
Businessmen now seem to be coming around to the realisation that they have ended up raising too much debt too fast and need to bring it down. Some of them like Subhiksha and Kingfisher have had to shut down their operations. Others are facing huge losses. As Sreenivasan Jain wrote in a recent column in DNA: “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain. (You can read the complete article here)
The realisation also seems to have come around among businessmen that they need to sell of what they are now calling their “non-core assets”. Deccan Chronicle recently tried selling its Deccan Chargers IPL team but found no buyers willing to pay more than Rs 900 crore. Over the weekend BCCI cancelled its franchise. So all the debt that was raised to get the cricket team up and going has now gone down the drain. There are next to no assets to sell against it. DLF sitting on top of more than Rs 25,000 crore debt has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore.
Hotel Leela has been trying to sell its business park. Vijay Mallya managed to sell a stake in his F1 team to Sahara. Media reports suggest that Mallya has been in talks with the British company Diageo to sell United Spirits. There are also rumors that he is trying to sell real estate that he owns in Bangalore to pay off all the debt on Kingfisher Airlines. In the meanwhile no one seems to be interested in buying Kingfisher Airlines even though the government has allowed up to 49% foreign direct investment in the aviation sector.
Kishore Biyani managed to sell off Pantaloons and Future Capital in order to pare down his debt. The Bharti group got out of the education business by selling Centum Learning to Everonn education. Also some of the big companies that had got into organized retail have either closed their stores or scaled down the level of their operations. Suzlon is in major trouble. Its FCCB loans amounting to $221million(Rs 1,160 crore) are set to mature later this month and the company is in no position to repay. Its request to extend the repayment has been rejected by the bondholders. It is now being speculated that the company will default on these loans and go in for liquidation.
The learning out of all this is that it is easy to expand when the money is easily available and the going is good. But selling out when the tide turns around is not so easy.
But what businesses should have hopefully learnt more than anything is that in this day and age it pays to focus on a few businesses instead of trying to do everything under the sun just because money to expand is easily available.
In the past things did not change in business. An interesting example is that of the Ambassador car. The car had the same engine as of the original Morris Oxford which was made in 1944. And this engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. To conclude, in the movie English Vinglish one of the characters who goes by the name of Salman Khan says “entrepreneur, shabd na hua poori ghazal ho gayi”. For the Indian entrepreneurs the expansions they thought would be as soulful as ghazals have turned into headache inducing heavy metal. Hopefully they have learnt their lessons.
The article originally appeared on www.firstpost.com on October 15, 2012. http://www.firstpost.com/business/biyani-mallya-suzlon-dlf-easy-money-screwed-up-india-inc-490747.html
(Vivek Kaul is a writer. He can be reached at [email protected])

How the new Peter Principle caused Kingfisher’s downfall


Vivek Kaul
A few years back I had booked a ticket on an early morning Kingfisher flight from Mumbai to Ranchi, or so I had thought. I came to realize I was on Kingfisher Red and not the full service Kingfisher only once I was inside the aircraft.
Sometime later I came to realize that several people I knew had had a similar experience. They had booked flights thinking they were on the Kingfisher full service, only to realize later that they were on Kingfisher Red.
The airline clarified that it was not their mistake but the mistake of the websites that did not make a distinction between Kingfisher Red and Kingfisher First.
But the question that cropped up in my mind was that why would Kingfisher, a premium-upmarket brand, want to dilute its positioning by associating itself with Kingfisher Red, which was essentially a low-cost airline.
Vijay Mallya, started Kingfisher Airlines in 2005. A few years later he tried to get into the low cost airline business, which was the flavour of the season back then, by taking over Deccan Aviation which ran Air Deccan, a low cost airline. He rebranded it as Kingfisher Red. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer.
To explain this a little differently, let us take the example of Hindustan Unilever Ltd (HUL). It sells the Lifebuoy which is targeted at the lower end of the market and goes with the line tandurusti ki raksha karta hai Lifebuoy. The company also sells Lux which is targeted at the upper end of the market and comes with the tagline filmi sitaron ka saundarya sabun.
Of course, the positioning of Lifebuoy and Lux is totally different. And HUL tries to make this very very clear in the minds of the consumer. First of all, both the products have different names. Second the pricing is very different. And third, the advertisements of both the products emphasize on the “different” positioning over and over again.
Now Mallya running a low cost airline under the premium brand name of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium.
And it’s not just about the brand name and the positioning in the mind of the consumer. The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a low cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake.
So in the end this did not work and Mallya decided to close down Kingfisher Red. He explained it by saying that “We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers.”
Kingfisher might have just survived if it had not made the mistake of buying Kingfisher Red. World-over several airlines have tried running a full-service and a low cost airline at the same time and made a mess of it. A company cannot run a low cost airline and a full service career at the same time. The basic philosophy required in running these two kind of careers is completely different from one another.
But the bigger question is what was Vijay Mallya trying to do by running a liquor business, a real estate business and an airline at the same time? This was other than spending substantial time on his expensive hobbies of trying to run a cricket and an FI team, and cheaper ones like commenting regularly on Twitter.
There isn’t really any link among the businesses Mallya runs. Some people have tried to explain that the airline was just surrogate advertising for the beer of the same name. But then there are cheaper ways of advertising than running an airline and losing thousands of crores doing it.
Businesses over the years have become more complicated. And just because a company has been good at one particular business doesn’t mean it will be good at another totally unrelated business.
Mallya is not the only one realizing this basic fact. The period between 2002 and 2008 was an era of easy money. Businesses could borrow money very easily to expand as well as get into new business. And this is what finally got businessmen like Mallya into trouble.
The British economist John Kay calls this the new Peter’s Principle. The original Peter’s Principle essentially states that every person rises to his or her level of incompetence in a hierarchy. Simply put, as a person keeps getting promoted he is bound to appointed to a job, he is not good at. The same is the case with companies which keep buying and diversifying into different businesses, until they land up in a business they don’t really understand. And that drives them down.
Mallya was a victim of the new Peter’s Principle, his non related diversification into the airline business cost him dearly. The lack of focus has hurt Mallya’s core alcohol business as well and United Spirits is no longer India’s most profitable alcohol company. That tag now belongs to the Indian division of the French giant Pernod Ricard.
An era of easy money got Indian entrepreneurs including Mallya to get into all kinds of things which they did not understand and had no clue about. Kishore Biyani brought the retail revolution to India, having been inspired by Sam Walton who started Wal-Mart. His retail businesses were doing decently well till he decided to get into a wide variety of businesses from launching an insurance company to even selling mobile phone connections. When times were good he accumulated a lot of debt in trying to grow fast. Now he is in trouble in trying to service the debt and rumors are flying thick and fast that he is planning to sell Big Bazaar, his equivalent of Wal-Mart. This after he sold controlling stake in the cloths retailer, Pantaloons.
Let’s take the case of DLF, the biggest real estate company in the country. It tried getting into the insurance and mutual fund business. It had to sell its stake in the mutual fund business and if news reports are to be believed it is trying to lower its stake in the insurance venture. It also tried unsuccessfully to get into the luxury hotel business and failed. Hotel Leela tried to get into the up-market apartments space and failed.
Reliance Energy (the erstwhile BSES) was turned into Reliance Infra and now is into all kinds of things. It is building one section of the Mumbai Metro, the completion of which keeps getting postponed. It is also supposed to build the remaining portion of the sealink in Mumbai.
The days when businesses like Tata and Birla used to do everything under the sun are long over. In fact, those were the days of license quota raj with very little competition. Hence companies could get into a new space as long as they got a license for it.
An interesting example is that of the Ambassador. The car had the same engine as of the original Morris Oxford which was made in 1944. The same engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. And when it comes to airlines its time Mallya read what Warren Buffett told his shareholders a few years back.
“Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt.”
The bigger sucker saved Buffett. But Mallya may not have any such luck
(The article originally appeared on www.firstpost.com on July 5,2012. http://www.firstpost.com/business/how-the-new-peter-principle-caused-kingfishers-downfall-368549.html)
(Vivek Kaul is a writer and can be reached at [email protected])