Jet-Kingfisher fiasco: What they said?

During the recent Jet-Kingfisher drama involving the illegal alliance, sacking of 1900 employees and then hiring them back, big time industrialists and ministers made statements. These statements were illogical and contradictory. Since our media is afraid to point out the discrepancies because of their vested interest, I would like point out the inconsistencies as I don’t want them to think that we are stupid. Lets analyze what each of them said.

Mr. Praful Patel’s comments

Comment no. 1: Our aviation minister Mr. Praful Patel is probably the most confused person. His first comment (Financial Chronicle – 16/10/2008) was, “Cartelisation becomes an issue only when there is no competition in the market. But in our skies we have Air India and the three low cost carriers. Also directorate general of civil aviation (DGCA) has provisions to safeguard consumers’ interest against predatory pricing.”

Illogic & Contradictions: Mr. Praful Patel strongly supported the alliance even though you don’t have to be a rocket scientist to figure out that prima facie this alliance was illegal. When two competitors sit together and control supply (route rationalisation), it is cartelisation. Reduction of supply by an agreement between competitors reduces competition. Second, the minister has mentioned it a number of times in the past that the government run airlines need to improve their performance otherwise they will disappear. In fact, once because of delay, Mr. Patel flew a private airline ditching Air India. Now all of a sudden, Air India/Indian become formidable competitors. Third, it is surprising he thinks that the financially troubled low cost airlines would be serious competition to Jet-Kingfisher combine with over 60% market share. Lastly, even if there was strong competition, I think it is not in public interest to let two competitors with 60% share to come together as no purpose would be served. Such a step will only make Naresh Goyal and Vijay mallya richer.

Comment no. 2: Mr. Patel’s comment on the government’s plan to invest around $375 million in Air India (Financial Chronicle-16/10/2008), “The government is the owner and as owners if the carrier needs capital, we have to invest.”

Illogic & Contradictions:I think this is a valid and a logical statement and it should also hold true for Jet and Kingfisher. Jet and Kingfisher are owned by its shareholders with Naresh Goyal and Vijay Mallya as the majority shareholder of their companies. It is their duty to invest. If they don’t have the money, they need to sell their stake. Sahara sold its airline to Jet, because they needed cash. The primary reason that Gopinath sold Air Deccan to Vijay Mallya was because he was short of funds. So similarly, Vijay Mallya should sell his stake. If the valuations are low, its Vijay Mallya’s problem. Even Gopinath sold his airline when the valuations were low. Now both these guys don’t want to do that. They want to sell when the valuations are high and this is the main reason behind the alliance.

Comment no. 3: At the India Aviation Summit in Hyderabad, civil aviation minister Praful Patel said, “As a civil aviation minister I can’t take any decision or give directive to airlines on HR issues.” (Financial Chronicle 16/10/2008)

Times of India (18/10/2008) “I asked him (Naresh Goyal) to sort out the issuee within 24 hours. I told him Jet may have financial difficulties but that does not mean you take such drastic actions and make it free for all. This is not acceptable.”

Illogic & Contradictions: What a turnaround? First, it is a HR problem and then all of sudden it becomes a issue of national interest. Do you want to guess why. Its the election, stupid. I think Mr. Patel received a call from party high command and explained to him the reasons why the sacking of employees was not a good idea. Such a step by Jet will lead to more firings and winning the elections would be impossible. He may have also realized that without the ministerial berth, Vijay and Naresh may also not remain as his friends.

Comment no. 4 Minister Praful Patel said that Air India didn’t have to worry. “It has been competing against these two carriers from the very beginning.” (Financial Chronicle 16/10/2008)

“There is no monopoly. Air India is a formidable airline, that can meet the challenge,”

Illogic & Contradictions: I have already mentioned that Mr. Patel has given a number of warnings to the public sector airlines to improve their performance or perish. It seems that Air India and Indian have become good performers all of a sudden.

Comment no. 5 There are adequate safeguards. Let them (low cost airlines) officially ask for what they want and then the DGCA can check if the rules and regulations are not being complied with or not. The Competition Commission of India has already taken note of the alliance and will act in case of any violation. (Times of India – 16/10/2008)

Illogic & Contradictions: Mr. Patel should know that the Competition Commission is not operational. MRTP will take at least 2/3 months to investigate. The process can be easily delayed by the airlines. Also, MRTP does have have prosecuting authority. So Jet and Kingfisher will get a breathing space of 3/4 months at the minimum. This is exactly what they need to “ride over the storm” and cheat the customers for their benefits.

Comment no. 6 Mr. Patel’s turnaround, “I have asked the DGCA and all other concerned agencies in the aviation ministry to keep a close watch on the alliance. They will not be allowed to become or act like a cartel. If they even try to do so, we will act decisively and come down with a heavy hand.” (Times of India – 18/10/2008)

Patel said he was alright with the alliance so long it was all within the four corners of the law.

Illogic & Contradictions: By the times DGCA investigates and reacts, Jet and Kingfisher will collect the money from its customers. They wouldn’t mind winding up the alliance after that as I don’t think this alliance can last for very long. With a minister by their side and their own influence, Jet and Kingfisher will have enough time to, as one of them said, “ride over the storm.”

Senior commerce and industry official comments

Comment no. 1: A senior commerce and industry official said that the alliance would help the Indian aviation industry “survive and consolidate.”

Illogic & Contradictions: Now do you think that Naresh Goyal and Kingfisher went into alliance to save the aviation industry? They are doing this so as to avoid selling their stake at low valuations. I think with two strong personalities like Naresh and Vijay, the alliance cannot last long. They will only be together till the market improves and they can raise funds at a higher valuations. Every industry survives on its own economics. Even if Naresh Goyal and Vijay Mallya want to exit their respective companies, I am sure there are others who would be willing to buy but maybe not at the price demanded by Vijay Mallya. Further, how can anyone assume that consolidation is good for the industry and the consumer? Lastly, irrespective of the fact whether the alliance will help or not, such an alliance is illegal not only in India but across the world.

Mr. Vijay Mallya’s comments

Comment no. 1: “We need to cut the flab. We need to be lean, mean and efficient.” (Times of India – 16/10/2008)

“We will do whatever it takes to cut cost and stay efficient.” (Times of India – 16/10/2008)

Illogic & Contradictions: I fully agree with what Vijay says but is he walking his talk? Why did he have to buy Air Deccan? I am sure that this action of his has not made him lean and mean. What about him spending money on Air Deccan’s unsuccessful rebranding a number of times. He even had all the planes repainted. What about his announcement at the Paris air show that he is placing one of the biggest order of planes. Vijay should realize that he can’t recover the money that he has lost because of his mistakes by creating a monopoly and ripping off the customers.

Comment no. 2: “We have set up a group to examine the route rationalisation because it does not make sense for both of us to operate the same routes with low seat factors. Rationalisation is needed so that a route is serviced at a high rate of capacity use.” (Financial Chronicle – 16/10/2008)

Illogic & Contradictions: Who built the capacity? Mallya built the capacity. So if we go by Vijay Mallya’s above logic of route rationalization, then why do we need so many airlines? We don’t need Jet or Kingfisher? We can just let Air India and Indian to do the route rationalization. We can nationalize all the airlines. At least, we will not be paying for people’s ego and their interest in buying cricket teams, racing teams and horses.

Comment no. 3: “You have to give us time to work things out. By the next quarter, the results and benefits of this alliance, will come out. We have sound professionals to guide us.” (Financial Chronicle – 16/10/2008)

Illogic & Contradictions: They have sound professionals to guide them. He must be joking. Vijay Mallya has not been able to figure what he is going to do Air Deccan till date. If he considers buying Air Deccan and placing huge orders for airplanes as sound decisions, I think he needs to get a realty check.

Comment no. 4:“We are reevaluating our entire international route structure. It makes no sense for both of us to fly to London with empty seats.” (Financial Chronicle – 16/10/2008)

Illogic & Contracdictions: If you remember, Vijay was very keen to go International. I think he may have pressured the ministry to allow him to fly abroad based on Air Deccan’s eligibility. At one time, he was asking the ministry to do away with the 5 year rule so that he can go International. Also, as mentioned above, why do we need Jet and Kingfisher to fly the London route. Air India can do it alone and we will also not have to worry about route rationalization, giving fuel to airlines on credit, load factors, or saving the airline companies from going bankrupt.

Comment no. 5:“The sentiment is not good. Banks are nervous. Shareholders don’t like us too much.” (Times of India – 16/10/2008)

Illogic & Contracdictions: I think shareholders have a right to be angry. Vijay Mallya took on more than what he can chew. He may still be right in whatever he did, but he needs to invest his own money in the airline or sell a part of his stake and not ask/expect consumers to pay more by forming a cartel. Why should banks give him money if they feel that it is risky to do so. I am sure he can sell his equity but he is not selling because the valuations are low.

Mr. Naresh Goyal’s comments

Comment no. 1: Goyal said that if the airlines did not focus on cost reduction, they would go bankrupt. (Times of India – 16/10/2008)

Illogic & Contracdictions: I am sure that both the airlines will not wind up because Naresh Goyal and Vijay Mallya will make an all out effort to protect their investment. They can raise funds at low evaluations or ultimately sell their stake lock stock and barrel. If SpiceJet can get funding, I am sure that these two can also arrange for more funds. The cost of getting the funds may be high.

Comment no. 2: Goyal said that Jet and Kingfisher flying on same route with a 40% load factor (as passenger growth has dropped) does not make sense. “Instead of having duplicate flights, it’s better either of usflies with 80% load. There is still 30% excess capacity in domestic sector and fares are 30% below costs. (Times of India – 16/10/2008)

Illogic & Contradictions: Well Mr. Naresh Goyal, taking your logic into consideration, we do not need any other airline as Air India and Indian can run flights with 80% load factor on their own. It also does not seem logical and fair that Naresh Goyal is proposing sharing of the business between Jet and Kingfisher. What about the other airlines?

Comment no. 2: “Everybody is going for code sharing, there is globally the Star Alliance and Sky Team. What’s wrong if we enter into an alliance and share resources?” (Times of India – 16/10/2008)

Illogic & Contradictions: I am not aware of the structure of Star Alliance and Skyteam but I can say with confidence that the countries in which these organizations are operating from will not allow any type of cartel. Also, I think some third parties would also be involved in these organizations. Sharing of infrastructure like reservation system, frequent flier program or maintenance facilities is different from controlling supply through route rationalization. I don’t think anybody would object if Jet was maintaining all Kingfisher planes at its facilities on certain commercial terms. We need arms length transaction in such a case.

SpiceJet, a low-cost carrier, has announced a 15 per cent reduction on advance purchase fares , and withdrawn the Rs 150 congestion surcharge. If SpiceJet can arrange for funding and also think of reducing its prices, Jet and Kingfisher need to think about their strategy.

Times of India View

It is Times of India’s (TOI) view that government or politicians should not interfere with hiring and firing decisions of employees. I think I also agree with them. However, TOI is not giving a balanced view. Even though the alliance is prima facie a cartel, it says in its editorial that “the alliance maybe a cartel.” What is “maybe” about “routr rationalization?” Its headline should have said “Jet Kingfisher form a cartel” but it didn’t. It should have come out with a more in-depth analysis of the effect of the alliance on consumers. However, one cannot expect TOI to be fair because it has a vested interest, that is, it gets huge advertising revenues from both Jet and Kingfisher. How can it expose the scam of these two companies?

To take this a step further, TOI should not involve politicians to enhance their image. When it calls the finance minister and the chief ministers to become its editor for a day, one would think that TOI is using their status to promote their own newspaper. Also, TOI’s views are biased. It has been reported in the press (Mint) that TOI uses what it calls “private treaties” and its PR subsidiary to sell news. If this is true, TOI has no moral grounds to comment on what is right or wrong. People living in glass houses should not throw stones at others.

Even though, I have criticized Jet and Kingfisher for their actions in forging an illegal alliance, I would to state the following:

(a) I believe Jet is a good company and efficiently run. I have travelled by Kingfisher and would say that Vijay Mallya did an excellent job of running the airline. However, he should have stuck to his positioning and not become over ambitious. I think his buying Air Deccan was a serious mistake which has brought him to this stage.

(b) I also believe that the airline industry has a genuine complaint of high fuel prices. How can they compete globally if they do not get fuel at a competitive price. I believe the government should look into this and reduce the taxes. For our economy to grow, we do need all segments of our transportation system running cost effectively and efficiently.

Lastly, I would request Mr. Praful Patel, Mr. Vijay Mallya and Mr. Naresh Goyal as well as others that their audience / customers are not fools. They should not try to fool us.

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