The financial woes of Kingfisher Airlines have grabbed media headlines these past few days. Even as Kingfisher seeks a restructuring of its massive debt owed to banks, the focus has shifted to the plight of the aviation industry as a whole, which is accumulating losses by the day. Jet Airways, by far the best-run airline, has recorded a net loss of R836 crore in the first half of 2011-12. Kingfisher?s losses are at R732 crore and SpiceJet has a net loss of over R300 crore. The public sector carrier Air India does not publish quarterly results but would easily have lost close to R4,000 crore in the first half of this fiscal. Of course, Air India is a different saga altogether, and needs to be studied as a standalone case for multiple reasons. It is further projected that the aviation companies will reel under a total debt of about $20 billion by 2012-end.
The larger question to be asked is why are private airlines, which were known to run fairly efficiently, losing so much money when India has been, by far, the fastest growing domestic aviation market over the past seven years? The domestic passenger traffic has been doubling every five years and currently stands at 50 million annually. It is poised to touch 400 million by 2020, according to trade experts.
So why are private airlines going bankrupt in the fastest growing aviation market in the world?
Interestingly, this question can easily be extended to cover some other key sectors of the Indian economy. For instance, one can also ask as to why telecom services companies are virtually going bust under a mountain of debt in the fastest growing telecom services market in the world! The growth in the mobile subscriber base in India?from about 75 million in 2003 to over 750 million in 2010?marked a 10-fold increase in a matter of just over seven years. Such market expansion has been beyond anybody?s wildest imagination, yet telecom companies are struggling financially.
Following the 3G and broadband auctions, the total debt of telecom services companies would have gone up by at least $15 billion. The total financial burden after the 3G auctions roughly worked out to $20 billion and this is mostly being funded by debt.
Another sector whose financial troubles are deepening by the day is infrastructure, where companies are running debt-to-equity ratios upwards of 4:1 with not enough cash flows visible in the near term. Infrastructure stocks have been hammered by the stock market in the past few weeks beyond recognition. The GMRs, GVKs and Lancos of the world are now reduced to being penny stocks. Incidentally, infrastructure, too, is regarded as the fastest growing demand segment in the Indian economy.
So one is tempted to repeat the larger question; if aviation, telecom and other infrastructure sectors are the fastest growing segments of the Indian economy, why are companies finding themselves in such a deep financial morass and seeking bailouts from banks?
One common behavioural pattern can be discerned in all these fast growing sectors. Entrepreneurs in their over-enthusiasm and greed have jumped into the fray without doing enough math. As a result, there is too much fragmentation in all these sectors, making individual companies unviable.
True, it has been a good ride for the consumers so far, at least in the telecom and aviation sectors. But the larger picture that is emerging now is quite scary. Clearly, this party is not going to last much longer.
There are too many players in the airline sector where there has been a race to the bottom in terms of pricing, especially in the low-cost segment. The same had happened with the telecom companies and now there is a collective move to raise mobile tariffs.
The larger argument could be that capitalism, in its initial stage of boom, goes through such irrational exuberance, prompting all manner of first generation entrepreneurs to jump into the fray and overextend themselves. These entrepreneurs miscalculate their numbers and misread business cycles, and get into deep trouble. Indeed, it is a learning process.
However, in the Indian situation, these problems have got exacerbated because of the intensity of crony capitalism afflicting these very sectors.
In most of the infrastructure sectors, political clout is a necessary asset which is leveraged to the hilt. Massive amounts of public sector bank loans have been extended to these sectors and the well-connected entrepreneurs also know how to get their debt restructured into longer maturity periods without necessarily paying anything out of their pocket for making mistakes in business decisions.
RBI, in its latest report on trends in the banking industry, has warned that the banks? exposure to the infrastructure sector is a major cause for worry. This will play out fully as the economy slows down further in 2012. One estimate is that the total bank exposure to the infrastructure sector stands at R5.6 trillion or roughly $115 billion.
The top 10 banks have lent to various infrastructure sectors, including aviation, to the tune of about $65 billion. State Bank of India (SBI) and ICICI have the largest exposure to these stressed sectors. Additionally, there is also about $25 billion of non-fund based commitments, in the form of guarantees, to the infrastructure sectors. Again, SBI and ICICI account for over 60% of these non-fund based guarantees.
No wonder, the stock markets in recent weeks have grown deeply suspicious of the health of Indian banks and have beaten down many bank stocks. Clearly, there are rough times ahead for all those invested in these sectors.
mk.venu@expressindia.com