When egos take over business sense

Thu, 25 Oct Pre-Open

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With license suspension, last nail has been driven in Kingfisher airline's coffin. While the writing had long been on the wall, the firm was kept on artificial life support system. The delay in pulling the plug has cost heavy. The lenders, fuel suppliers, airport operators and the shareholders of the company are the ones to pay for it.

That the rot had set in was blatantly obvious long time back as flights kept getting cancelled, salaries remained unpaid and loans to the company turned NPAs. Still, it was ego and power play at the top levels that kept Kingfisher flying for so long. The cancellation of KFA's license has come too late. Meanwhile, it is the lenders' and tax payer's money that has gone to a black hole. Not to mention the suffering of employees that remained unpaid and passengers.

So what was wrong with Kingfisher Airlines? While there are a lot of points one can enumerate here, they all originate from the ego of powerful man kept unchecked. This could be seen right from the birth of the airlines. Venturing into highly leveraged airline business fraught with risk and having no relation with the existing businesses should have accompanied a clear strategy that never existed. A poor management led to the losses that keep piling up. Not surprisingly, it was mainly the public sector banks that kept wasting money on this doomed business. Meanwhile, the losses just kept on getting bigger and bigger. It was again the inflated ego that prevented Mr. Mallya to file for bankruptcy at an early stage and minimize the damage.

Things went out of control when mixed with ego of the Government of India for whom letting the airline go bankrupt was a dent on nation's image. But it was ready for the losses to swell at the cost of maintaining a false image. For similar reasons - Air India's debt that stands at four times its market cap has been restructured backed by the Government guarantee. We wonder what the Government is counting on since there has been no change in the management or any performance guarantee. The Government will get away just as it has in the past with a long list of debacles. The PSU banks will have to write off the money lent to failing businesses. Needless to say, it is the tax payer's money that is at stake here. Not to mention the opportunity costs. The same resources could have been used in some other profitable venture leading to value creation for all stakeholders.

When businesses run on egos rather than economic logic, such events are inevitable. However, markets in the long run will value tangible gains. Moral of the story - avoid burning hands by investing in businesses where egos prevail over business sense.