Monday, November 14, 2011

The rise and fall of a castle in the air



NOT WELL-GROUNDED: The sign at a closed Kingfisher Airlines booking counter at Mumbai airport tells a bigger story.

NOT WELL-GROUNDED: The NOT WELL-GROUNDED: The sign at a closed Kingfisher Airlines 
booking counter at Mumbai airport tells a bigger story
Source : The Hindu :K Giriprakash :13 Nov 2011
How an airline obsession put a liquor baron on the rocks
Never has the flamboyant Vijay Mallya been in such a tight corner before.

He took over the UB Group even before he turned 30 after his father, Vittal Mallya, passed away suddenly in 1983. Since then, he has consolidated the group holdings, shed those companies, including a car battery making venture, which didn't make sense to his business, won a corporate battle — and a war of words — with the pugnacious Manu Chabbria, wresting from him Shaw Wallace, once among the top companies in the liquor industry. Today, his beer business controls half the domestic market while the liquor business controls three-fourths of the market.

But as the saying goes, the quickest way to become a millionaire is for a billionaire to invest in the airline sector.

Kingfisher Airlines was set up in 2003 but hasn't seen a single year of profit since it got listed in 2006. Today, accumulated losses stand at about Rs 8,200 crore and the money to pay for fuel, salaries and airport fees is running out, prompting Mallya to approach the government for a bailout.

The company blames the government for its predicament — the high cost of aviation fuel, the requirement to service non-profitable routes — with a top UB Group official telling The Hindu that the politicians running the country should decide whether they want the transport sector to be robust or are happy enough with “continuing the bullock cart age.”

But market analysts believe flaws in Mallya's business plans and style of functioning lie at the root of Kingfisher airlines' woes.

In a controversial report on the airline, Veritas Investment Research analysts point out that Mallya should have never got into the airline business. “We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India's premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions,” two analysts with the research company said in a report in September this year. The report was hotly contested by the UB Group management which felt there was nothing wrong with the airline.

The problem, of course, lay in acquisitive excess. For Mallya, there was no ducking the temptation of getting into the airline sector. For one, there was the glamour, something he couldn't get enough of despite the yachts and islands. In time, the airline became a stepping stone for the pursuit of other adventures.

He acquired Whyte & Mackay, a Scottish bulk liquor maker amidst drama and glamour, holding a press conference in London to announce the deal. He bought newspapers (Asian Age was one such), fashion and movie magazines, bought and sold a TV company and added football teams to his ever expanding empire. He even added a cricket team to his list of acquisitions and called it Royal Challengers. Someone who was known for his distaste for politicians, he actually funded a party and became a Rajya Sabha MP as well.

The acquisitions wouldn't just stop there. He went on to own a racing team (Force India) which regularly competes in Formula One racing events, launched a calendar named after his brand, Kingfisher, in which the best of the models fell over each other to feature. He held New Year parties at his famed Goan palatial bungalow.

Of course, the biggest venture of them all was Kingfisher Airlines and because he was the big daddy of the glamour world, he promised flyers a class of service not usually seen among the domestic airlines. Jet Airways was good and on time, but was for busy executives; Air Deccan was for the aam aadmi, a sort of shuttle service, while the others either didn't matter or were too small.
Mallya didn't disappoint. He brought glamour into the business of running airlines. Each seat in his aircraft had a TV screen just like the international air carriers offered welcoming guests by appearing on the screen and asking them to write to him personally if they were unhappy with any service. He handpicked air hostesses, gave away goody bags to each passenger and the welcome at the airport counters had to be seen to be believed. He made you feel special. The corporate sector wanted all top executives to fly Kingfisher and they came back admiring the service.

Three key mistakes

It was when the good times seemed to last forever that Mallya made his first strategic mistake. Deccan Aviation's Capt G.R. Gopinath, who was desperately looking for a buyer for his airline, Air Deccan, had all but tied up with the Anil Ambani for a sell-out. Some last-minute delays eventually led to the collapse of the deal. That's when Mallya, who kept denying that he couldn't even think of buying an airline whose business model was different than his own, suddenly put in his bid, apparently offering more money than the previous one to clinch the deal.

It seemed a good deal in the beginning. Mallya got Air Deccan's huge market share and several aircraft as well, plus an immediate listing. Thrown in was another goody: the licence to fly on international routes as Air Deccan had been in the business for five years — a requirement by the regulator for any airline to fly overseas. But he also acquired the losses incurred by the airline.

Through a reverse merger, Kingfisher Airlines became Air Deccan and once the entire acquisition was completed with necessary approvals from the regulator SEBI in place, Mallya quickly changed the airline's name back to Kingfisher Airlines in 2008.

He spun off Air Deccan's fleet into a subsidiary called Kingfisher Red. So, Kingfisher Airlines had an economy as well as business class and flew on trunk routes including the metros, while Red did the rounds of tier-II cities' as well as some of the bigger cities. It was picture perfect.
It wasn't, actually. Mallya was not just into one business but several and each as different as the other. Normally, for such diverse businesses, one would appoint a CEO each to run it with a hands-on approach who would, in turn, report to the group chairman.

While the liquor and the beer businesses had an experienced set of officials running the show, the others needed the undivided attention of Mallya himself. More so for the airline venture. This was where his second mistake came in. The airline had everything going for itself: great brand visibility, loyal customers and a wide network. But as a former business partner of Mallya pointed out recently, he was more like an absentee landlord.

Mallya was seen everywhere and apparently took more than necessary interest in running the airline but it wasn't just good enough. The business model was coming apart and losses kept mounting. There was cannabalisation from the mother brand. “If two brands look alike, then obviously, passengers will opt for the cheaper priced,” the former partner, who did not want to be identified, said.

Industry analysts say the third mistake was that the airline should have first consolidated its domestic operations and then introduced international routes because on the foreign routes, the competition only gets bigger and with those who have deeper pockets.

Looking for a soft landing

The airline is today saddled with total debts of over Rs. 6,000 crore. Mallya was forced to take loans from banks which now have a total exposure of about Rs. 7,000 crore to Kingfisher Airlines, of which over Rs 1,300 crore had been converted into equity during the last fiscal as part of a debt restructuring exercise. Of the banks' total exposure, over Rs. 4,000 crore are in the form of term loans. The consortium, led by banking behemoth State Bank of India, also includes a number of other public and private banks.

But early this year, after the airline missed one of the milestones to raise Rs. 1,000 crore through global depository receipts because of the crisis in the Arab world, the lenders converted part of their loans to equity at a premium to market price. As a consequence, these banks now hold 23 per cent stake in the airline.

These loans for Kingfisher have also come at an enormous cost for the UB group. More than nine out of 10 shares of its crown jewel, United Spirits have been pledged as collateral to the banks.

Awash in liabilities, Kingfisher Airlines is today asking the banks for another debt recast and perhaps some easier terms to pay interest costs. What remains to be seen is whether the banks will agree this time because they are under extreme pressure not to do so. The government's view on the matter is, of course, the most important factor.

But in a recent interview to Business Line, UB Group chief financial officer Ravi Nedungadi pointed out that when the first debt recast happened, the price of crude was about $80 per barrel, which has now gone up to $100 per barrel while the rupee has eased past Rs. 50 per dollar from about Rs. 40 earlier. “It is obvious that the working capital requirements too has gone up,” says Nedungadi.

In its bid to reduce costs, the airline has started cancelling flights and has recently closed down its low-cost carrier Kingfisher Red which, according to one analyst, might prove to be another costly mistake. “Indian passengers are extremely price conscious and this measure may just lead the airline into a deeper mess,” he said.

The ‘king of good times' may just have to abdicate his throne some time soon if he wants to stay in business. It isn't always that you can pull off every business venture in your life time. Scotch on the rocks works. Kingfisher on the rocks doesn't.

The unpleasant side of Steve Jobs.

Steve Jobs

Source :BL:D Murali :13 Nov 2011

Walter Isaacson reveals the emotional, and sometimes unpleasant side of Steve Jobs.
Ever wondered why on-off switches are an anathema to Apple devices? Because of the iconic co-founder's belief in afterlife, as captured in ‘Steve Jobs' by Walter Isaacson. To Jobs – who was about fifty-fifty on believing in God, because he felt there was more to our existence than meets the eye – the on-off switch perhaps symbolised death, as if, ‘Click! And you're gone.'

He liked to think that something survives after you die, because “It's strange to think that you accumulate all this experience, and maybe a little wisdom, and it just goes away. So I really want to believe that something survives, that maybe your consciousness endures…

 Maybe that's why I never liked to put on-off switches on Apple devices.”

HARSH HONESTY

Many have wondered how, behind a company that makes products that mean so much to most people, there was someone as mean as Jobs. Even his family members wondered whether he simply lacked the filter that restrains people from venting their wounding thoughts or wilfully bypassed it, narrates Isaacson. “This is who I am, and you can't expect me to be someone I'm not,” was the explanation that Jobs would offer.

In the author's view, Jobs could actually have controlled himself, if he had wanted. “When he hurt people, it was not because he was lacking in emotional awareness. Quite the contrary: He could size people up, understand their inner thoughts, and know how to relate to them, cajole them, or hurt them at will.”

A snatch of Jobs-speak informs that he did not think he run roughshod over people. “But if something sucks, I tell people to their face. It's my job to be honest,” defends Jobs.
Advising one to be able to be super honest, Jobs notes, “Maybe there's a better way, a gentlemen's club where we all wear ties and speak in this Brahmin language and velvet code-words, but I don't know that way, because I am middle class from California.”

DESIGNER DAD

Growing up with Paul and Clara Jobs – a high school dropout with a passion for mechanics and his salt-of-the-earth wife who was working as a bookkeeper – the couple who had adopted him soon after birth, the child Steve learnt many profound lessons. 

Not only that he was ‘chosen' and ‘special,' rather than just ‘abandoned,' but also that craftsmanship is important. “Steve, this is your workbench now,” Paul had told him when marking off a section of the table in the garage. “I thought my dad's sense of design was pretty good, because he knew how to build anything.

If we needed a cabinet, he would build it. When he built our fence, he gave me a hammer so I could work with him,” Jobs would reminisce.

Fifty years later the fence still surrounds the back and side yards of the house in Mountain View, informs Isaacson. “As Jobs showed it off to me, he caressed the stockade panels and recalled a lesson that his father implanted deeply in him.

 It was important, his father said, to craft the backs of cabinets and fences properly, even though they were hidden. ‘He loved doing things right. He even cared about the look of the parts you couldn't see.'”

An interesting sidelight in the book is about how Paul's craftsmanship helped fulfil the signed pledge the couple had made when Steve was adopted – that a savings account would be funded to pay for the boy's college education.

 “My college fund came from my dad paying $50 for a Ford Falcon or some other beat-up car that didn't run, working on it for a few weeks, and selling it for $250 – and not telling the IRS.”

BUILDING INSPIRATIONS

The ‘original vision for Apple' was the house where the family lived, built by real estate developer Joseph Eichler, whose company spawned more than 11,000 homes in various California subdivisions between 1950 and 1974, one learns. Inspired by Frank Lloyd Wright's vision of simple modern homes for the American ‘everyman', Eichler built inexpensive houses that featured floor-to-ceiling glass walls, open floor plans, exposed post-and-beam construction, concrete slab floors, and lots of sliding glass doors, describes Isaacson. “Eichler did a great thing. His houses were smart and cheap and good. They brought clean design and simple taste to lower-income people. They had awesome little features like radiant heating in the floors,” Jobs would admire, during one of his walks with the author around the neighbourhood.

Isaacson reports that the appreciation for Eichler homes instilled in Jobs a passion for making nicely designed products for the mass market.

 “I love it when you can bring really great design and simple capability to something that doesn't cost much,” he said as he pointed out the clean elegance of the houses. 

“It was the original vision for Apple. That's what we tried to do with the first Mac. That's what we did with the iPod.”

FIRST PRINCIPLES

You can find many nuggets of design gyan in the chapter titled ‘Design principles', which opens with a section on Jony Ive, the head of the company's design team. From almost quitting Apple, Ive stayed back after listening to Steve announce that the company's goal is not just to make money but to make great products.

Ive and Jobs would soon forge a bond that would lead to the greatest industrial design collaboration of their era, writes Isaacson. “Ive was a fan of the German industrial designer Dieter Rams, who worked for the electronics firm Braun. Rams preached the gospel of ‘Less but better' - Weniger aber besser - and likewise Jobs and Ive wrestled with each new design to see how much they could simplify it.”

Simplicity, explains Ive, is not just a visual style; it is not just minimalism or the absence of clutter. “It involves digging through the depth of the complexity. To be truly simple, you have to go really deep… You have to deeply understand the essence of a product in order to be able to get rid of the parts that are not essential.”

MANAGEMENT LESSON

For company bosses, a key takeaway is an insight of Jobs about why decline happens in companies like IBM or Microsoft. “The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important,” he traces. “The company starts valuing the great salesmen, because they're the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company.”

Examples that Jobs mentions are of John Akers at IBM, who was “a smart, eloquent, fantastic salesperson, but he didn't know anything about product” and Ballmer in Microsoft, so much so that Jobs did not think anything would change at Microsoft as long as Ballmer is running it.
“I hate it when people call themselves ‘entrepreneurs' when what they're really trying to do is launch a startup and then sell or go public, so they can cash in and move on,” frets Jobs. “They're unwilling to do the work it takes to build a real company, which is the hardest work in business. That's how you really make a contribution and add to the legacy of those who went before.”

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