F1: will Kingfisher Air's losses affect Formula One's Force India?

Kingfisher's "kingfisherworld.com" website's media section went silent in February 2007 after a flurry of good news stories.

That was half-a-year before the company's founder Dr. Vijay Mallya announced that he (personally) would purchase the Spyker Formula One Team from a group of venture capitalists who turned out to be more venture than capital. Mallya in fact co-owns the team with Michiel Mol who owns a large part of Lost Boys International, a major sponsor for the team in under previous ownership.

Before Spyker's involvement the team was known as Midland having been bought from Eddie Jordan as a financial basket case. Unfortunately, Alex Schnaider's Midland money wasn't enough to fund the team and its development.

It's fortunate that Mallya's power base in brewing and distilling is doing well for Formula One is a massively expensive sport.

The team has support from a lot of not very wealthy sponsors. that's not a criticism of the sponsors but it's a fact of life that the people that generally sponsor F1 are those with very deep pockets.

So it's a surprise to see AVG, in global software terms a minnow despite a large share in anti-virus and computer security software, compared to the names seen on the side of other teams' cars.

ICICI bank isn't small - and in fact it is currently claiming to be bucking the international trend for banks to be in trouble. Another large company with sponsorship credits is The Reliance Group, the website for which says "The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 34 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India." For students of business, Reliance is an interesting case - a company from "the third world" that is a strong competitor because of globalisation. It is a major player in oil and gas and textiles adopting the principle that it's best to own the supply chain from top to bottom.

Foster Denovo is a UK independent financial adviser. With the financial industry in turmoil, UK financial businesses are facing extremely tough times.

Medion International is a German consumer electronics retailer with a presence in other markets. That's a market that is set to struggle as consumer spending is falling.

STL communications provides commstech and some cash to Force India but also Honda and some major corporations as well as many smaller firms.

UPS Direct is a UK supplier of systems to prevent computers and other equipment dying when the power goes off. They are not small but as the UK's economy dries up, providers of services to commerce will inevitably find a slow down in sales.

The Dalmore, a single malt, is also credited as a sponsor - but like Kingfisher (drinks or airline is not very clear) it's a house brand for it's owned by Whyte and Mackay which United Breweries has just bought.

Obviously, Airbus aren't small - but Kingfisher Airlines is a big customer of Airbus. We make no allegations and cast no aspersions but we could see that, in some countries, the relationship between the chairman of a large company and one of his suppliers where money is paid to one of his private interests would be potentially a cause for investigation.

RotoZip produce clever hand-held tools for the construction industry - an industry which is already in serious decline across the world.

Which brings us back to Kingfisher Airlines. They promise "KINGFISHER Airlines promises its guests an unparalleled Good Times experience and sets new standards in the Indian skies" and are unashamed of their policy of getting the best looking women they can find as cabin crew (let's face it, there are a few airlines that could usefully adopt this policy, not mentioning any names). After all, this is an airline that sponsors a "Swimsuit Special" glamour section on its website.

But this week, Kingfisher and Jet, India's main low-cost carrier which has recently begun flights to Singapore and Malaysia, have made an announcement that falls short of merger but is very close to integration.

Increased fuel prices and decreasing air travel are blamed for both airlines making whacking losses in recent months and the companies see it continuing.

Described as "an alliance" in some respects, it is a rescue package for both by the other: the announcement says "The two airlines will be able to rationalize their operations and derive the maximum synergies and thereby offer the best possible fares for the benefit of the consumers. However, there will not be any mutual equity investments between the two companies."

It goes on "The alliance will also enable a stabilization of the Indian aviation industry in the larger public interest for the benefit of the customer during the current downturn of the world economies." Reading between the lines, that must surely mean that the plan (which will not, of course, require any regulatory or stock market approval) will prevent one or both of them suffering major financial difficulty.

Naresh Goyal, Chairman of Jet, described the not-quite-merger as "a completely new industrial model for aviation in India which would be based on an unprecedented depth of cooperation between the two companies. There will be huge cost savings and revenue enhancement opportunities arising from this alliance.” For "revenue enhancement" mean "reduction in losses."

But if it looks like a merger and it smells like a merger, then surely on at least some level it is a merger. One would be tempted to think so when there is already a joint management team in place: "While maintaining their separate legal entities and brand entities both Jet and Kingfisher will examine co-branding opportunities and have formed a core committee of senior management personnel from both companies who will drive the various identified initiatives forward with immediate effect under the overall direction of Mr. Naresh Goyal and Dr. Vijay Mallya."

And this is the plan:

"The Scope of the alliance will include the following areas:

* Code-shares on both domestic and international flights subject to DGCA approval.* Interline/Special Prorate agreements to leverage the joint network deploying 189 aircraft offering 927 domestic and 82 International flights daily.* Joint fuel management to reduce fuel expenses.* Common ground handling of the highest quality.* Cross selling of flight inventories using the common Global Distribution system platform.* Joint Network rationalization and synergies.* Cross utilization of crew on similar aircraft types and commonality of training as also of the technical resources, subject to DGCA approval.* Reciprocity in Jet Privilege and King Club frequent flier programmes."

Kingfisher Airlines has made changes to its board today with Col. Jayanth K Poovaiah, Lt Gen. N S Narahari, Mr. S N Ladhani, Mr. P N Thirunarayana, Ms. Bala Deshpande and Mr. Hitesh Patel all resigning. Capt. G R Gopinath resigned as Managing Director. Mallya has consolidated his position being appointed Managing Director of the company and being named Chairman and CEO.

At least part of the purpose of the Jet / Kingfisher deal was to increase the prospect of access to capital: how bankers will view such a consolidation of power, particularly given Mallya's chairmanship of the Group as a whole and his personal and extensive time being spent with Force India (which is itself spending money at an alarming rate as it strives - and to a great extent succeeds - to pull itself up the grid.

After the announcement Jet told employees that it was to make 1,100 of them redundant. Mallya on the other hand told Kingfisher cabin crew their jobs are safe.

15 aircraft will be returned to their leasing companies at the end of the year, according to Business Standard this morning - that's almost 10% of the combined fleet, and the newspaper reports that that equates to about 5% of the combined domestic flight patterns.

Kingfisher has, the Standard says, "three recently delivered A330s lying unused .. has already sold two out of five A340s to Nigeria's Arik Air and deferred delivery of 32 A320s."

Goyal is quoted as emphasising the seriousness of the situation by saying "“There is a 30 per cent overcapacity in the industry and every airline is still selling below cost. We have instances of international airlines dumping aircraft and filing for bankruptcy but we do not have any Chapter 11 in India." He added that they need to operate at 90% capacity to break even but they are running at two thirds of that. But there's something wrong with his maths if he thinks the deal with save the airlines: "If Jet and Kingfisher have flights within half an hour, we can combine the two flights and then get loads of around 80 per cent."

Kingfisher signed a "multi-year" agreement with Toyota's F1 team in January 2007 to put "Fly Kingfisher" on the side of the Panasonic Toyota team. The Kingfisher logo has disappeared from the Toyota cars.

The little team that can, or is increasingly close to doing, will be biting their fingers as they prepare for this week's Chinese Grand Prix. Surely history can't repeat itself for the fourth time?