What Vijay Mallya can learn from Warren Buffett

It is sad that Warren Buffett has never gotten around to writing a book sharing his thoughts, his investment philosophy and his experiences. But every year he writes a letter to the shareholders of Berkshire Hathaway, a company that he runs, in the month of February.

In a letter he wrote to the shareholders in February 2008 he said: "Now let's move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.

"Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

...

And there was more to come. "The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.

"And I, to my shame, participated in this foolishness when I had Berkshire buy US Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid.

"But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt," Buffett pointed out in the same letter.

...

So here is the world's greatest living investor conceding that he made a mistake by investing in an airline. He further pointed out that airlines as a sector have never made money, and despite that investors have kept pouring money into it, in search of elusive growth.

But such is the glamour of owning an airline that people cannot keep away from it. Ask Vijay Mallya, who started Kingfisher Airlines in 2005. But as Buffett has said airlines never make money, they only suck capital. Kingfisher now has accumulated losses of greater than Rs 6,000 crore (Rs 60 billion), having never made money since its launch.

...

Hence the Kingfisher experience has been pretty much in line with the global experience. Interestingly the only airline to make profits consistently over the years is Southwest Airlines.

The low cost airline has made profits year after year after since it started operating in 1973 though in the recent past its profits have come more from successful bets on oil derivatives than through earning enough passenger revenue. Mallya did try to get into the low cost airline business by taking over Deccan Aviation which ran Air Deccan, a low cost airline.

He rebranded it as Kingfisher Red. This was a big mistake. By doing this he diluted the premier positioning that Kingfisher Airlines had acquired in the minds of the consumer.

...

To explain this a little differently, let us take the example of Hindustan Unilever Ltd. It sells the Lifebuoy which is targeted at the lower end of the market and goes with the line tandurusti ka raksha karta hai Lifebuoy.

The company also sells Lux, which is targeted at the upper end of the market and comes with the tagline filmi sitaron ka saundarya sabun. Of course, the positioning of Lifebuoy and Lux is totally different. And HUL tries to make that very, very clear in the minds of the consumer.

First of all, both the products have different names. Second the pricing is very different. And third, the advertisements of both the products emphasize on the "different" positioning over and over again.

...

Now Mallya running a low cost airline under the premium brand name of Kingfisher would be like HUL selling Lux soap under the name of Lifebuoy premium.

The philosophy required to run a premium brand is totally different in comparison to the philosophy required to run a cut throat low cost brand. Hence, Mallya buying Air Deccan was mistake. And then changing its name to Kingfisher Red was an even bigger mistake. So in the end this did not work and Mallya decided to close down Kingfisher Red.

He explained it by saying that "We are doing away with Kingfisher Red, we do not want to compete in the low-cost segment. We cannot continue to fly and make losses, but we have to be judicious to give choice to our customers."

...

The reason airlines constantly lose money is because it is one business where companies really have no way to control their costs. The primary expense in running an airline (a company doesn't always have to buy the aircrafts, it can lease them) is oil.

And oil prices in the recent past have been on their way up and currently quote at around $120 a barrel. Airline companies have no control over this price. The higher it goes the higher is their expenditure in running the airline and given the competition that prevails they are always not in a position to pass on the increasing cost to the customer.

These problems have plagued Mallya as well. Given this airlines are specialised business which require full time attention.

...

Mallya's business interests are too diverse to allow him the time and attention required to manage Kingfisher, busy as he is running his diverse businesses and indulging in expensive hobbies like IPL and Formula 1, and cheaper ones like commenting regularly on Twitter.

His other primary business interests are in the fields of alcohol and now real estate. There isn't really any link among these businesses. Businesses over the years have become more complicated. And just because a company has been good at one particular business doesn't mean it will be good at another totally unrelated business.

Several big businessmen have learnt this in the recent past, the hard way. Reliance's attempts at the retail business haven't gone anywhere.Reliance Communications, run by Anil Ambani is a loss making company.

...

The junior Ambani's expertise has been in the financial services business through Reliance Capital and his attempts to play both GSM as well CDMA technologies in telecom, have been disastrous.

Bharti recently exited the insurance business it had started with much fanfare. NDTV's attempts in the general entertainment business by launching the Imagine channel came a cropper. Or let's take the example of Southwest Airlines. They remained focused on the airlines business.

And did not suddenly decide to enter another business which was alien to them, just because they had the money to do so.

...

This lack of focus has hurt Mallya as well. Mallya's United Spirits is no longer India's most profitable alcohol company. That tag now belongs to the Indian division of the French giant Pernod Ricard.

Commenting on this change an analyst had said: "What is the point of calling yourself the largest in the world, if you don't have profits to show for it."

It is time that Mallya followed Buffett's time tested investment philosophy and shut down Kingifisher Airlines or sold it off to someone who knows the business better.