As Kingfisher Airlines (KING.NS) careens toward collapse, the Central Government finds itself between a rock and a hard place.
The government, already weakened by a string of corruption scandals over the past year, will face further political heat if it tries to rescue a money-losing private carrier - especially one owned by a flamboyant liquor baron.
If it lets Vijay Mallya's airline fail, however, the government will hurt state-run banks, which own about a fifth of Kingfisher's shares and three-quarters of its $1.3 billion debt.
Kingfisher is struggling with fewer flights and pilots, staff demoralized by unpaid salaries, and outstanding dues to aircraft lessors, oil companies, airports and tax authorities.
It needs at least $400 million quickly to keep flying, figures Centre for Asia Pacific Aviation (CAPA), a consultancy. Mallya's plans to raise funds through a share sale have been stalled and he has been lobbying the government to get state-run banks to lend more.
The fast clip at which the government has moved to change regulations in the past two months - airlines can now directly import fuel, lowering their costs, and private carriers can fly overseas more - has lifted expectations that Mallya may eventually win the help he needs from the government.
India: Kingfisher's national carrier, one Tweeter quipped last week.
A government bailout for a private carrier would not go down well with the public in India, where airlines are still not the common man's preferred mode of travel. Conscious of that, the government insists it is not looking to bail Kingfisher out.
Mallya avoids the bailout word too and, instead, says he is only asking for more working capital, which Aviation Minister Ajit Singh says is up to the banks to decide on.
However, late last year Prime Minister Manmohan Singh spoke of finding ways to help Kingfisher, which has led many to believe that in the end the government will come to its rescue.
Is the government being duplicitous about its stand on the increasingly distressed Kingfisher Airlines? the daily Business Standard wrote in an editorial, advocating no more funds from state banks for a carrier that wasn't 'too big to fail'.
Saving a private airline would be risky for Singh's government, which has faced pressure from allies, political opponents and civil activists for more than a year over graft.
After all the charges of crony capitalism ... if the government rolls out the red carpet for Kingfisher, it will once again come under attack, said Paranjoy Guha Thakurta, a political analyst.
Mallya, whose liquor business clout helped win him a seat in the upper house of parliament two years ago, could use his political ties to save the carrier he started in 2005.
Allowing foreign carriers to buy a stake in Indian carriers is probably the key policy step Kingfisher desperately wants the government to take. Unlike in 2007, when ailing airlines were bought over by Kingfisher and Jet Airways (JET.NS), there are no domestic carriers circling to buy up rivals today.
In the short term, it is in urgent need of money. If they get about 10 billion rupees now, that will last them about three to six months; and after that we will definitely have FDI (approval for foreign direct investment), said Sharan Lillaney, an aviation analyst at Angel Broking.
However, foreign carriers have shown little interest so far in investing in the Indian airline sector, which has grown by 17 percent in 2011 but intense competition has driven five out of six local carriers to massive losses.
Indian carriers are on course to post cumulative losses of up to $3 billion for financial 2011/12, CAPA estimates.
I don't think FDI is the answer to all the problems. Indian carriers need to resolve the fundamental issues of excess capacity, high cost structures and unviable pricing strategies, said Kapil Arora, a partner with Ernst & Young.
DREAMS TURN SOUR
After India embraced economic reforms two decades ago, a slew of private carriers rose in the Indian skies and then ran into the ground.
Modiluft, East West, NEPC Airlines and several others shut down operations within a few years of their launch for reasons ranging from inability to manage cost to funding concerns.
Mallya, who had so far run a very successful liquor empire - turning it into the world's second-largest by volume through acquisitions - probably chose to ignore past lessons.
He took pride in getting a five-star rating for his airline, making it the first Indian carrier to provide passengers with a personal video screen, offered a superior level of service and even hand-picked air hostesses himself.
For Mallya, who owns several yachts as well as cricket and Formula One teams, an airline was an extension of his persona.
For sure, there was ego and vanity at play because even when he started the airline it was not a secret worldwide that the airline business doesn't bring in easy money, said Santosh Desai, a brand strategist and columnist.
In a rush to expand, Mallya acquired Air Deccan in 2007 for $220 million, a deal that saved the tottering low-cost carrier but over-leveraged Kingfisher.
Soon after, a global downturn hit Indian carriers hard, choking access to the equity market. Most airlines survived the crisis, but a debt mountain built up at Kingfisher and the top carrier, Jet Airways (JET.NS). Equity markets recovered, but Kingfisher failed to raise fresh funds.
This, along with operational losses partly due to high fuel costs - Kingfisher has never reported a profit - were crippling.
Questions have also been raised about its business model.
India is a very price-sensitive market. In transportation, it is a volumes game; many of the frills do not matter in a short two-hour flight, said Amber Dubey, director of aviation at global consultancy firm KPMG.
What passengers really want is on-time performance (OTP), clean and safe aircraft, efficient service and low fares.
Kingfisher now flies only 175 daily flights from a peak of 400 six months ago, with only 28 of its fleet of 64 operational. Lessors have started cancelling leases for planes, and the aircraft Kingfisher owns are mostly pledged with lenders.
An uncertain future and delayed salaries have driven away about 300 pilots and a few hundred other staff to rivals.
The carrier is also losing prime slots at key airports, which, along with a staff crunch, may prevent a quick return to normal operations even if it does survive this debt tsunami.
About nine-tenths of Mallya's 58.61 percent stake in Kingfisher is pledged. Even the brand 'Kingfisher' has been used as collateral, according to media reports.
The company is now seeking to restructure its $1.3 billion debt, which may force lenders to take a writedown, extend fresh loans and make Mallya plough in fresh equity.
This has been in the works for six months, however, and it is unlikely an agreement can be reached in a hurry.
In a deal done early last year, lenders converted debt into a stake of just over 23 percent in the carrier at about 65 rupees a share. But the stock has lost about 60 percent since the beginning of 2011, closing down 4.35 percent at 24.20 rupees on Friday.
Graphic - Kingfisher's losses over the years and shareholding structure: link.reuters.com/dyd76s
Kingfisher's end, if it happens, would be the biggest failure in Indian aviation history and would impact the sector in the short term.
If you see such a substantial number of seats being removed from the market suddenly, it will have a very adverse impact on the fares, said E.K. Bharat Bhushan, chief of India's aviation regulator.
A collapse could also lead to thousands of job cuts and the withdrawal of flights on some loss-making routes that Kingfisher flies exclusively or shares with state-run Air India.
Kingfisher's market share in domestic skies, which has halved to about one-tenth in recent months, will get divided among rivals, with the low-cost carriers benefitting most.
Ever since Air India and Kingfisher flew into turbulence, budget carriers' market shares have increased dramatically.
If Mallya can keep moving levers in Delhi, as he has in the past, Kingfisher could remain more than a brand of beer. If he falters and the government withdraws the life support, Kingfisher could run into the ground quickly.
The failure would also dent Mallya's image, crafted through the years with massive display of wealth, wine and women.
Mallya represented the extreme of an exuberance that India has seen lately, said Santosh Desai. But business cycles can be cruel and those traditional values of caution and prudence take precedence over unfettered ambition.