This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week, we're going far beyond the confines of our borders to highlight the actions of Sanjay Aggarwal, CEO of Kingfisher Airlines in India.
The dunce cap
What? You thought egregiously stupid CEO actions only occurred within the United States? Think again, because this gaffe is truly something special.
As Warren Buffett has opined before, the airline industry is a capital-intensive, low return business that often isn't worth the trouble -- and that rings true whether you're operating an airline in the U.S., or in this case, India.
Since 2008 began, Kingfisher Airlines, a passenger and cargo transportation company, has lost better than 95% of its value on the Indian stock exchange. Kingfisher has blamed much of its woes on a fiercely competitive airline industry, an "unabated increase in fuel prices," rupee devaluation, rising interest rates, and a continued downward pressure on yields. In short, we're not running low on excuses why performance has been poor.
But, just how bad have things been? Kingfisher's 2012 annual report highlighted a 13% decline in passenger revenue, a 30% increase in fuel costs, and a nearly 1,100% increase in one-time expenses. Overall, the company's net loss rose by 127% to $428.4 million.
As is to be expected with such large losses, Kingfisher divested some of its assets last year. While U.S. airlines' actions haven't been nearly as dire, Delta Air Lines (NYSE: DAL ) , US Airways (NYSE: LCC ) , United Continental (NYSE: UAL ) , and Southwest Airlines (NYSE: LUV ) all reduced capacity in 2011 in response to higher fuel costs and tepid travel demand.
Given the mounting losses, you'd expect Kingfisher to attempt to rein in expenses, but that isn't the case. Aggarwal, in spite of a 127% larger loss, actually took home a 90% increase in pay last year! What's remarkable (and mind-numbingly stupid) is that while employee headcount fell by 22%, employee costs still rose, albeit by less than 1%. How is this possible? Because many of the remaining high-ranking employees received pay hikes, starting with Kingfisher's CEO. Still, other lower-wage employees have received no pay at all!
To the corner, Mr. Aggarwal
There couldn't be more, right? But yes... there's is!
In addition to boosting pay across the board for high-ranking employees while the company is struggling to stay afloat, Kingfisher is facing legal action from India's own government which has filed suit against the company for not paying its fair share of service taxes which it's supposed to collect from passengers. According to Central Board and Excise Chairman S. K. Goel, Kingfisher is responsible for close to $1.4 billion in fees owed. Kingfisher has denied the allegations thus far, but let's just say I know who I'd rather side with.
On top of its legal woes, Kingfisher has roughly $1.4 billion in debt being held by a consortium of 17 banks that'd like nothing more than for Kingfisher's assets to begin to be liquidated.
And despite all this, Aggarwal received a 90% raise. Way to throw caution to the wind (insert eye-roll of the century here)!
Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your suggestion in the spotlight.
If you'd like a surefire way to avoid investing in companies with questionable leadership practices, I invite you to download a copy of our latest special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report contains a wide array of companies and sectors that are likely to keep your best interests in mind, regardless of whether the market is up or down. Best of all, it's completely free for a limited time, so don't miss out!