Mumbai: India’s largest airlines were forced in May to raise ticket prices to counter rising prices of aviation fuel and potential combined losses of $2 billion in the year to March 2009. These carriers are trimming costs, getting out of low-profit routes, and thinking up new business models to fly over a looming crisis.
Still, silk farmer-turned-aviator G.R. Gopinath, pioneer of the Re1 air ticket and founder of India’s biggest low-cost airline Simplifly Deccan (formerly known as Air Deccan), believes low-fare carriers are still feasible since in a country where travelling by air is still aspirational, less than 4% of Indians are flying.
Now vice-chairman of Deccan Aviation Ltd after Vijay Mallya’s Kingfisher Airlines Ltd bought the company last year, he’s all set to launch a full-fledged cargo airline.
Trendsetter: G.R. Gopinath, vice-chairman of Deccan Aviation Ltd. (Photo: Hemant Mishra/Mint)
Last week, after receiving an award for the best budget airline of 2008 from Hindi business channel CNBC Awaz, Gopinath told Mint in an interview that ticket prices have to be raised for the industry to sustain, but low fares should also be available to keep the momentum. Edited excerpts:
Low fares and low-cost carriers are going to stay. The model is all about cost-efficiency. You should be innovative and initiatives towards that should be effective.
Low cost is also about inclusiveness. Air Deccan was Tata’s Nano. Nano wants to enable the middle class to graduate to cars from scooters and motorbikes. Similarly, Air Deccan was for the common man as only 2% of the Indian population was flying. If you could draw in a small percentage of the remaining 98%, it would be a great boom for Indian aviation.
I had launched the Re1 ticket to stimulate the market. When I was flying my plane with 20% seats vacant, it was judicious to offer those seats at cheaper rates.
This would not only increase my collection but also stimulate the market. By increasing fares, airlines end up chasing the same set of passengers. You must remember that in this country, only 40 million people are flying.
When fuel prices went up two years ago, Air Deccan imposed a Rs500 surcharge along with the base fare of Rs3,000 for a Bangalore-Delhi flight. Other airlines, including full service carriers such as Jet Airways and Indian Airlines, had to impose the same fuel surcharge of Rs500 but they cut their base fare to Rs2,500.
Obviously, this favoured full service carriers because with the same fare, passengers would prefer flying full-service carriers. Then there came a situation when every airline started charging Rs2,500 as base fare. This led to an unhealthy competition.
Prices need to go up. Three years ago, Air Deccan was selling a Bangalore-Delhi ticket for Rs4,000. We were short of Rs5,000 per ticket when it came to covering our costs. Today, Deccan needs Rs6,740 to break-even with 80% passenger occupancy.
Like in any sector, only certain aspects of the business are in your control. Airport rentals, fuel costs, staff costs, etc. are not in your control. You will have to increase asset utilization. You need to increase the flying time for your planes. You also need to keep innovating.
Cutting costs all the time is the name of the game. We stopped giving cars to pilots even when oil prices were not this high. We denied cars to air hostesses, too. We had even withdrawn meals to pilots those days.
Yes, costs are going up. But if the price of rice goes up, it does not mean Udipi hotels will go out of business. Autorickshaws will not go out of business because of increasing fuel prices. Low-cost airlines are really like some Udipi hotels where self-service is key. It means you manage smaller real estate when compared with other big hotels.
Some experts blame Air Deccan for creating overcapacity in the market. Now airlines are forced to cut flights.
Yes, I admit overcapacity was a villain. But infrastructure constraints and monopoly by private airport operators were also serious issues for airlines.
But Air Deccan was deploying capacity vigorously…
Yes. But that was the nature of the business at that time. Five years ago, when I started selling a Mumbai-Ahmedabad flight ticket for Rs1,800, about half of the charge in other airlines, Jet Airways and Indian Airlines introduced new flights for the same fare. These airlines were making money in other routes but took a hit on this route to kill my business.
Do you think scaling up at that speed was a mistake?
Scaling up was never a mistake. Thank god I scaled up. Scaling up helped me to connect across the country. Even before Vijay Mallya came into the picture, we had raised Rs1,500 crore in debt and equity just because of our scale. You need a bigger organization.
There will be mistakes. I am sure I could have managed Air Deccan’s growth in a better way. But there were larger issues faced by us. Pilots were leaving us due to poaching by other airlines and flights were getting grounded.
But later on, the scene changed and the Directorate General of Civil Aviation introduced regulation curbing the movement of pilots from one airline to another.
Do you regret selling Air Deccan to the UB Group?
Not at all. I did what was best for my company at that point of time.
Since a merger of Air Deccan and Kingfisher Airlines is around the corner, would you consider stepping down from the Deccan Aviation board? How is your relationship with Vijay Mallya?
I will not step down from Deccan board. I have not sold any shares in the company. Vijay Mallya and I are good friends.
Vijay Mallya plans to shed the Deccan brand. How do you feel about that?
Certainly, it will disappoint me. I hope that will not happen.
You are suddenly launching a cargo airline. What is the logic?
The idea was not born yesterday. It was incubating for more than two years. When I was running Air Deccan, logistics was the biggest challenge as we were flying to many interior and small towns. We were spending thousands of dollars and cancelling or delaying several flights for silly reasons.
For instance, a brand new engine for an Airbus flight would cost $12 million. This engine would reach Mumbai from Singapore in 24 hours. But it would take another two-three days to reach interior airports such as Rajahmundry or Jammu. This was bothering me. I want to build a complete logistics company with end-to-end transportation facilities.
Will you keep this as your own entity?
I am a first-generation entrepreneur. I don’t have any ego issues to keep on holding them under my wings. I am more interested in building a company that will be successful. I put in all the money I had. I was fully aware I would not get investors as there was no business plan or finance model. I have plans to invest $200 million in the form of debt and equity over the next three years.
That sounds like building Air Deccan all over again.
The aim is to become like Air Deccan. We will be starting in the Mumbai-Delhi route. Later, we will scale to other interior parts of the country and launch international operations. Size and reach are the main challenges. You need to be big as India is one-sixth of the world’s express market.