A few weeks ago, as it has done every so often, Air Deccan, India’s biggest low-cost carrier, raised the fares on a few of its secondary routes to test customer response.
Just as they had done in the past, passengers baulked, and the flights flew increasingly empty.
But this time around, Deccan’s reaction was new: It stuck with the higher prices, some as much as 8-10% more or almost Rs400 for each ticket.
“That’s just not how we did business before,” said a senior executive at the Deccan Aviation Ltd owned airline. “It’s not in our DNA to fly planes half empty.”
Before as in “before Vijay Mallya became an investor”. Mallya, whose United Breweries Holdings Group owns Kingfisher Airlines Ltd, paid Rs550 crore to buy a 26% stake in Deccan Aviation on 1 June.
Until now, Air Deccan’s pursuit of passengers has been so fervent that load factors (how full the planes are) were discussed non-stop at top level company meetings, and breaking even of operations was relegated to a future date: first 2007, then 2008.
Since the Kingfisher deal, questions of what will happen to Air Deccan’s core philosophy of low costs, low fares, no frills and intense, almost manic, growth have swirled around both G.R. Gopinath, the charismatic entrepreneur and the carrier’s chairman who introduced India to budget airlines, and Mallya, the equally charismatic liquor baron who seems intent on overtaking competition the old-fashioned way—by buying it.
The ‘Deccan way’ of running operations was the subject of a staff meeting two weeks ago in the airline’s Bangalore offices, according to two people who attended it, but didn’t want to be named.
“We do our business a certain way, and (Kingfisher) does their business a certain way,” Gopinath told the gathering, which included four members of a Kingfisher task force that now works closely with Deccan staffers. “But as long as we can keep the DNA of our business intact, we are open to change.”
Since the deal went through, changes have come quite quickly at Deccan and it is unclear how much Gopinath can do to preserve the DNA of the airline. Chief finance officer Ramki Sundaram, whose last stint was as an investment banker in London for Investec, is now the officiating CEO of the airline, and most likely the next CEO. But since the Kingfisher deal, he doesn’t report to Gopinath. Instead, he reports to a newly reshuffled board, of which Gopinath is the executive chairman and Mallya a deputy chairman.
In a telephone interview, Gopinath said that the shift was his idea and one of the four conditions he placed on Mallya before closing the deal.
“One of the fundamental principles for me is that the company has to be run on a professional basis,” he said. “And Mallya agreed with that.”
This and the other conditions—per-share price, an independent board of directors, and an immediate payment of Rs200 crore—were hammered out in a 45-minute phone conversation just three days before Gopinath would have closed a private equity placement deal with another player.
The board itself is a 12-member balancing act, three nominated by United Breweries (UB), three by the original promoters, which includes Gopinath and two of his close friends, and the remaining six independents agreed upon by both UB and the original promoters.
But the arrangement is already beginning to chafe. Gopinath is tired of repeatedly answering the same question: Who is really running the show? Still, at an aviation conference in Mumbai, Mallya was asked about future plans for Deccan and Kingfisher.
“I need to check with my new employer,” joked Mallya alluding to his formal title of deputy chairman.
Mallya, through a spokesperson, declined to comment because his company is in a government-mandated silent period as it engages in an open offer to buy another 20% of Deccan Aviation’s shares from the open market, which it is required to offer to do under stock market regulations.
It is not yet clear how many individual shareholders will take him up on the offer to buy Deccan Aviation’s long-underperforming stock, which closed Tuesday trades at Rs141.55, close to where it leaped to after Kingfisher announced its acquisition of a stake. That price is just below its initial public offer price of Rs148, and UB’s offer to buy the shares at Rs155 would result in a slight profit for any long-term investors who didn’t bail out when the price peaked at Rs159.05 in January.
But even with a 26% stake, Mallya is the biggest shareholder and sees himself as more than just a strategic investor. When a reporter for Fortune magazine asked him whether he would be in charge of Deccan Aviation, his answer was uncharacteristically succinct.
“With a majority stake, that’s pretty inevitable, isn’t it?” he is quoted as saying.
One of the most controversial ideas being floated, according to the Deccan senior official, is the possibility of dividing the two airlines fleets into Airbus jets and ATR turbo-props.
The turbo-props, for both Deccan and Kingfisher, fly to smaller non-metros, and have been consistently profitable, because there is little price competition on those routes. The Airbus A320s that Deccan flies on major metro routes, and the varied Airbus airplanes that Kingfisher deploys on the same, have bled money since both airlines started. Taking Deccan’s A320s and converting them into the lush, full-service planes that Kingfisher has used to wrest market share from Jet Airways (India) Ltd would take Deccan out of the price equation on the metro routes. That means everybody could start to charge more, instead of racing to match Deccan’s low, loss-inducing prices.
That proposal, which is still in its initial stages but popular among Kingfisher executives, would reduce Deccan to a bit player in India’s aviation scene, rather than what Gopinath had planned as its inevitable destiny: India’s biggest airline, transporting a billion people a year.
“That’s too premature—the ink is not even dry yet, and we have not even completed the formalities,” said Gopinath. “Eventually, when you have a 200-ATR fleet... we could eventually have a separate division.”
Gopinath said that while it is possible that Mallya and he could have major disagreements on future plans for the company, that wasn’t likely.
“That could happen in any relationship,” he said. “But you can’t live in a marriage constantly worrying about divorce.”
The more likely dangers, he said, are a departure from Deccan’s business model or a clash of egos. Both Mallya and Gopinath have outsize, if dissimilar, personalities, and they both generate, some say crave, significant media attention.
“If we do not put our ego ahead of the company, and we ensure that the interest of the company is at the at the top, all other things will work out,” Gopinath said.
But the question that Gopinath has tired of—who’s the boss?—is raised often at Deccan’s offices in Bangalore as well, and “there’s no simple answer to that question,” said the senior Deccan official. “There’s a lot of dust in the air and we need to wait for it to settle down.”
But while the dust settles, there is some agreement on what needs to be done right away. Nudging fares upward and focusing on easy synergies is key, said Deccan’s acting CEO Sundaram.
“There are a number of areas where there is a lot of low-hanging fruit that we agree on,” said Sundaram. “Both parties are mature enough that even if we have differences of opinion, we can drill down to the basics and decide which direction to go in.”
Already, the two companies have successfully negotiated for cheaper insurance (Deccan, it appears, was getting a better deal than Kingfisher), and Gopinath foresees significant cost savings in engineering and training, and perhaps a jointly-owned repair facility to service their common fleet.
Sundaram, and all the officials interviewed for this story, underlined that the relationship between Mallya and Gopinath is friendly, and that Deccan is not getting its marching orders from Kingfisher. But the uncertainty about leadership is making staffers nervous, capping off months of constant speculation as Deccan teetered on the verge of running out of its start-up equity after almost non-stop losses, which topped Rs213 crore in the last quarter.
For now, according to those officials, the real action will move to behind closed doors and into the boardroom.
“Watch this space closely and see what the board looks like,” says Sundaram, when asked about which way the balance of power is swinging. “The intent is to have the independents be really strong.”