Air Deccan’s financial woes are temporary: Gopinath

Air Deccan’s financial woes are temporary: Gopinath
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First Published: Mon, May 14 2007. 12 54 AM IST
Updated: Mon, May 14 2007. 12 54 AM IST
G.R. Gopinath, the charismatic entrepreneur who went from being an organic farmer to running India’s biggest low-cost airline, has found himself and his airline in the news in the last few weeks. Deccan Aviation Ltd, which operates Air Deccan, announced losses of Rs213 crore for the January-March quarter, its biggest loss since it went public. The company is involved in a high-profile search for up to $100 million in private equity to stay afloat and Kingfisher Airlines Ltd chairman and chief executive Vijay Mallya is already biting at the heels, telling everyone he is interested in the four-year-old airline, which carries one out of every five domestic passengers.
In a wide-rang ing telephone interview with Mint, Gopinath says the airline’s financial woes are temporary, and that private equity investors are on their way to bail out the airline. He sets the record straight on a week of high-profile back-and-forth barbs between him and Mallya, and talks about how frustratingly close he feels the airline is to breaking even.
Edited excerpts:
Would you like to elaborate on Air Deccan’s financials?
We have very large investors in our company, investors who are big by international, global standards. Two of those institutions are Capital International and ICICI Venture, and the last analysis is that if we don’t find any money, then they will pump in the money; they are here for the long term. They have been here right from day one, when we had just one aircraft and nobody believed in us and analysts never gave us a chance. But people who believe in India will put money in Air Deccan. It is not easy, but it is a challenge worth taking; it is a strategy that will require funding for maybe one or two years.
How much longer before your operations will be able to fund everything?
In our prospectus, we said that we should be in profit in 2008... We never said we would be in profit earlier.
Are you still on track for that?
What is all the panic about? We said very clearly we would be in profit in 2008. We foresaw that, because of a temporary, sudden burst of so many aircraft from so many airlines, there would be some amount of bleeding, especially on the trunk routes. Now we have redeployed our aircraft in a different manner, where 80% of our aircraft are on the non-metro routes, and we think we could be in profit earlier.
What do you think about passenger resistance to paying more for Air Deccan tickets? You have tried on some routes to get them to pay more, but they just won’t do it.
It’s not a question of passengers not wanting to pay. Today, the yield of SpiceJet, which has much smaller operations than ours, is about the same as ours, and our costs are about half of Jet Airways. Four years ago, when Air Deccan was started, there was a cartel between Jet Airways, Indian Airlines and Air Sahara; it cost Rs12,200 to fly between Bangalore and Delhi. Today, if I get Rs4,900, I am in profit. If I am making a profit at under Rs5,000, compared to four years ago when salaries were half, fuel prices were a third, what does it show? It shows that it is a different business model, a more robust business model. We need to get another Rs500-600 more in some sectors, Rs300-400 more in other sectors. The problem is that we are not getting (that) for various reasons.
Why aren’t you getting that?
When a customer goes to a website and sees that Indian Airlines is dropping its fare below mine, obviously, even though he may have an emotional attachment to Air Deccan, he will go and buy the Indian Airlines ticket. There is definitely excess capacity in the market. So you need to have two things: have the same price at a higher load factor (the number of seats occupied in a plane in percentage terms), or get higher prices. That is a factor of a societal shift happening in the Indian demographic... of the customer shifting to air travel.
It will take six-seven years: it’s a J-curve (at some point passenger traffic will soar straight up). But, when that happens, you have to be able to exploit it.
How will you stay afloat until then?
Though it looks scary, it’s not. If you look at how many Indians are flying, the number is only growing...
If the current search for private equity doesn’t work out, how confident are you that your big institutional investors will pump in some more money?
First, it will work. We have already finished due diligence with two companies, and we’ve got more than two players... and there are other companies that want to put in more money than we require, for various reasons, and some who want certain rights, and this is a question of negotiating what is a correct fit for the company. There has to be a vision alignment, a management alignment, a cultural fit with the person who is coming, and we are looking for a strategic investor who believes in the infrastructure, who believes in the India story, who (is) here for the long term.
Of the two players you said have completed their due diligence, how soon do you think you will be in a position to make an announcement?
It should happen in the next 15-30 days.
And there are other investors you are still negotiating with?
The very fact that there are so many people talking with us shows that Air Deccan is an attractive destination. We are probably in a scenario where even though we are losing money, we have a business model which is robust, which is scalable.
We have demonstrated that, and built a great company, where we are now the second-largest airline, with the largest route network going to 65 cities—the largest network by a huge margin.
Jet Airways only goes to 46 airports, Indian Airlines goes to 43. We have the largest e-commerce site in India.
It is our understanding that representatives of (US buyout fund) TPG Inc and Irelandia Investments(the investment arm of Tony Ryan, who launched low-cost RyanAir) have spent some significant time at your offices. Would it be fair to assume that they are two of the players who might invest in your airline?
As you know, we are a listed company, and I cannot give you the names. There are definitely more players, large players, large strategic investors, and the fact that they are talking to us shows that they find Air Deccan an attractive destination.
Your last quarter was worse than any of your previous quarters. The amount of private equity funding that you are looking for will last you only for two quarters at the rate at which you lost money in the last quarter (Air Deccan lost Rs213 crore in January-March).
Nobody invests in a company based on the past. They invest in the future. Anybody who buys stock, they are looking at the future. Last quarter was an aberration. Last quarter we moved to a new computer system, because our website got hacked, our system collapsed.
So, the losses were extraordinary? They won’t be repeated?
No.
Are you happy with your share price? Do you think the market is valuing Air Deccan correctly (Deccan Aviation shares closed at Rs120.35 on Friday, well below their IPO price as well as 52-week high of Rs 162.70 on 17 January)?
I think that anybody will say that the stock prices are probably undervalued, especially for a company of this size, so you have to respect the market.
Among a lot of people who are first-time fliers, Deccan seems to be the preferred choice. But among the more regular fliers, there is a bit of an image perception they have of your airline that is not entirely favourable, especially because of issues with delays.
There are two issues there. As you go to these small towns, there are issues related to the recovery of the aircraft. It’s not easy to get the aircraft in and out quickly, especially if you go to remote towns. Also, we didn’t get parking, so we had to spread our bases. Today, that works in our favour: we have eight operational bases, where our aircraft go at night for maintenance.
Today, our Airbus flights have the best on-time performance. With our ATRs (smaller, approximately 80-seater turboprop aircraft), our on-time performance within one hour (of schedule) is 98%.
And there’s a huge change, both on the product and the perception. We have a long way to go in honing our product in terms of customer service and that sort of thing but, of course, expectations are always high.
Our product is very clear: we are an airline with the entire emphasis on giving you the lowest fare. Our mission is very clear: we are in the transportation business. We are not in the entertainment business of providing you with multiple channels, or in the gourmet business, or in the fashion business of displaying models. We are very very focused on one thing: take large volumes of people, at affordable prices, above our costs, and we are going to continue to do that, and we are not going to dilute our model.
There’s a possibility that Warwick Brady (chief operating officer at Air Deccan) might take a job at Mandala Airlines (an Indonesian carrier that is looking for a CEO).
No, not yet. I don’t know anything about that. People ask me, but...
And last week has been a week of odd friction between Deccan and Kingfisher. You and Mallya are good friends, but in the media it would appears that there is a bit of a back-and-forth. Do you want to address that?
Yeah. Vijay Mallya, I think, made some statement, maybe in jest, but it may have been conveyed differently by the media or probably (the way) he spoke... It looked a little presumptuous to me, as if (Deccan) is something that he can just decide on his end to buy. I just said we are here for the long haul, and we are not for sale; we are looking for financial institutional investors. Immediately, he retracted his statement. He said, “I never meant it... It’s desirable, yes.” Which I think is flattering, that he thinks that this is a good investment.
It was a very hedged statement that he made, that he was interested in a stake, but not right away.
I said that we are in the opposite ends of the consumer space. Forget about me competing with other airlines, we are competing with trains. So I said that Vijay is probably being presumptuous... You can’t just buy us, this is not a toy.
Coming to our previous story (Mint carried a report on 5 May that according to two separate analyses, Deccan’s equity had dwindled to about Rs40 crore on 31 March, making it crucial that the airline get outside funds to continue operations, given that it lost money at a rate of Rs2.3 crore a day from January to March 2007), do you dispute that number?
I’m not a financial analyst, I am not a finance guy.
There probably could be some truth in it, I am not saying there isn’t. But, if you look at airlines around the world—the other day I was in Australia, and the CEO of Virgin Blue told me that when they started, they had enough money for just 10 days and today after five years, they have money for 145 days. Qantas has money for 60 days; it has been in the business for 50 years.
I don’t think that that is an indication of the success of a business—this kind of splitting of hairs and reading things out of context.
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First Published: Mon, May 14 2007. 12 54 AM IST
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