With shifting power equations, profitable growth is the new mantra at Deccan

With shifting power equations, profitable growth is the new mantra at Deccan

New Delhi/Mumbai: In an interview this February in his office in Bangalore, G.R. Gopinath, the man who brought low-cost airlines to India, was feeling introspective.

The question—asked at a time when his Air Deccan appeared to teeter on the edge of profitability and oblivion, before Vijay Mallya gave it a shot in the arm, and before it racked up even more spectacular losses—was simple: What if, after having revolutionized air travel here in India, Air Deccan and Gopinath faltered in the next few months and never made it to the finish line, clearing the way for nimbler rivals to head towards profits and sustainability?

The normally garrulous Gopinath took a few seconds to compose a reply.

“It’s impossible," he said. “We are the ones who started this transformation in air travel, and whether or not I am there, Deccan will win this marathon."

Now, eight months after that conversation, Gopinath’s words seem almost prophetic. Interviews with nearly 20 people closely involved with Deccan Aviation Ltd, the company that operates Deccan—including high-level staff, board members, the chief executive and the bankers who help the company run its complicated finances—show that in the last two months, Gopinath’s influence over the airline he created has waned considerably. The officiating chief executive, Ramki Sundaram, reports to Gopinath regularly in his position as chairman of the board of directors, but he has also put in place policies and strategies that are often the exact opposite of those Gopinath followed in the previous five years from his perch as chief executive, chairman and co-promoter of India’s largest low-cost carrier.

“Sometimes I wonder if Captain would even recognize the airline today," said a senior official at Deccan, who asked not to be named because he didn’t want to be seen as criticizing his mentor’s five years at the helm. Gopinath, who was in the army, is often called Captain, in deference to his rank.

"It feels like we are reinventing the wheel sometimes," this official said.

“But to be honest, the real question is whether it may be too late."

At the same time, Gopinath, while still the public face of Deccan (as the airline was renamed some weeks ago in a rebranding exercise), has spent more and more time focusing on alternative projects, spending weeks outside the office. Sometime this week, Accenture Ltd, the consulting firm appointed by Deccan’s majority shareholder, the UB Group, will make its recommendations to synergize Deccanwith UB Group’s airline, Kingfisher Airlines Ltd. A recommendation to merge the airlines has been expected by investors in the Deccan stock, who have pushed Deccan’s usually sluggish share up by 123% since May, but it is not clear what role—if any—Gopinath would have in the newly-merged airline, which would be India’s largest by both fleet size and the number of passengers carried.

Gopinath, who is travelling in Europe right now, fiercely rejected the notion that there have been any substantive changes to the airline’s business model, other than an image makeover.

“Where is the change? Apart from changes in colour and logo, there is no change in the business model," he said in a phone interview on Thursday. "Even the branding has been done after appointing independent consultants by us and Kingfisher to give a larger image to the airline."

In many ways, the changes that Sundaram has brought in are a rejection of the core ways in which Gopinath had steered Deccan for five years of explosive, if financially unsustainable, growth.

Gopinath, for instance, in a nod to the successful practices of European low-cost carrier RyanAir Plc., had an almost single-minded focus on increasing the airline’s load factors, which measure how full planes fly. In board meeting after board meeting, as the firm’s losses piled up, he promised investors and colleagues that as soon as Deccan’s planes were able to fly more than 90% full on a regular basis, profits would startto flow.

He was, of course, right, if overly optimistic. The way Deccan managed its sales for each flight, many of the early seats were given away for eye-popping low amounts like Rs500 or Rs100. It was only towards the last few seats of each flight that the airline would be able to recoup its cost. In effect, the last 10% to 15% of each flight’s passengers would subsidize the first 85%. But those last few seats often went unsold with competitors aggressively pricing their tickets lower, guaranteeing that on average, every ticket Deccan ever sold was sold at a loss.

“It felt like we were digging faster and faster into a hole, and kept hoping we would strike oil at the end of it, but we never found it," said a person who worked with Deccan until earlier this year, but has since left to work elsewhere. “That 90% load factor—it meant everything."

Today, the relentless focus on load factors has been abandoned as unfeasible, and has been replaced with an emphasis on increasing the revenues for each ticket sold, called yields in airline-speak.

Deccan is giving away fewer tickets, and the bottom prices on many sectors have moved up by a few hundred rupees, said the CEO of a competing airline who tracks Deccan’s fares daily.

Since then, Deccan’s load factors have plummeted, falling to 65% this August before recovering to 70% in September, a disastrously low number for an airline that needs high volumes to break even.

“Rather than attributingany particular management style to particular people, I canonly say that that was something that made sense then, and what we are doing iswhat makes sense now," said Sundaram, who was recruited from London’s InvestecBank Ltd about eight months ago, around the same timeas Gopinath’s Februaryinterview.

He declined to answer a direct question about his working relationship with Gopinath, and what Gopinath’s continuing role in the company is. “I think we should skip this question if you don’t mind," said Sundaram. 

Other than the load factors, Gopinath’s tenure as chief executive was defined by his devotion to growing as fast as possible. Deccan, under him, was adding planes to its fleet at a rate of almost one a month, sometimes even faster, making it one of the fastest growing airlines in the world. As the fleet size swelled to about 40 airplanes, Deccan started flying to locations such as Dharamshala, Rajamundhry and Bhavnagar, over time making Deccan the biggest airline in terms of airports serviced.

“We fly to more places than Jet Airways and we fly more people than Indian Airlines," Gopinath boasted in June of this year, when Air Deccan nudged aside state-run Indian to become, briefly, the second biggest airline in India in terms of passengers carried.

Gopinath's almost manic desire to add routes was often the cause of clashes with Warwick Brady, his ex-chief operating officer, two officials at Deccan confirmed separately. Brady, who left the airline in May to become the chief executive of Indonesia’s PT Mandala Airlines, had tried unsuccessfully to convince the board of directors to give him the authority to cancel unprofitable routes, delay the deliveries of A320 planes for the rest of the year, and return or sell back at least five smaller turboprop aircraft that serviced unprofitable routes, these officials said.

Today, six months after Brady’s departure, Sundaram has done just that—returned three of the five ATRs, taken the other two out of service, juggled deliveries around, and barely added any significant new routes. He also said he was looking at ways to rationalize fleet growth.

“I would rather put it this way, that there was a stage when we needed critical mass and to grow fast and we’re now in stage where we need to consolidate our operations and our network," he added. “We need to grow, but we need to get profitable growth."

Gopinath said on Thursday that the slowing down of the airline’s growth was an idea that he supports, and that it makes great business sense. “You need to balance between profitability and growth," he said. “There is no point in growing when you are facing excess capacity in the scene. Referring to slowing downthe growth, I would have done it myself when all airlinesare bleeding."

And at least one investor, who holds a sizable stake in the company and asked not to be identified, said he welcomed Deccan’s slower expansion. “Gopinath gave us the speed," he said. “And now Mallya will give us the profit."

In Bangalore, on a lane named after Vijay Mallya’s father Vittal, Gopinath lives in the shadow of the junior Mallya’s mansion. Mallya, for whom people often use polite synonyms of flamboyant as descriptors, is in almost every possible way the anti-Gopinath. Or as Gopinath put it, while Mallya wooed him to buy a stake in Air Deccan, “He is from Mars, I am from Venus."

For those looking for metaphors, the fact that Gopinath’s mail arrives with Mallya’s father’s name on the envelope might be delicious. But for those who watch Deccan and its suddenly volatile stock price, Mallya’s embrace of Gopinath is even more important, because in the past few months, it has become no less than a bear hug.

Of all the things that Gopinath held dear to his vision of the airline, the fact that it be a pioneer in cost-cutting—bare-bones and borderline frugal air travel—was paramount. He charged passengers for water, did away with seat numbers and paid his air hostesses more so that they would clean the toilets at the end of a flight, doing away with cleaners. The results showed: Air Deccan was associated with filthy planes, crowded gates and chaotic boarding.

Since the Mallya takeover, which has eventually resulted in the UB Group owning 46% of the airline after a well-received open offer, the airline has pegged its future on a transformation, both of its product, and how the airline is perceived by customers.

“We’ve addressed various process related issues to get the operations a lot more robust than in the past and separately, we have launched an image makeover exercise," said Sundaram.

In effect, the airline is trying to shake off its old image, the image of the Gopinath days.

It has added leather seats to its planes, many of which are now painted in red and white livery similar to that of Kingfisher Airlines. It gives away free Kingfisher mineral water.

And then, the final reversal: Some of the planes may be fitted with food heaters, so that people can pay for hot meals on flights. The meals and the new flashier outfits for air hostesses, especially, are extremes from Deccan, as was run by Gopinath, who said in an interview in May that “we are not in the gourmet business, we are not in the modelling business; we are in the transportation business."

Most of these changes, said a Deccan official, are coming directly from Mallya, who has made no secret of his disdain for low-cost airlines, both as a business and as a travel experience. The bet, said this official, was that if the transformation was done quickly enough, customers will start associating Deccan with Kingfisher Airlines’ lush full-service experience and might be willing to pay more for tickets on a Deccan flight. “People are happier with the service, and with the product attributes," said Sundaram. “If (that means) I can increase yields, I surely will."

That transformation has not come cheaply and it has yet to yield any results. It will cost more than $1 million (about Rs4 crore) for the entire fleet to be repainted, and the airline is not sharing estimates of how much the rest of the image makeover will cost. In the last quarter, which ended September, Deccan’s losses mounted—at Rs253 crore, its largest quarterly loss ever—while revenues grew 24%.