Home / Mint-lounge / Mint-on-sunday /  How IndiGo’s Rakesh Gangwal became the king of the blue skies

After an intense morning of negotiations at the Washington office of European jet maker Airbus, sometime in early 2005, about a dozen executives stepped out for lunch.

As a fleet of company cars arrived to take them out, one declined to be chauffeured. Dining out at a fancy restaurant would be a waste of money and time, Rakesh Gangwal, 62, told the French executives who were hosting him. Instead, Gangwal said, he would introduce them to a nearby self-service, fast-food Mexican outlet called Chipotle.

The executives who followed him were in for another disappointment if they had expected a leisurely lunch over friendly banter. The burritos, costing $5.25 apiece, were meant “to go" and be eaten over work back at the office. The lunch was packed, the people drove back and resumed negotiations over bites of the spicy tortillas.

By evening, the talks were over and Gangwal, one of the two co-founders of IndiGo, and Aditya Ghosh, then the airline’s legal counsel and now its president, had signed a final term sheet to buy 100 Airbus aircraft valued at $6 billion at list price. It was the first time an airline from India—let alone a start-up—had ordered such a large fleet.

Gangwal’s frugal nature has served IndiGo well. After starting operations in 2006, IndiGo has gone on to become India’s biggest domestic airline by passengers flown, with a market share of 37.4%, and the most profitable airline, with a record net profit of Rs1,304 crore for the year to 31 March—a fourfold jump over the previous year.

It has been the only consistently profitable Indian airline since 2009, a result mainly of its ability to keep costs low.

On Thursday, Gangwal’s InterGlobe Aviation Ltd, the owner of IndiGo, completed a Rs3,130 crore initial public offering (IPO) that received demand for 6.14 times the shares on offer. At the per-share price of Rs756, the airline is likely to be valued at Rs26,500 crore—more than 67 times the equity of about $60 million that Gangwal and co-founder Rahul Bhatia contributed at the time of its founding.

Gangwal has been a quintessential disrupter.

Like Chipotle Mexican Grill Inc. has grown in the past two decades to challenge McDonald’s Corp. in the US fast-food business, Gangwal’s IndiGo has overtaken established airlines such as Jet Airways (India) Ltd, which was founded in 1992, and national carrier Air India Ltd.

Gangwal, a graduate of the Indian Institute of Technology, Kanpur, moved to the US in the 1970s, studied at Wharton School of Business and rose to become the CEO of US Airways Inc. at the age of 45. An otherwise gentle and soft-spoken person who is notoriously media-shy and hates to be photographed, he can be quite the brawler at the negotiating table.

“He has a way of negotiating I have never seen before," says Airbus executive vice-president for strategy and marketing Kiran Rao. “Rakesh is fast, furious, shrewd and always negotiating, Rahul (Bhatia) is much more laidback. Rahul is like a swan going across the river—underneath pedalling like crazy, but absolutely smooth when you watch it. There is nothing smooth about Rakesh."

Gangwal would drive the Airbus negotiators to the point of exasperation. He would raise a point and if the other person conceded, he would prod him to go a little further and concede more. Airbus executives had to take frequent breaks in between the negotiations. Gangwal knew he could play Airbus off against its American rival Boeing and had no problems doing so.

Airbus was in a tough spot. It had received no orders from India from 1990 (the year an Indian Airlines A320 plane crashed, killing 92 people near Bengaluru) to 2002. Air Sahara and Jet Airways were using Boeing planes. Four years after the 9/11 terror attacks in the US, aircraft makers were still struggling.

The first 100 planes that IndiGo audaciously ordered from Airbus in 2005 are now seen to have given the airline a competitive advantage over its rivals. Gangwal’s bet of buying planes in bulk meant IndiGo got a nice discount on the ticket price, besides training and spare parts support from suppliers. The contract was designed to extract the most value out of the entire supply chain to support a young airline.

“That one was the cornerstone or the keystone to success," Gangwal said in a rare interview this week, adding that the management deserved credit for doing a superb job of building the airline from the ground up.

Airbus’s Rao agrees that IndiGo drove a “very aggressive deal", without specifying the exact price the airline paid for the planes.

“100 aircraft is not to be sniffed at. Nobody would sniff at 100 aircraft," he says.

After the deal, IndiGo entered the market with a cost advantage over its rivals, capable of fending off any price competition in its early days.

Non-resident Indian businessman Bhulo Kansagra, who then owned rival SpiceJet and competed with IndiGo, knows what it was like in those days.

“He (Rakesh) is the best dealmaker I have ever met, and you can fathom how good he is from the Airbus deal he cut," Kansagra says. “You need somebody like that to keep your costs down."

It has never come to light, but Bhatia, Gangwal and Kansagra had almost reached an agreement to start SpiceJet in the early 2000s. After ModiLuft shut shop in 1996, Kansagra had bought its air operator’s licence and Bhatia and Gangwal were to join as partners. But things did not work out and Bhatia applied for a new licence under the name of IndiGo soon after. Kansagra exited SpiceJet in 2010.

In the years that IndiGo gained scale as a budget airline, it helped that tycoon Vijay Mallya’s now defunct Kingfisher Airlines was competing with Jet Airways for full-service passengers, having exited the low-cost segment; it eventually went under in 2012. The government, meanwhile, merged Indian Airlines and Air India into one brand.

The team, including expats, that Gangwal brought in to set up structures and put measurable yardsticks in place to stifle complacency and pilferage included chief executive officer Bruce Ashby, chief operating officer Steve Harfst, chief financial officer Riyaz Peermohammed, chief commercial officer Sanjay Kumar and vice-president (operations) Shakti Lumba.

All of them have been rewarded generously in the IPO.

If the airline lists at 700 a share, Ashby’s shares would be worth about 57 crore, followed by Peermohammed’s 57 crore, Harfst’s 05 crore, Kumar’s 5 crore and Lumba’s .6 crore.

Some of them are selling all their shares in the ongoing IPO; others like Peermohammed are keeping them.

IndiGo president Ghosh, who took over the helm after Ashby’s three-year contract ended in 2008, has also been rewarded with incentives worth about Rs110 crore.

It is the first time since private airlines emerged in the 1990s that an airline will create so many millionaires.

But the rewards have not come easy. Gangwal has been a hard taskmaster and ensured that everyone accounts for their decisions.

For any new plan thrown at him by any department head, Gangwal would simply tell them the possible repercussions far into the future. It was then up to the head to take the call. Cost was always kept in mind. Failure wasn’t appreciated.

The airline’s plans to not publish an in-flight magazine for many years is a case in point.

Gangwal’s logic against an in-flight magazine in the early days was simple. The airline had 50 planes with 180 seats with six daily departures for each. They would require printing thousands of copies of the magazine, which would only add to the weight carried on the aircraft and burn more fuel. Cabin crew will need time to place them and this may add time for the turnaround of planes.

Passengers would rip them off, others might take them away. A torn magazine would reflect negatively on the airline’s image, which means the magazines would have to be replaced every three days.

What would be the cost of additional print? It is most likely that the advertising revenue the magazine would earn wouldn’t meet the cost incurred in publishing it.

But the moment IndiGo reached critical mass, it introduced a in-flight catalogue. Because of the airline’s market share, the catalogue is able to attract high-end advertising, making the publication a profit centre on its own.

Typically, to take those decisions, airlines hand over millions in fees to consulting firms. Gangwal himself entered the aviation industry when consulting firm Booz Allen Hamilton Inc. assigned him to work on the United Airways account in the early 1980s. But Gangwal himself rarely hired any consultant for IndiGo. He himself has been IndiGo’s permanent consultant, saving the company millions in consulting fees.

“I don’t know, but consultants are bad news; I mean, what would they know about the business?" he says with a laugh. “If we have to hire consultants to tell us what we should do, we should not get into this business."

Gangwal has had his share of failures.

In 1998, he launched a budget airline branded MetroJet under US Airways to potentially take on SouthWest Airlines. MetroJet was to be a no-frills, low-cost operation that concentrated primarily on East Coast leisure destinations like Florida and New England. Before that, in 1994, he launched Shuttle by United, or “U-2" as it was referred to, from San Francisco.

Both were eventually shut down.

Gangwal says failure doesn’t bother him.

But having taken IndiGo public and with 430 planes on order, failure isn’t an option any more. Not all planes will be a permanent part of its fleet because IndiGo typically returns planes after every six years to keep its fleet young and costs low; yet, it will be a much bigger airline than what it is today.

Meanwhile, aviation in India is turning into a different ball game.

IndiGo faces increasing competition from foreign airlines that have invested in Indian carriers and have the financial muscle to fight a long battle. Etihad Airways has invested in Jet Airways; Singapore Airlines has started Vistara in a joint venture with the Tata group, which has also partnered AirAsia Bhd to launch a low-cost airline.

IndiGo will also have to keep operational integrity intact as its fleet increases beyond 100 planes and maintain its accident-free record. There will also be the bells and whistles—the temptation to build airline lounges, introduce frequent flyer programmes, reconfiguring the seating, etc. And on top of it all, it needs to fill the planes it is acquiring.

Towards the end of this year, the airline will start getting the first lot of the new Airbus A320neo aircraft it has on order. By March 2018, nearly one-third of its 154-strong fleet will be A320neos.

To be sure, the planes that promise to reduce fuel costs by 10-15% will help it save on costs. Even a 10% fuel saving would mean the overall costs for the airline will be reduced by 4-5%, because fuel accounts for about 40-50% of an airline’s expenditure.

The cost advantage “allows you to add more capacity... bring the fare down because as we are adding capacity, we have to fill the seats. If these neos, when they start coming and by 2018 if we had not dropped the fares down, we will not be able to absorb that kind of capacity", Gangwal says. “And if you do not fill the seats, you are in big trouble. So, it is like a perpetual cycle."

Gangwal says India has room for at least two successful and profitable budget airlines and two successful and profitable full-service airlines. IndiGo has already tried to be somewhere in the middle—being a budget airline, but not low on quality and service.

To critics who are suspicious of IndiGo’s consistent profitability in a market where its rivals are burdened by accumulated losses and debt, Gangwal has a ready answer. “Ten years from now, the doubters will still have the same doubts—you have proved it (profitability) for 20 years, prove it for another 20 years," he says. “We will prove it."

He goes on to spell out his vision for IndiGo.

“We want to put in place an air transportation network that India can be proud of, forever," he says. “That literally is the vision. In my lifetime, I will accomplish that."

At home, Gangwal avoids shop talk. His wife is a homemaker and daughter Parul, 26, is building a career at SalesForce.com Inc. after recently quitting as an investment banker at Morgan Stanley.

A vegetarian who likes a glass of Bordeaux wine sometimes, Gangwal still has Chipotle with guacamole for a quick meal.

He is happy that IndiGo is talked about in the same breath as much older airlines like SouthWest and RyanAir, and will “absolutely, without a doubt" remain invested in the airline.

“Oh, the fun has just started," he says. “The hard part is behind. Now, it is time to have fun."

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