Posted by: John Elliott | June 10, 2007

Mallya challenges Gopinath’s low-price Deccan dreams

 

G.R. Gopinath, a former Indian army captain, has earned a place in India’s aviation history for founding cut-price Air Deccan, which since 2003 has introduced air travel to tens of thousands of railway passengers unable to afford full fares. But Deccan, which has grown into India’s second largest airline, has had heavy losses – as well as chaotic flight delays and cancellations – and it now looks as if Gopinath’s trailblazing will soon end.

The trigger for the change came on June 1 when Vijay Mallaya, who founded full-price Kingfisher Airlines in 2005 and is one of India’s most egocentric and charismatic businessmen, bought a 26% stake in Deccan for $137 million, defeating Anil Ambani of the Reliance-ADA Group, which had been negotiating a take-over.

Mallya now hopes to gain control by buying up to 20% more with an open stock market offer (in line with stock exchange rules). He then plans to start rationalizing the two airlines’ operations that together have a 30% market share and 71 aircraft, challenging Jet Airways, the much-admired market leader that has 60 planes.

That might shock Gopinath, who told me that Mallya’s arrival was as a “strategic investor” and was “not a take-over.” Mallya had said, “let me invest and you run the airline,” so Gopinath expected Deccan’s “existing values” to continue.

But when I asked Mallya during a telephone interview (he was in Miami) whether he’d be “in charge,” he laughed and replied: “With a majority stake that’s pretty inevitable isn’t it?” He repeated his known view that “the low cost model doesn’t work in India,” and added:

“There is no question of cut prices continuing in India – everyone wants to raise fares. Deccan is widely regarded as a market spoiler and that will stop!”

India’s domestic carriers have been plunged into a downward price spiral, driven initially by Gopinath’s passion to fly people who had never been in the air to destinations never before served by an airline.

There has also been a massive growth in capacity, which rose 50% last year. New airlines such as SpiceJet and Indigo have joined the no-frills league and others like Jet (which recently took over Air Sahara) and government-owned Indian (formerly Indian Airlines, now merging with Air India, an international carrier) have plunged into the cut-price war.

Kapil Kaul, regional CEO of the Centre for Asia Pacific Aviation, estimates annual losses at $500 million, based on an average deficit of around $15 for each of 33 million passengers carried last year. Deccan recently lost $50 million in just three months.

“Fares are half the levels of five years ago, while fuel is up three times and manpower costs have doubled,” says Ravi Nedungadi, president and chief financial officer of United Breweries Holdings (UB), a leading liquor and beer company that is Mallya’s main business. That is unsustainable and the general industry view is that prices should go up. Several airline operators talk about at least covering the $15 losses, though few think bigger increases are possible quickly. “We hope for a greater rationality of pricing,” says Saroj Datta, an executive director of Jet.

Gopinath agrees that “whatever we need to do to be in profit, we will do it” but adds: “we will still have a low fare policy.” He and Mallya hope to make savings of $75 million in the coming year by rationalizing routes and other operations – both their airlines fly the same Airbus and smaller aircraft. They will also delay some aircraft purchases, though Mallya plans to grab headlines at the Paris Air Show later this month with a big Airbus order.

Mallya will also want to make more Deccan changes, ending uneconomic rock-bottom fares aimed at attracting poorer passengers, and raising fares on less popular routes. That is where a clash with Gopinath could start. There is already speculation about how long the two men can work together. Mallya is famed for his domineering though informal management style and likes the limelight.

Gopinath also likes to be in the news, though in a more low-key fashion. Gopinath even said recently (correctly, most people thought): “We are from different planets – he is from Venus, I am from Mars.”

Mallya’s 26% stake in Deccan Aviation, which owns Air Deccan, has been bought by UB, which last month acquired Scotland’s Whyte & Mackay whisky company for $595 million. Executed through an issue of new shares, the 26% makes him the largest single shareholder, but Gopinath says he can call on about 35% with the support of two co-promoters and friends. Two venture capital firms have about 22%, and the rest is public. So Mallya needs to increase his stake by about at least 10% through the open offer or later open market purchases.

Nedungadi says UB has a “muscular presence” on the board of its group companies “to give direction and energize synergies.” A new professional CEO is to be appointed at Deccan, to replace one who left recently. He will report to the board headed by Gopinath as executive chairman and Mallya as deputy chairman, but not to Gopinath directly.

The industry betting on a full merger of the two airlines within a couple of years and Mallya is already talking publicly about the “Kingfisher-Air Deccan group” – not Gopinath’s dream at all!


Responses

  1. <a href=”meriyatra.in” rel=”nofollow”>meriyatra.in</a>
    Lets hope he can raise standard of low cost aviation in India. Having travelled once in low cost airlines, they feel dangerous.


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