"I will first stabilise the business before thinking of scale" | Outlook Business
Home  /  Strategy  /  Interview  / "I will first stabilise the business before thinking of scale" | MAR 02 , 2018

RA Chandroo

Interview

"I will first stabilise the business before thinking of scale"
Captain GR Gopinath in his second-coming with Air Deccan wants to focus more on cash flow than scale

Kripa Mahalingam

A decade after he exited the commercial aviation industry, Captain GR Gopinath is making a comeback by re-launching Air Deccan. The airline received its licence under the government’s regional connectivity scheme, Ude Desh Ka Aam Naagrik (UDAN). Along with its strategic partner, Air Odisha, both airlines will fly 84 routes across the country. Gopinath, who made air travel affordable for millions of Indians when he launched Air Deccan in 2003, talks about his learning from his previous experience and plans to connect all of India through his newly launched airline.

What was the trigger for re-entering the aviation industry after selling out in 2007?
When we launched Air Deccan in 2003, around 13 million tickets were sold in the country, and by the time Air Deccan exited in 2007, 60-65 million tickets were being sold. Currently, 110 million tickets are being sold with flights to six major metros, Mumbai, New Delhi, Chennai, Bengaluru and Kolkata, accounting for 75%. The headroom for growth is still huge in India. For example, Malaysia, which has a population of 30 million, sees 20 million air tickets being sold. In India, the sector has not grown to its full potential because of challenges on the regulations front and monopoly of airports. Today, less than 3% of India’s population or about 30 million people have sat on an airplane. Though there are 110 million tickets sold, many of them are repeat customers. So, if you can get the country’s middle class population of 300 million to take even one flight a year for a vacation or a visit to their relatives, the growth potential is huge. Today, business is where the bulk of the travel is happening. Ryanair, which flies more passengers than all the airlines put together, gets its traffic from people largely visiting friends and relatives. There was an unfulfilled dream to see Air Deccan fly high again — thanks to a set of fortuitous circumstances, the opportunity landed on my lap with the regional connectivity scheme being implemented. 

What’s changed now that makes you more confident?
Between 2003 and 2007, almost all the routes that have now come under UDAN were connected by Air Deccan. For example, flights to Bellary, Mysuru, Vijayawada, Belgaum, Rajahmundry in the south, and in the north, places such as Gwalior, Kanpur, and Kullu. But after the takeover by Kingfisher, these routes were abandoned. What’s more this time the government is subsidising 50% of the seats for which they are paying up to 3,500-4,500 per seat. While I can’t price the 50% subsidised tickets for more than 2,500, the balance I am free to fix the pricing. We are looking at pricing it just below the first-class air-conditioned rail ticket. So, a Chennai-Mysuru will be around 1,700. The subsidy largely takes care of my breakeven cost. That is a good start to begin with. We don’t have to pay airport or fuel tax, plus there are no landing or parking charges. More importantly, these routes come with three-year exclusivity.

When we launched Air Deccan, the business model was different. This time around, we will do things a little differently. Of course, the learning helps and there are benefits which didn’t exist before. For instance, earlier I didn’t get any subsidies for any of those places I flew to. Now with subsidy, I have an advantage. But there could be new challenges that crop up and catch me by surprise. I think the last time around I was in a hurry to scale up, so I expanded quickly. That caused a lot of cash burn and we ran into cash flow problems. Jet and others were trying to pull me down. So, I said, one way to tackle them was to scale up. And that’s what I did. Mistakes happen but that’s what entrepreneurship is. All the bets you take won’t pay off. I got the model right even back then but in my rush to garner market share quickly, I didn’t pay enough attention to the unit economics and that cost me dearly.

By when do you plan to become fully operational?
We are going to fly to 62 towns along with Air Odisha who is our strategic partner. We have won 34 routes and Odisha has got about 50, so that makes it a total of 84 routes connecting 62 airports. We should be fully operational in the next five months. It is more than 1.5x what IndiGo, SpiceJet are covering today. They are only going to 40 airports. But we are not competing with them. We are looking at a different market where we are going to stimulate demand. 

What kind of fleet size are you looking at and how are you funding the fleet acquisition?
Right now, we are going to deploy 12 aircraft over the next five months. Each aircraft will cover about 5 to 6 airports. We have four right now, one has been launched, the other three will follow shortly. We are funding everything through internal accruals. 

Why did you choose the smaller 18-19 seater Beechcraft over Avions de transport régional (ATR)  
We choose Beechcraft because these are new towns and we need to see how we can stimulate demand in these markets. If I put in a bigger aircraft, the government not only has to give bigger subsidy, but I have to sell more number of seats as well. The need now is to build the market rather than deploy the aircraft and then wait for it to fill up. If capacity runs out, I can always deploy another aircraft and that would a better way of utilising our resources. 

But there is a fight for landing spots with no spots available during the day in Delhi and Mumbai?
Yes, there is a fight. So, what we are trying to do is get a night landing in Mysuru. So, it is Mysuru-Mumbai at midnight because, but there is no slot in day time. We are working around these immediate challenges.

Is the infrastructure in these regional airports good enough or does it need to be developed?
There is some basic infrastructure in place but I am telling the government not to spend 100 crore on building flashy terminals but rather invest about 10 crore in each airport to build better runaways and buy better instruments for landing which improve the overall safety and reliability of airports. These towns don’t need flashy terminals. 

Isn’t the success of the business model hinging a lot on subsidy? Will it work when the subsidy goes away?
I think three years is enough time for us to stabilise our operations. After three years, the government may or may not continue with the subsidy. But that is not a cause for concern. In my opinion, they should not continue the subsidy as three years is sufficient time to seed the market. It is pretty much in line with incentives you give companies to set up operations in new industrial zones such as no stamp duty, free water or electricity, income tax or sales tax exemption. 

But what happens when rivals enter the market after three years? What kind of competitive advantage does this exclusivity actually offer?
To begin with, there are not many flights from metros to small towns. Nobody is going there. Today, 60% of all flights are in Mumbai and Delhi. So, if you want to go from Delhi to Cooch Behar, you come from Delhi on an IndiGo or Air India flight and land in Kolkata. We are the only ones flying to and from Cooch Behar. So, we will act as a feeder to these airlines.

I think the future is in these small towns because the big cities are already congested. Most of them are probably anyway getting a second airport. Delhi is putting in new runways. So, while connectivity will improve in the metros in the next two-three years, small towns offer an immediate opportunity. Hence, I need to build a model that suits small towns.

Competition is always part of business. Airline is a tough business. Despite competitive pressure, the airline with most efficient operations and lowest cost structure will continue to do well. For example, Ryanair has revenue per passenger of just €40 but is still the most profitable airline in the world. British Airways earns €240 from each passenger and is still making losses. In India, IndiGo has been successful because it has ruthless control over costs. 

But it’s not just about cutting costs. It is also about innovation in the business model. For instance, when we launched Air Deccan, we eliminated all intermediaries by selling directly on the internet and started to charge for food. So, what were costs earlier now turns into a revenue stream. Then we looked at increasing asset utilisation wherever we can. For instance, if Jet Airways was flying its aircraft for 10 hours, we used to fly 13-14 hours. When you increase the asset utilisation of an aircraft, you are also increasing the asset utilisation of all the ancillaries. The airport rent you pay is irrespective of whether you do one flight or 100 flights, so you stretch all the things. Hence, you have to build a business model that is in sync with the industry dynamics. 

Can you reflect on some of the learning from your earlier stint with Air Deccan?
In retrospect, I should have avoided selling out to Kingfisher. But since I had no background in running a large business, and was under immense pressure from investors to sell, I had to make that hard choice. But this time around the focus is not to expand but to consolidate and thrive. I am going to build a robust business and manage my cash flow better. I don’t have to scale up immediately since the government is backing us up. So, I will now stabilise the business first before we think of scale. This is my last venture, an unfulfilled dream to finish on a high, which I hope to fulfil through this.

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