Aviation is not a key sector for governments in India. It is not considered integral to economic development. Politicians tend to be more sympathetic to what is perceived to be good than what is indeed good! They tend to look favourably at something that continues the parallelism in rural road development, rural electrification, rural agriculture, and rural health and education even if such projects do not actually lead to the desired noble aim of rural uplift. Political leaders who openly acknowledge the existence of corruption in these schemes have calculated that of every rupee earmarked for these projects only ten paise reaches the beneficiary. I had a vision for the country: I wanted the common man from the small town to be able to fly. I would do well to ride piggyback on the popular rural theme: rural is where I wanted to go, and the rural pitch would take me there!
I knew I would be mauled if I were to enter the aviation fray headlong. My competitors were powerful and would use every trick to finish me off. I also sensed that my competitors were happy flying the big city network and would not want to venture to tier II and III sectors in the interior. I, therefore, decided that a strategy of connecting non-metro urban centres would make them complacent about us and they would leave us alone. Even so, they could put spokes in the wheel and delay the project causing us to notch up cost overruns and impact our balance sheet.
Now that people knew I would be starting an airline, help was forthcoming. Politicians across India wanted to know when I would launch my airline. Did their town or city figure in the zigzag? Builders associations, chambers of commerce, and industry wanted to chip in.
By projecting relative cost, occupancy, and revenue per passenger, we decided that a forty-eight-seater ATR turboprop aircraft was best suited for the small-town interconnects. We would have two approaches for the business model. Number one: flights from small towns and cities would be feeders to flights between metros. Number two: the pricing would be different. It would be low fare and compete with the price point of AC first class of the railways. We calculated that a fare that is 25 to 30 per cent above AC first class and much above AC second class would make it a viable business model.
The Common Man Must Fly
The decision to launch a low-cost airline was actuated by an inner intuitive logic, but for me to realize the objective I needed a plan of action. The crucial thing about planning is timeliness of execution. The airlines business has three principle components: aircraft, pilots and technicians, and a hangar, maintenance facilities, and airport space. These three have to be mobilized and operationalized in optimal synchrony. Aircraft cost a lot but an aircraft has value only when it flies; it is worthless on the ground. I had to ensure that aircraft arrived when the other components were in place: not too early and not too late. Pilots and technicians had to be paid salaries, but they must be on board and must be aligned with the concept of LCC and Deccan’s motto and vision before the aircraft arrived. Not too early, either. Hangar space attracted rent; spare parts and tooling are cold inventories if not put to use. They had to be ready but not too early.
However, before setting up the material basis of the airline, I needed to obtain a licence and official support. I set about it in full earnest. I knew Venkaiah Naidu, the BJP president and a sincere pro-reforms politician. I asked him to introduce me to Rajiv Pratap Rudy, the minister of civil aviation. Both politicians were known for their progressive attitude to development. Venkaiah Naidu was from Vijayawada and Rudy was from Bihar, representing regions that craved connectivity.
Venkaiah Naidu spoke favourably about me and my proposal to Rajiv Pratap Rudy, a young, energetic man with perceptible dynamism. I sold Rudy a vision: Deccan’s proposal to launch an LCC. Rudy was doubtful about selling tickets at half the price of my competitors and making profits at the same time. He thought I would go bankrupt.
I explained the philosophy of LCC. I said it was not a new concept but a revival of an older culture of innovation and efficiency. It is an attitude to money and resources. It is a culture that does not allow you to spend on unnecessary things. It is home ecology conservation, about not wasting food, water, energy, materials, and labour; it is about frugality; about doing away with the redundant.
My father lived with this spirit of conservatism. We lived in separate houses in Bengaluru. I lived in the cantonment area while he lived in Basavanagudi, 6–7 km away. On weekends I sent my driver over to his residence to fetch him. My father steadfastly refused my offer. He said just because I could send a car did not mean he must use it. He took a bus to the nearest bus station, and walked. I used a different metaphor with well-known aviation journalist Cuckoo Paul, and said an LCC is like an Udupi hotel. She wrote in the next day’s papers that I was launching an ‘Udupi in the sky!’
An Udupi hotel, a fast-food restaurant, really, as I have explained earlier, is a low-cost affair. It is an excellent example of cost-cutting without sacrificing quality. It sets out its philosophy of business very clearly. People would have to serve themselves from the service counter and eat standing around a circular table on a fixed stand or at a sill along the wall. There is no opportunity, or tacit encouragement, to hang out, lounge around, smoke, read a book, or chat with friends. It is a zero frills area with no extras. The restaurant cuts down costs on several fronts. There are no waiters, real estate requirements are lower, maintenance costs are lower than in an AC deluxe restaurant, and there is less electricity consumed. These Udupi hotels across the city of Bengaluru are always crowded. The proprietors spend less and earn more; customers get to eat good and clean food served piping hot, at much cheaper prices, and they save time because the food is always served quickly.
The owner of an Udupi hotel makes it clear right at the outset that it is a place in which to eat and leave. When customers go to an Udupi hotel, they do not expect to sit around and be served. They expect no frills but get what they have really come looking for: good, inexpensively priced food served in a clean environment. That is what an LCC is all about.
An LCC is about inclusiveness, innovativeness and efficiency. It commits itself to fly the common man and prices the tickets so that a larger number of people at the lower end of the economic bracket can fly the airline. The rich and well-to-do are welcome but they must realize that they will not be pampered as they are on a legacy airline.
An LCC innovates. It flies point to point and saves time and cost on luggage transfers and dovetailed flight connections. Being a point-to-point airline means the contract with the passenger ends when he/she reaches the destination. Any further leg of the journey is a new contract. Onward travelling passengers will have to collect their baggage and stand in the next check-in line. In a full-service airline, a Delhi–Mumbai flight waits for a British Airways flight to land passengers travelling from London and Amsterdam. In such a hub-and-spokes model, onward flight schedules are made to dovetail with inward flight arrivals. Aircraft in such a model of operation are often on the ground for longer periods and this entails costs which passengers eventually have to bear in the form of higher fares.
LCC focuses on efficiency. It has more flying hours per aircraft per day and thus increases the operational efficiency per passenger. LCC aircraft take off early and finish late in the night. A prudent flier on a family visit or a small and medium entrepreneur on a business visit will want to stretch a rupee as far as he can and will be willing to fly out at 5 a.m. if a flight is available and the ticket costs half the usual fare. The CEO of a large corporate company will be willing to pay for the luxury of some extra sleep and will therefore choose a more expensive 8 a.m. flight.
Efficiencies are also possible when you don’t serve food in flight. Cleaning is easier and time for loading and unloading food containers is reduced. The aircraft can take off almost immediately after the passengers have deplaned and new passengers have boarded. Fewer food containers on board brings down the weight and fuel consumption of the aircraft. When food is sold rather than served free the cost model becomes a revenue model; people are careful w
hen they pay for food, there is less wastage, and less pilferage. What is a cost overhead for legacy airlines becomes a revenue source for LCC.
Prudent handling of water as a resource is a great cost-saver, and is an ecologically sensible thing to do. Not all the water that is served complimentary is consumed. There is plenty of wastage. Passengers are more careful with the water they purchase. Fewer water bottles on board mean lower weight and lower fuel burn. Free newspapers are another cost factor. You pay to buy a newspaper, and pay the staff that bring it on board and clear out old papers. At each transit, this process takes time, and eats into revenue.
Innovation can apply to cost-cutting and to creating positive revenue streams. We considered both. We would add on 23 per cent more passenger seats. We would do away with the business class and offer 180 seats rather than the 144 seats offered by legacy airlines. Besides, we would fly 25–30 per cent longer hours than other airlines. Another innovation concerned the distribution network. The LCC model eliminated brokers and agents which straightaway brought down costs by 15 to 20 per cent.
I explained to the civil aviation minister how our LCC would be able to offer the low fares through cost reductions per passenger as well as induct positive new revenue streams. I told Rudy that while the government was proactive about reforms, the reforms would not reach Kanpur or Ranchi without air connectivity. I spoke of the waste of time, and hence loss of revenue and productivity, when 200 million people travelled by road or railway. I said the economy would benefit when teachers and trainers, mechanics and plumbers were able to fly. I explained how investments would percolate to the interiors if air connectivity was ensured. Rudy asked me to address the civil aviation officials about low fare airlines. He himself was quite convinced.
I did, and explained at the meeting that Deccan would need only three airfields to get started: Vijayawada, Rajahmundry, and Hubli would do, and I sought a minuscule investment for each of these airports to be connected for the first time. These airstrips should be repaired and be able to handle take-off and landing of ATR aircraft. Just a shed where people could stand about and wait for their flight would be sufficient. My aircraft would land, pick-up passengers, and fly off within twenty minutes. All I required was a good runway with a thatched shed and a toilet!
Hubli, Vijayawada, and Rajahmundry were representative of the newly emergent economic centres of India that were growing fast and were straining for connectivity to help them sustain and further ramp up their growth-rates.
The deck was cleared after I cleared all doubts. The licences and permits for the airline would come in good time but what was of prime importance was the government’s decision to allocate a few crore rupees to repair the runways in Hubli, Vijayawada, and Rajahmundry. The papers the following day reported that India’s first low-cost airline would begin flights to Hubli and Vijayawada and link unconnected parts of India. It set the country aflame. This had a spin-off. I was flooded with calls from chief ministers’ offices from all states wanting to know when I would start flights to their respective states. There was a frenzy of interest and no time to lose. We had to plan to be safe but move the project at lightning speed. After getting the go-ahead from Rudy, I went to Mohan Kumar to give him the news.
After meeting Connor McCarthy in Dublin in March 2003, I gave myself six months for the launch of the airline. I made a media announcement that Air Deccan would be launched in August. The die was now cast.
Mohan and I now had a very clear road map before us for the new venture. The decks had been cleared with the government, but we had no time to lose. We had to find the funding before the project lost steam or the government changed its mind.
Though all the economic sectors in India were booming—IT, biotechnology, cement, steel, automobile, and telecommunications— aviation was not. It was not looked upon as a sunrise sector. Wall Street analysts and financial experts were indifferent to it. Even the aircraft manufacturing industry was reluctant, although it was desperate for sales and was in the throes of a severe recession following the 9/11 massacre.
In the 1990s the government opened up the Indian skies to competition. A raft of airlines launched operations, each with the same business model and competing for the same pie. They did not look for ways of generating new passenger traffic. Competition was fierce and there was a shake-out, leaving most of them bankrupt, including East-West, NEPC, Modiluft, Damania, UB Air, and Gujarat Airways. This wholesale bankruptcy created a monopoly status for Indian Airlines, Jet Airways, and Sahara. Because the economy was stagnant at the time, no one thought of acquiring the bankrupt airlines. Now in the new vibrant economy, bankruptcy would bring in acquisitions and growth. At the time, in 2002, Indian Airlines, Jet Airways, and Sahara flew thirteen million passengers while Ryan Air alone was flying thirty million passengers in Europe. The timing looked ideal for the launch of a low-cost airline.
I decided to meet Ladhani in Delhi, when Mohan confirmed that we would be ready to launch with Rs 5 crore, to start off with. We travelled together in a Jet Airways flight from Delhi to Bengaluru, economy class. I explained my business plan to Ladhani. I said a traditional airline charged Rs 20,000 one way for business class and Rs 12,000 one way for economy.
My low-cost airline would allow you to fly this sector for Rs 4000 flat. Ladhani was a man who could afford to charter a plane from Delhi to Bengaluru but he flew economy class. He welcomed the prospect of flying cheaper even if it meant the seat would be slightly more cramped.
The licence stipulated that to start an airline we would need a minimum fleet of five aircrafts within twelve months of operations. We decided that we would launch with three aircrafts to achieve a minimum network scale and ramp up to five within six months.We decided to start with a forty-eight-seater turboprop and later upgrade it to seventy-two-seater. News reports that my airline intended to use turboprops led to an increased sales pitch from turboprop companies.
Another critical decision that I took, on which hinged the future of the airline, was that from the very first day we would distribute tickets only over the Internet and not print any. Passengers would pay upfront and book three months in advance. That would create a comfortable cash-flow for the airline. I told Mohan to go ahead and create the entire IT infrastructure to support the airline. The Internet distribution model would eliminate our dependency on travel agents.
Once the business model and processes were decided, I asked Ladhani for the money. He was aware that an airline enterprise would require an investment of anywhere between Rs 100 crore and Rs 200 crore. When I asked him for Rs 5 crore, he was quick to make his terms clear. He said I would have to return the money in six months failing which I would have to forfeit 50 per cent control of the helicopter company.
Ladhani knew instinctively that by committing myself I would never be complacent and I would go to any length, if necessary, to make the airline work. He also wanted an interest on the loan. Without batting an eyelid, I signed and we got the money. Thanks to Ladhani, Air Deccan was born.
If you are a corporate company seeking to diversify, you allocate funds for the company, find a CEO, and launch the project. If you are an entrepreneur with nothing but dreams, you start with what you have. Entrepreneurial soil is fertile. It sustains ideas and innovations. There is great energy in the entrepreneurial seed. It germinates in acute conditions of stress and nutrient deprivation. It pushes through the hardest of sod and shoots sprout. The belief in oneself and the will to succeed are not measureable in terms of money.
There was buzz about the airline much before it was launched. People felt aligned with it as though they were potential stakeholders. Everyone wanted the business to succeed: government departments, the DGCA, the ministry, and eventually aircraft and engine manufacturers. It was infectious.
We used three criteria in deciding between competing vendors and service providers: professionalism, quality, and what was best for the company.
There was no room for any personal agenda or predile
ctions. This policy allowed us to learn a great deal about the business from competing vendors. They educated us about the advantages of using their company products and services and the disadvantages of using the offerings of the competition.
Before finalizing the aircraft manufacturer, we ran an intense competition between ATR and Bombardier. Turboprops were being phased out across Europe and the United States, with only the Bombardier and ATR remaining afloat. Their sales had plummeted so they were in dire straits and therefore desperate. Deccan was in a position to give them a new lease of life.
Vendors soon realized that we were obsessed about being low-cost and made their best offers. After an evaluation of the aircraft, we homed in on ATR. They were quick to respond. Their financial offer, apple for apple, was more competitive; and most importantly, they came not only with a financing solution for the aircraft lease, but they also structured an integrated maintenance, tooling, and logistics, and pilot/engineering training support which was so designed that it reduced our capital expenditure upfront and was a boon for a start-up company like ours.
I, however, thought that by visiting Toulouse I would get to know the management better, meet the CEO Jean Michel Leonard, and also get better terms. The long-term success of the airline was linked to how seamlessly we were able to work together on all these fronts. ATR was a collaboration of three European aerospace majors: Germany (EADS), France and Italy (Allenia).
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