My team warned me many times. They said, ‘Captain, the writing on the wall is clear. Please see it. Don’t close your eyes.’ They identified three areas of conflict of interest between Deccan and IGT. By then Bhatia had already launched his Indigo in partnership with Rakesh Gangwal from the US a well known aviation professional who had stepped down from the post of president of US Airways. My marketing executives said the first conflict of interest lay in the fact that our IT system, was experiening problems, slowing down and causing much inconvenience to passengers, and was not being restored or upgraded. Each time our system collapsed, operations went caput. Travel agents could not book tickets, change the status, cancel reservations, or get refunds. Passengers had no way of accessing the system. Each time the system collapsed, Indigo, and the other low-cost airlines, benefited.
My executive identified a second conflict of interest with Bhatia’s IGT. For the new airline he had launched, Bhatia did not use his own IGT-made system but implemented Navitaire. His choice of Navitaire indicated clearly that he had little faith in his own system.
Third, Bhatia’s IGT had my airline’s data which he could use in planning his routes and pricing which could trigger the collapse of my airline. Mohan and I listened with disbelief. And to our horror we realized we were, to use a slang, ‘made suckers’. We decided to tackle Rahul head on and told him that we wanted to migrate. After a series of meetings between our teams, Rahul eventually offered to sell us the system. He had developed Version 2, and we agreed to buy the upgrade for $7 million. This however involved migration to the new system and required the active collaboration of Bhatia and his team. He for his part seemed to be in no hurry to take the transition forward and each day’s delay meant much anguish and loss of business to Deccan. It also meant that as he had all our data he knew which of the sectors were the most profitable. The combination of our data in his hand and delayed migration to the new IT system was proving to be a boon for him and a disaster for us. It was a straight case of unresolved conflict of interest.
I once asked Azim Premji of Wipro why Indian IT companies, known for their software programming wizardry the world over, had no presence in the aviation reservation systems although it was a multi-billion-dollar business. It was Galileo, Amadeus, and Saber for full-service airlines and Navitaire for low-cost airlines. Why hadn’t Indian IT companies like Wipro and Infosys joined the race?
Azim Premji said, ‘Captain, mission-critical IT requires huge investments. You have to build and test the system. No airline uses a new IT vendor to provide critical services to the company because of the danger of glitches. If you want to avoid glitches you need to invest huge amounts of money, time, and resources. That is because you have to run your IT software on a platform where it works. IT people who have worked with airlines for fifteen to twenty years have a great advantage. They have developed and tested the system on a live platform; are familiar with it. Yours has been an enormous platform for IGT. You have provided them the opportunity to build and test their system live on your platform.’
A cold shudder ran down my spine when I realized my vulnerability and that the very survival of Deccan was at stake. Mohan and I were acutely aware of how dire and urgent the situation was. We had to move quickly but cautiously to extricate ourselves from the insidious enemy. We approached Navitaire and asked them to sell us their system, they wanted a no-objection note from Bhatia. We asked Bhatia and he served a legal notice on Navitaire, requiring them not to deal with Deccan until the IGT contract with Deccan had run its course. That road for us came to a dead end. We looked out for other possible software partners and discovered Radix, a US-based IT company.
We began working with Radix to customize the system to handle larger passenger numbers and capable of accommodating growth. We worked quietly with Radix who brought it into their own system and customized it for us. In three months we migrated to the new Radix system. The switch happened at midnight. At 5 p.m. on the previous day, just as courts were closing, we filed a caveat in all the high courts concerned that we would be switching to a new IT system as the existing system was jeopardizing the interest of passengers and the airline’s business. We stated that it was a mission-critical switch and that the court must not grant a stay to IGT, should that company approach the courts, without giving Deccan an opportunity to represent itself. We also filed for damages.
We switched systems and waited with deep anxiety to see how the new system worked. The worry was well founded: the following day there was chaos at many airports and hundreds of passengers’ names did not figure in the manifest although they had obtained e-tickets in the IGT system. By evening we realized we had lost passenger data and didn’t know how much. Assuming the seats were empty, the new Radix software had automatically sold tickets. We were, however, surprised when passengers with tickets already issued to them by the IGT system turned up. The uncertainty would persist for three months, the advance period over which bookings had been made consequent to the data mayhem. We had to ride the storm and had no alternative but to compensate the passengers.
The media had a field day. They accused Deccan of over-booking the flights to speed up its cash flow. Those three months were the worst in Deccan’s history. We lost bookings data and passenger contact records. Our cash flow suffered immensely. We were compelled to put the travelling public through much inconvenience and our public image took a beating. We had been brought almost to our knees.
This was ironic because we collected Rs 7 crores a day when we needed about Rs 8 crores to break even, the loss amounting to one crore a day. It simply incinerated all the capital we had raised. That other airlines also were losing money was no consolation. The aviation scene was again in a tight spot. Jet Airways could not raise a single dollar in the public market; Kingfisher was unable find any equity in the open market; Indigo too failed to raise money. It took three months for Deccan to fix its IT problems and plug the loopholes. It stabilized time-bound flight schedules, cut down delays, and ironed out engineering issues.
It appeared that Deccan could make it; it had begun to reacquire its original public image. The public once again began placing faith in us; gone was the hidden snigger. I received letters and email from passengers acknowledging the transformation. There were very few cancellations and for on-time departures and arrivals we were the best. I had asked the DGCA to publish every month the on-time performance of all airlines. Deccan beat the rest.
Deccan had regained its position on other parameters too. In network spread it was the largest with sixty-seven cities to Jet Airways’ and Indian Airlines’ forty-three cities. In passenger share percentages, Jet was 22.6 to Deccan’s 22, and Indian Airlines 19 per cent. In less than four years Deccan had become the largest airline, replacing Indian Airlines as the nation’s carrier. The political leadership had begun to look to Deccan rather than Indian Airlines to connect to remote parts of India.
Given a little more time, Deccan could have weathered the storm and overcome the cash crunch but time was running out. I might have pulled it off had my IT system not collapsed. We had to bear in mind the welfare of four thousand employees; the public insurance funds and retail investors we had to answer to. We had people in secondary employment; a stake in regional economies.
When I thought about it, it no longer mattered to me whether I remained at the helm or not. External funding would erode my control and I would no longer have a say in the day-to-day running of the company, but bringing in outside capital would protect Deccan. The dream must live on, I thought to myself.
I named Edelweiss, a Mumbai-based boutique investment advisory firm, to raise equity in the market.
Vijay Mallya kept persuading me to merge our two airlines. I resisted his proposition and maintained that the marriage would not work. The analogy of marriage was a powerful one. I frequently used it to show how diverse our interests and goals were. I remarked to the press one day that Vijay Mallya was from Venus and I was from Mars. How could the two meet?
We differed radically, and irreconcilably, in our thinking, lifestyle, and business philosophy. A merger could not be the solution for Deccan’s growth. Deccan was a phenomenal brand; a great investment. The company’s debt was negligible when compared to its revenue.
Reliance Overtures
Any new investor in Deccan would begin with a fantastic advantage. They had readymade infrastructure, fleet, routes, manpower, and expertise. We had our own hangar in Chennai, eight bases across India (Delhi, Mumbai, Kolkata, Thiruvananthapuram, Bengaluru, Hyderabad, Ahmedabad, and Chennai). With about 500 pilots and 500 trained engineers, we had engineering and operational capabilities across India. We were in everybody’s hearts and Deccan’s name was on everybody’s lips, from the president to the peon. We had a low-cost culture with the lowest cost per kilometre, which was the envy of any investor. Also, in addition to solid material assets, our work ethics was all about maintaining clockwork precision in all matters.
I had to choose a partner who would take a larger stake in the airline than I; was on the look-out for deep pockets. I wasn’t certain how long it would take for us to break-even, though we needed only about Rs 600 per passenger. This uncertainty stemmed from runaway oil prices, congestion at airports, and unrelenting induction of aircraft by all airlines including Deccan. I sensed that because of the brand and size of Deccan and because of the strong stock market sentiment, the time was ripe to dilute holding and sell equity to fuel growth. If by chance we did not break-even going forward and the market collapsed, it would be a huge calamity—for employees, vendors, investors and customers, and I would be responsible. I resolved ‘I won’t let my ego to decide the future of the airline.’ I felt intuitively, as I had on previous occasions, that I had to move fast and close the funding if I were to keep alive the low-fare model and the common man’s flying dream.
Madhu Kela, head of Reliance Mutual Funds, was among the first to call. ‘Capt. Gopi, why don’t you give us a stake?’ he asked. I went over and met Amitabh Jhunjhunwala, Anil Ambani’s right-hand man. Then I met Anil Ambani himself. He had just come out of a very bruising, public battle with his brother Mukesh Ambani and emerged unscathed, proving his mettle. The war of words traded between the brothers had evoked much interest in corporate, bureaucratic, and political circles.
The Ambani brothers presided over India’s largest business empires. People wondered whether Anil Ambani would have the ability to execute business plans without his brother’s help. The unexpected result was that rather than halving, the company became two businesses. One brother became Number One, the other, Number Two.
Anil Ambani was also very aggressive in all his ventures. His mutual fund became the largest MF, his infocom business wiped out previous losses and began registering profits, racing ahead at the heels of Airtel.
I met Anil Ambani at his office; in awe a second time. The Ambanis have a mental and genetic make-up that inspires you to work twenty-four hours a day to the exclusion of all else. They demonstrate to their investors and shareholders that they will go to any extremes and do whatever it takes to succeed; that they will not let them down.
We met over lunch. He served me the food himself and proved to be an extraordinarily gracious host. He was not in the least pompous but exuded a quiet acknowledgement of his own sense of power. There is a magnetic field to power of all kinds. Sitting before him, I felt the aura of the power of colossal wealth and far-reaching influence. The lunch meeting lasted three and half hours. I spoke for half an hour about my dreams. Anil Ambani spoke non-stop for the next three hours. He said nothing about Reliance, said nothing about investing in Deccan. He told me the story of how his father had built Reliance. His father, Dhirubhai Ambani, had started out as a petrol station attendant and ridden to school on a cycle. He had worked hard and built wealth for the people who had trusted him. He was trying to convey that should he decide to associate with me, he would be lending us a name that was very precious to him; was trying to tell me that he would not share the name unless he was confident that the name would not be sullied. I got the message.
When we took leave, Anil Ambani complimented me, referring to a quote of mine in the newspapers when I asked Naresh Goyal to fight me in the market rather than hide behind politicians. Anil said he admired my guts. He was keen in investing but his finance people would work out the numbers.
I asked K.V. Kamath, by now a friend and advisor, to check with Anil Ambani if he was serious about the investment. I didn’t want to waste my time and his. Kamath called back to say Anil Ambani was indeed keen to go ahead, ‘But’, he said ‘the rest is for you two, to decide.’
I met Anil Ambani a couple of times after that. The finance teams of both companies did due diligence over the next two or three months. They validated our numbers, undertook a sanity check on our business model, and subjected it to stress tests. Amitabh Jhunjhunwala was attending to the entire process. We eventually shook hands and signed a preliminary term-sheet and decided on a date when the final term-sheet would be signed. The media had learnt through the grapevine that Reliance was likely to invest in Deccan, and this made for a lead story. Such is the power of the Reliance brand that a mere hint of its associating with Deccan sent the stock prices up. It is not such a good thing for the prospective investor because when stock prices shoot up, he ends up paying a higher price for the stock. We had agreed that Anil Ambani would take a 26 per cent stake in the company, and according to SEBI guidelines, he would be obliged to make an open offer to the public of 20 per cent. He would be required to acquire the public shares at a minimum price that matched the price of investing directly in the company.
There are some people with an intuitive understanding of business; have a nose for money. I don’t think any MBA programme can teach this. They simply know what makes a business tick, simply know what needs to be done to scale-up a business. They are naturals when it comes to managing the environment. I felt tying up with Reliance would be in the best interests of the company and investors. Anil Ambani said they were aware that the cash burn was likely to continue for some more time but would do whatever it took to continue the growth. Their single concern was to ensure returns to investors. Anil Ambani said just as Deccan had made it possible for the common man to fly, Reliance had made it possible for the average man to invest in public shares and get a good return on investment. It meant that if the losses continued, I would not be able to prevent them from taking charge of the company through majority investment. This would of course jeopardize my own position, but I was game because the company and its employees and investors mattered most.
We agreed that Reliance could invest more money even if it meant their assuming a 51 per cent share in the company. We sat down and worked out a draft—legal document deciding on the share price, the initial deposit, the structure and roles of various parties in the new board, and their functions and prerogatives. We also fixed a date for signing the final term-sheet: exactly fifteen days after we had signed the preliminary document. We shook hands affirming our total commitment to the deal.
Although we had arrived at an in-principle arrangement between Reliance and Deccan, we had not legalized the relationship. I was aware of many possible last-minute changes of heart and remained open-ended about the deal. I continued to respond to inquiries from investors. There was one from Texas Specific Group headed by David Bonderman who had invested in various American aviation companies. He had also been the chairman of Ryan Air. He had used our helicopters once or twice and I knew his team in Mumbai.
I was still dogged by one concern: what would I do if the Reliance deal fell through at the last moment? This was improbable, but surely not impossible. I still retained a healthy scepticism about the world.
News got around that Reliance had decided to invest in Deccan. Vijay Mallya resumed his overtures but I avoided taking his calls. Others therefore called on his behalf: senior politicians, senior executives, and Mallya well-wishers. Even Kiran Rao of Airbus pitched in. They asked me
to reconsider Mallya’s offer: he was willing to accommodate my demands. They seemed to visualize a Deccan–Kingfisher alliance as a beacon on the Indian aviation map. They realized that a tie-up between us would help stabilize the markets—saw synergies: resources, expertise, flight and engineering operations, logistics, maintenance and inventory. They said that operationally speaking, there was a perfect fit: Kingfisher Airline had Airbus and ATRs, so had Deccan. The only difference, they agreed, was that Mallya’s was a full-feature service; ours was an LCC. They saw commonality; I saw the difference in our philosophies and work-styles. I was from Mars and Mallya was from Venus.
The fifteenth day arrived: the day on which Reliance and Deccan were to sign the final deed. They were supposed to give us the deposit money. Amitabh Jhunjhunwala called to say that Reliance was also in discussion with another airline and that it would like to close the two deals together. Could I give them another fifteen days? I said I was like an unmarried bride and could wait for another fifteen days, pointing out however that I was not morally bound, and might not refuse—should another suitor propose.
I had no particular reason to suspect Reliance’s good faith. We had gone through a series of painstaking negotiations, audits, and documentation processes, but the world of business is not a charity fair. People did not pick up the fallen simply to help them up; there are no good samaritans. More than anything, however, I was aware of the dynamics of the stockmarkets; aware of Deccan’s strong brand equity. A collapse of this would mean downgrading of brand equity; abdication of positions of advantage and vulnerability at the negotiating table. I did bother about what I would do if Reliance did not keep their word and pulled out.
Amitabh Jhunjhunwala had reassured me that things would be fine. Bulo Konsagra, a London-based NRI who was promoting Spicejet, had called to say Reliance was seeking investment in their airline so there was nothing dubious in the wings. What worried and bothered me was ‘The deal is not done till it is done—with money in my bank’. Can I take a chance? What if….
Simply Fly Page 49
