Simply Fly

by Capt G R Gopinath

  The day I received the call from Amitabh I was heading back to Bengaluru from Mumbai by the evening flight. I received a call from R.V. Deshpande, a senior member of the Congress party in Karnataka and a former minister who wanted to meet me. I was at home by 9.30 p.m. and Deshpande dropped in.

  Inking the Deccan–Kingfisher Alliance

  Deshpande broached the subject. He said it would be a good thing for Karnataka if Mallya and I joined hands and worked together. He said there were many things common between the two of us and we should take advantage of that in order to give the people the best deal in aviation. I patiently repeated the same words that I had been using to describe our mutually disparate characters. Deshpande finally said the least I could do was to take a call that Mallya would be making that night. I said I would certainly do that.

  Vijay Mallya called me a little after ten that night. He spoke endearingly and in a spirit of camaraderie. He said, ‘I know you’ve shaken hands with Reliance. It does not matter what they have offered you. I am willing to better every term in the deal. You quote the price. I will not negotiate. Let us do the deal.’

  Mallya was calling from Monte Carlo where his $100-million personal yacht, the Indian Empress, was berthed, and hosting his famed annual party on the eve of the Formula One race. He said, ‘I am calling from Monte Carlo. I am at the dinner table with a host of VVIPs. The Prince of Monaco is here, the stars of Formula One are here. I am calling you in the midst of all this because it is very important to me. Please make a note of all the major terms of the deal. I will call later.’

  Before retiring to bed that night, I sat down and jotted down the nonnegotiable terms I wanted Mallya to meet in the unlikely event that he would go all the way and actually offer to meet them. I was disappointed with Reliance’s wanting a deferment; but surprised by Mallya’s persistence. The day had been a long one and I slipped into deep slumber.

  The phone rang at about 4 a.m. when I was fast asleep. I think he called a second and a third time. I woke up and received his call, stepping out to the balcony to avoid disturbing my wife. I said, ‘Vijay, I want you to know this is serious. I’ve already shaken hands with Anil Ambani but they need another 5–6 days more. However, I’ve already got a preliminary term-sheet from them so let’s not discuss this unless you are going to meet some major points. Point number one is that you will not dilute this business model.’

  Mallya spoke to me in Kannada. He was disarming in his tone and began on an elaborate pitch. He sounded urgent but winsome. He said it was his philosophy to address all the segments of the market: low, middle, and high. He had done this with whiskey and beer. He said he was aware of my commitment to a low-cost airline and he respected that. Together we would be good for the industry. However, with Reliance’s entry into the fray, the bloodbath would continue. Our coming together would altogether transform the scene.

  Vijay Mallya asked me if I had the list ready. I read out my list which included conditions that would deter Mallya. I said, ‘If you are serious about investing in Deccan, you will have to make a deposit of Rs 200 crore immediately. Then you will have to take a 26 per cent stake in the company through direct investment and another 20 per cent through open offer from the public shareholders. You must be prepared to make a total investment of about Rs 1000 crores. You will have three directors on the board and I will have three. There will be another six independent directors jointly selected by us. I will be the chairman.’ Vijay interjected at this point to say, ‘Can I be vice chairman?’ I said, ‘Fine. We will have six independent directors who will be truly independent. We will have a CEO who will not report to me but to the Board. Ramki Sundaram, our CFO, will be the officiating CEO till we find an alternative. Most importantly, I can only believe that you are interested in carrying this deal further if you make the deposit in three days; otherwise the deal is off.’

  Any sane investor would take three months to bring in investments that run into hundreds of crores. Reliance sat on thousands of crores but took three months to decide. I was not at all certain whether Mallya had that kind of money and whether he could raise it at such short notice.

  Mallya agreed to all the conditions, but requested that the 200 crore deposit was too high and was ready to deposit 100 instead. I said, ‘Won’t do’. He said, ‘Let us agree on 150.’ I said, ‘Fine, and I also want you to give me Rs 160 per share.’ He haggled and suggested ‘Rs 155?’ I agreed, but he would have to pay the balance of Rs 410 crore within four weeks or he would have to forfeit the Rs 150 crore. He agreed.

  It appeared surreal. He was in his yacht in Monte Carlo, I was thousands of miles away. The deal was concluded in forty-five minutes. It was perhaps the shortest time ever taken to negotiate a deal of that dimension.

  Vijay Mallya concluded the conversation by saying, ‘Gopi, Thursday afternoon you will have the DD by 2 p.m. Friday we meet the press in Mumbai.’ I told him I would hold the board meeting at 4 p.m. on Thursday. I would call it off if I did not receive the DD by 2 p.m., insisting that I was dead serious.

  I slept fitfully after this telephonic haggling with Mallya, half from the fatigue of disturbed sleep and half from excitement. I woke up just before noon when Ravi Nedungadi called. We decided to meet at the Oberoi at 2 p.m. Ravi was there, a glowering cigar in mouth. We discussed the documents that needed to be prepared. Auditors and lawyers on both sides sat together all of Tuesday and Wednesday to hammer out the details of the agreement. They looked at SEBI guidelines and compliance issues and had the term-sheets ready by 4 a.m. on Thursday morning and called me over to the hotel. It was a very large document running into a very large number of pages. I checked the key details and signed a preliminary agreement with Ravi Nedungadi representing Mallya. I, however, made it clear to Ravi that this term-sheet will become null and void if the demand draft did not reach me by 2 p.m. in the afternoon and also that this money will get forfeited if the balance money did not come within four weeks. The Kingfisher representative agreed.

  The deal was done. I don’t know whether what I did was right or wrong: the jury is still out on that. Many were of the opinion that I should have joined hands with Reliance, but the deal with Mallya seemed the best course at the time.

  I called the board for a meeting. Deccan shares were priced at Rs 125 and I was going to sell them at Rs 155. I was getting Rs 560 crores injected into equity. No one could decry that. I was confident, as always, that I could take a decision and the Board would support me. They were well aware that I did only what was in the best interest of the company and stakeholders.

  The board met on Thursday. The media had got wind of the deal, and by the time I went to office at 1 p.m. Deccan’s office was like a fortress. The press had besieged it and was camping outside. They had set up OB vans all around the office. The media wanted to cover the entire event live. I allowed them entry, so they set up cameras inside the board room. I thought it would be good publicity for the company and was still wondering if the money would actually reach us in time. It was like playing flush.

  My respect for Vijay Mallya grew. He had not discussed anything with me face-to-face; had not seen our balance sheets; had not done due diligence. He wanted Deccan very badly and had moved swiftly. He wanted the kill. It did not mean much to him whether I was chairman. He would inch his way in and own 46 per cent of the company. If Reliance had taken over the business, it would have been almost impossible for him to recoup his own losses. Reliance would have presented a formidable challenge.

  He also realized he would be creating the largest airline in India. Deccan was twice the size of Kingfisher. Our revenues were greater, we had more aircrafts, and we ran more routes. Without Deccan, he would probably have had to spend three times the agreed amount, Rs 3000 crores, to achieve Deccan’s scale.

  The DD had not arrived by 1.30 p.m. when I got a call. The caller said the DD had been purchased and the courier was on his way. Kingfisher was worried too that I might decide to cancel the deal if the draft did not re
ach before 2 p.m.; it was delivered a few minutes short of that deadline.

  The board meeting lasted an hour and half, and was perhaps the first time in India that a board meeting was broadcast live. Reporters asked us leading questions. Cartoons appeared in the newspapers the next day and the following days, lampooning the ‘marriage of two airlines’. The captions said it signalled the end of the era of low-cost air travel for the country. Be prepared, they said, to pay higher fares.

  Vijay Mallya kept his word. He sent us the remaining Rs 400 crore over the next four weeks; and made a public offering and invested a total amount of Rs 1000 crores. The next day I flew to Mumbai, Vijay came in from Paris and we met at the Oberoi and addressed a press conference in a hall that was bursting at its seams. Vijay Mallya was at his charming best and successfully parried all uncomfortable questions but said he was committed to keeping Deccan as a low-cost carrier.

  Although it would take three more months for Vijay Mallya to join the board, I invited him to attend the management meetings. I wanted to win his confidence and familiarize him with the way we were running the airline. I told him that putting together a professional management structure would allow us both to withdraw from day-to-day management functions. He spent two hours at the first meeting. The public image of Vijay Mallya is that of an extremely rich man who is forever partying; who loves to be seen in the company of glamorous women; and, who loves to splurge on expensive cars, yachts, jets, villas, and islands around the world. I, however, realized after the first two meetings that he is also a workaholic. Though he comes across as pompous on screen and on media, face to face he has a disarming charm, is endearing, courteous to a fault and a generous host. He also exudes immense charisma. I realized soon that he is extremely shrewd, razor sharp and a brilliant marketeer. His only foible is that he is late for meetings—very, very late. Unlike common belief, he does not party all the time; has a hundred things on his plate. He is forever in the midst of meetings and always at work. The venues are different and glamorous: his home or yacht or on an island he owns, or on his business jet. He seems, however, not to draw a distinction between work and personal life. He did not plan meetings in a way that made sense to those waiting for him. His sense of planning is utterly bizarre.

  As chairman, I told him as politely as I could that if he did not turn up for my meetings in time, I would start the meeting without him. I had to show regard for the other directors, including a general on the board. He made an effort and was only one-and-a-half to two hours late. This, I was told, was an extraordinary improvement by his standards of punctuality. He rose in my esteem just by the sheer effort he had put in.

  Rebranding and the Merger

  Vijay Mallya came for the next management meeting having done some really intensive research. He had hired marketing agencies for some fieldwork, having got them to undertake some dipstick research about how the combined brand was being perceived. Mallya combined brand power with value and priced his product on the basis of both. He said, ‘I can spend Rs 500 and make it look like Rs 5000, so I can charge more. I generally agreed with him, but for the low-cost model, every rupee is vital. Five hundred rupees is a lot of money. And I, therefore, stressed that we needed to control costs. This was a fundamental disconnect between us.

  Mallya made a presentation, encapsulating his market research findings. He wanted us to rebrand Deccan and suggested ways of locating and driving synergies. Deccan and Kingfisher would share material and human resources, equipment and facilities. I said we could do that only if we made employees feel part of the same airline combine. He, however, came up with an idea that continually pushed the costs up as we went along.

  Deccan and Kingfisher engaged independent teams to undertake market research. Both teams were unanimous about Deccan: that it had excellent brand recall and was the most preferred brand across the board. On the negative side, it was perceived as prone to delays and did not evoke high quality. Based on these findings, the management decided to reposition the Deccan brand and bring the company under the umbrella of Kingfisher Airlines.

  I had occasion to talk to retail legend Kishore Biyani on this rebranding exercise. Kishore runs the Big Bazaar retail chain that has a nationwide presence. He did not endorse the positioning of Deccan, saying, ‘Keep the two as distinct as possible. Deccan is a great brand. Kingfisher is a great brand. By repositioning you will be blurring distinctions and diluting the brand value of both. You should be deriving all the synergies only in the back-end.’

  Prof. Thirunarayana, independent director on the board of Deccan and professor of marketing at IIM-B, pointed out the danger of ‘getting stuck in the middle’, citing Michael Porter who had said that a brand loses its distinctiveness and positioning by doing so.

  Vijay Mallya made a presentation to both our teams. In it he depicted Deccan in big red font. He said we should have a common colour: red. He proposed renaming Air Deccan as Simplifly Deccan. Simplifly was what the airline stood for. He said the Kingfisher bird mascot would appear on the tail of all aircraft and on buses to the airport. It would, he said, make it easier to drive synergies.

  During the break, I asked my team to consider the suggestions and come up with their own assessment. I wanted not servile agreement but rational deliberation; a meaningful, well-reasoned decision.

  The teams met separately and deliberated. Most new entrants to my marketing team said they liked the new look. They felt that by ‘sexing’ it up we would be able to get a customer shift and re-woo those we had lost because of our ‘shoddy’ appearance. They believed that the refurbished image would allow us to charge a little more. This came as a surprise to me, but the discussions took place in a spirit of openness, and based on them I agreed to rebrand. But in hindsight now, I think I probably should not have agreed.

  I asked myself what it would cost to re-brand the airline; was it affordable on such a large scale? We were losing money; Mallya was losing money. The re-branding was estimated to cost the company upward of Rs 70 crores. It involved refurbishing points of sale and customer relations in sixty-five airports; the creation of new signage, new uniforms, and new airport counters, and repainting aircraft in third-country destinations and the concomitant loss of revenue. It was a huge cost. We had not done any financial analysis to determine the affordability of the exercise. Wasn’t there a cheaper way of re-branding?

  Vijay Mallya was confident it would be good for Deccan and good for Kingfisher. He asked me not to worry about the money; he would pump it in. Eventually however the money spent was not Kingfisher’s but came from the Deccan account—not from the cash flow but from the precious equity Mallya had injected. This aggravated Deccan’s losses.

  There was another development that was eroding Deccan’s character: One-rupee tickets had been stopped. Kingfisher had directed the revenue management team to maintain the minimum fare at a level higher than Rs 500.

  I learnt that all the airlines had come together and marked up the minimum fare on all flights, and the fare distinction between them and Deccan had blurred. This was cartel price-fixing which I had opposed earlier. The association of Indian airlines had earlier met to discuss a minimum price structure for all airlines. I was the target of the entire discussion agenda because Deccan had dynamic pricing. I opposed the minimum price-fixing because it did not reflect the costs of individual airlines. I said that if a full-legacy service airline fixed its bottom price at the same level as an LCC, passengers would migrate to the FSA. I also pointed out that it represented cartelization of the industry. There was no legal bind in India, with the exception of the somewhat mild one relating to the MRTP Act. I had stormed out of that meeting. Now all the airlines had got together and fixed a minimum entry level fare and called it fuel surcharge to avoid being accused of price-fixing, which was what it was.

  Now that the new revenue management team had agreed to fare-fixing, the entry level fare became Rs 2900, reducing the difference between a low-cost carrier airline and a full-serv
ice one to about Rs 400 to Rs 500. If an LCC and FSA have the same entry level fares, the occupancy or load factor tilts in favour of the full-service carriers. The low-cost carriers succumbed to the pressure tactics of full-service airlines and raised the fare hoping to cut their losses. They cut down loss-making routes but did not redeploy the aircraft to maintain utilization. Reduced asset-utilization of aircraft meant the cost per kilometre rose, and this had to be recovered from the fewer numbers of passengers flying the airlines. That meant higher fares. When you fly a larger number of hours, the aircraft is more useful, as are HR, management, airport services and space, fixed costs, insurance, and pilots with fuller utilization. An airline achieves a multiplier effect through cost savings.

  I had bitter arguments with Vijay Mallya, describing this was hara-kiri. If we did not cut costs things would billow out of control.

  The Kingfisher management thought they could attract more customers by adding frills. They decided to give free water on board Deccan and free newspapers. I opposed these moves. I said Kingfisher must be a better airline than Jet at a lower cost and that Deccan must be a better airline than other LCCs at a lower cost. My advice fell on deaf ears.

  Almost a year down the line, when the Kingfisher management was rooting for additional frills and the Deccan management felt bulldozed and losses were mounting, Vijay Mallya came up and did a conjuring trick and plucked a rabbit out of a hat. He said he had yet another market research exercise and said the results showed that he was losing money because of the Deccan brand.

  Mallya’s market research had put the blame for his losses on Deccan, but that very month CNBC gave Deccan a consumer award based on a survey by an independent agency across sixty-five airports. Deccan received the award for its on-time performance, connectivity, and routing network. This was not a rigged award. They had hired a third-party consumer research and survey company which had interviewed consumers and judged the airlines on a variety of parameters.