We had five years to go public, one of the conditions that had enabled us to raise institutional equity finance from ICICI and Capital International. There was renewed enthusiasm in the aviation sector and the market was getting hotter. The deployment of an aircraft a month was good for the growth of the company as a long-term investment, but it also meant we were front-loading the finances for the particular year and we constantly needed money to ensure we had the resources to sustain the rapid growth.
Acquiring new aircraft meant cash-flow problems. Not acquiring aircraft, and thereby not expanding, meant we would not be top of the line and competition would erode our flanks. The only way out was to expand operations at breakneck speed. It was a deliberate decision that we would deploy fifty to sixty aircraft and then take stock of growth. We would reposition the routes later to enhance the cash flow and make it sustainable over the long run.
Tickets @ Re 1…
We had sufficient cash-flow initially, but competition awoke to our presence when we hit major trunk routes like the Delhi–Mumbai thoroughfare. Jet and Indian Airlines were operating 350-plus flights daily on these trunk routes, as opposed to our fifty flights a day, and began offering lower fares. Indian Airlines, for instance, came up with its ‘Check Fare’ scheme of low fares. The two had worked out a deal to position a flight just half an hour before the Deccan flight, largely Indian Airlines. Jet seemed to have persuaded the national carrier to offer itself as a sacrificial goat if it came to losing. Their campaign asked customers to compare fares with competition, us, that is, and then buy their tickets. The airlines were deliberately offering lower fares to undercut us, known as predatory pricing; it is a practice that well-entrenched airlines utilize to kill competition and is unlawful in the US.
India had no such legal provision and the monopoly cartel tried to defeat us with predatory pricing. It works in the same way as when private buses in Karnataka try and upstage government-run buses on rural routes. A private bus arrives at a stop only a minute ahead and picks up passengers. It also offers a fare that is a rupee or so lower. It goes full while the government buses run empty. The private bus-operators are known to bribe the drivers and conductors on government buses to allow them to do this.
We wanted to shoo off Jet and Indian Airlines and so we reinforced our dynamic pricing with an offer inspired by Laxman’s cartoon. We introduced a small number of early-bird tickets at one rupee, hoping to create an unprecedented explosion in the number of people taking to air travel. Laxman’s Common Man had become a brand to which most people could easily relate. On a Bengaluru–Delhi flight, the cartel of Indian Airlines and Jet Airways was offering an average price of Rs 12,000 one way. We offered fares starting at one rupee for early birds, with an upward ceiling of Rs 7000 for last-minute fliers. We had a system of dynamic pricing that varied inversely with countdown to the date of flight: the closer to the departure date, the higher the fare.
What IA and Jet lost because of the Check Fare scheme, they made-up by marginally increasing the fares charged to passengers travelling in other sectors where we were not operating. They initially made gains because the number of flights we operated was small so they could gain leverage quite easily. I saw that if we ramped up our operations rapidly and deployed more flights across the country, the leverage would be gone and it would prove self-defeating for the cartel to use predatory pricing. This is exactly what happened. After Deccan got more routes and flights going, they abandoned the Check Fare scheme. Meanwhile, passengers on our flights were checking among themselves the fares they had paid and realized the advantage of early-bird tickets. The result was higher occupancy on our flights and lowered the occupancy on Jet and IA flights. The other carriers did not have more than 60–65 per cent occupancy. One-rupee tickets fired the imagination of the people and very rapidly became a buzzword.
Critics of this dynamic pricing system arrived and described me as being out to wreck the industry. I countered by saying that I was not an evangelist but that I had evangelical zeal, and that helped my business because low fares and low-costs were growth engines for the company and the country.
People from all walks of life thronged the city booking offices to buy the one-rupee tickets. Most were middle-class but there were some from the upper social bracket too. Office-going white-collar workers or blue-collar factory workers formed the majority. Among them were rickshaw-drivers too.
I soon realized that continued front-loading of the finances would, sooner rather than later, make it imperative for us to go public. I made this clear at the very first board meeting after ICICI and Capital International brought in equity. KV. Kamath, executive chairman of ICICI and one of the legendary bankers in the private sector, advised me not to lose time. He said it was better to do so when things were hot. ‘Don’t try to time the market. Take the money when you need it if the market is buoyant. Don’t keep waiting. If you need the money now, take it now,’ he said. We appointed two companies to manage the IPO exercise.
One of them was ENAM, the company led by Vallabh Bhansali, a very highly regarded investment banker and an astute reader of market sentiment. He had built an excellent network and was very knowledgeable about Indian market conditions. Any offering backed by Bhansali came with the assurance that it was a reliable offer. I decided to appoint ENAM as the lead banker and ICICI Securities as the other banker.
The economy was buoyant and the investment climate in India very encouraging. When, therefore, Deccan announced its public issue, it caught the imagination of the media, which gave extensive and positive coverage to our road-shows in India and across the world. There was a unanimous belief that our stock would be oversubscribed by ten times or more at a time when market sentiment was generally responsive to new offerings. Many companies had been heavily over-subscribed. Reliance for instance was over-subscribed by sixty times. Institutional investors were more than willing to pitch in substantial amounts of money running into millions. We wanted to raise $75–$100 million on the market for dilution of up to 26 per cent equity. I was inundated with calls requesting private placement. SEBI rules required that we apply for permission when filing the nomination papers for the public issue. The rules also required that as Deccan had not as yet broken even, 50 per cent equity should first be subscribed by institutions before the balance was allotted to retail investors.
Although the overall investment climate was affirmative and many issues were oversubscribed, some stocks that had traded just ahead of our IPO had not fared well. Bhansali advised me not to overprice the issue. The Jet Airways shares were issued at Rs 1200 but were trading well below that. I took his advice and we priced our Rs 10 share issues in the range of Rs 148 to Rs 155.
On the actual day of trading we were in for a rude shock: a huge tidal wave hit the market. God knows what went wrong, for within the first hour, the market crashed by 1000 points from its 13,000 mark and was described as the worst market crash in 150 years. Within a few hours it had crashed by 2000 points. Brokers and investment managers for mutual funds, rather than deciding how much of their funds to allocate for the Deccan issue were busy deciding which stocks to dump. They set up a trend by dumping stocks: as more brokers dumped, yet more followed suit. The market index which initially slid, had soon begun to tumble. It had a cascading effect and the market was shellshocked.
Circuit-breakers had been applied automatically at two points when the rate of fall had been too rapid. Trading was suspended twice, but when nothing seemed to work, Finance Minister Chidambaram intervened to restore confidence.
There are two kinds of investors: short- to medium-term and long-term. Most IPO investors are mutual funds that make money for their investors in the short- to medium-term. On that fateful day, nobody was buying. The mutual funds, many of them foreign institutional investors or FIIs, were scurrying for cover. They were considering only two options: sell or hold on. They were in no position to invest in our IPO. No financial analyst had the vision to forecast this mayhem on the
market. Number-crunching analysts have little foothold in reality. In fact, the crash came at a time when newspaper reports had predicted further surges beyond the 13,000 mark. The reports speculated about the possibility that the index would touch 16,000. The economy was doing so well that it had to happen, they argued.
The post-mortem analyses were prompt: analysts glibly concluded that the Indian market had overheated and a correction had been a systemic necessity. No-one was however any better for this hindsight. In fact, their forecasting models had gone so awry that it made astrology seem almost respectable!
Institutions called and asked me to withdraw the IPO, on the ground that an under-subscribed initial offer was a humiliation. I remembered former British Prime Minister Winston Churchill’s very forceful exhortation to his people during the war. ‘If you are going through hell, just keep going.’ It was a wry comment about the need to weather a prolonged phase of adversity during the war. I thought of the African proverb: ‘The only way out of a desert is through it.’ I said I was not going to withdraw.
I conferred with Mohan, Vallabh Bhansali, Renuka Ramanathan, head of ICICI Ventures, and Bala Deshpande, who also represented ICICI Ventures and was on our board. They were the sheet-anchors that held the Deccan ship together during the worst storm it had ever weathered.
I called up MD of SBI, MD of New India Assurance Company, and the chairman of LIC. I asked them not to judge Deccan on the basis of one incident. I said these were temporary speed-breakers and said that Deccan and the India growth-story were here to stay. They reposed faith in the Indian dream and stood by me like a rock. While the much-hyped fancy FIIs and mutual funds panicked and tucked tail, the staid and oft-ridiculed public sector funds bailed us out.
Retail investments in Deccan had already been over-subscribed but SEBI guidelines, which specified that institutional investors had to first pick up 50 per cent equity, prevented us from collecting the money. Vallabh Bhansali advised me to lower the issue price, which was the only way of ensuring that there would be some money on the table for the institutions that had invested. We offered a price at the lower band of Rs 148 and waited with our fingers crossed. The wait was interminably long, lasting all of five days.
I had felt it deep within me that I should not withdraw. This faith was borne out by many who called. The financial institutions developed cold feet but retail investors showed great faith. When the financial institutions recovered their breath and mustered the courage to pick up our stock, Deccan was marginally over-subscribed. We raised about $75 million in that IPO, which was akin to oxygen on Mount Everest.
Some companies withdrew their IPOs but Deccan stayed the course: we had to protect our brand value and justify people’s faith in it. It was after all a peoples’ carrier.
Things were brightening up on the financial front and I was now confident we would be able to sustain the airline in the near term but I needed to take decisions for the long-term; to understand the logic of the marketplace and the logic of growth. I saw a compelling lesson in the predatory games played on Deccan by Indian Airlines and Jet Airways. If our growth was slow-paced and cautious, we would never gain the momentum we required to keep afloat: they would surely underprice us and cut us out of the competition. My growth plan had therefore to be fast-paced, or at least sufficiently swift to ensure that their check-fare and other underpricing measures did not affect us.
I had two options. First was to work out a conservative growth plan that would prevent us from falling prey. And the second was to chart out a course so furiously fast-paced that the competition became irrelevant. Indian Airlines had at the time not been adding any new aircraft for several years and Jet Airways too was stagnant. I decided that the only way out was to expand operations at breakneck speed and relentlessly acquire, absorb, and deploy fifty to sixty aircraft and exponentially grow the airline. That would be a blitzkrieg no competitor could ever imagine, let alone anticipate and prepare for.
Global circumstances too favoured such a course. Post 9/11 the aviation sector was facing the worst ever recession in its history. About 3000 aircrafts had been grounded in the US and were parked in open parking lots at an airport in the Nevada desert. Desert air has the least humidity and causes the least damage to aircraft. It was an innovative solution to keep maintenance costs low. Airlines across the world had reduced the numbers of flights. Aircraft manufacturers with excess capacity and inventory, were desperate to find customers and were willing to allow quite substantial paring from the list price. The two major manufacturers of large aircraft, Boeing and Airbus, had no orders on hand.
Memories of the big shake-out in Indian aviation were still fresh and the mood was low. As usual, where others saw gloom I saw light or lit a candle. The dream still remained: I would sell a billion tickets a year some time in the future. The potential travellers had not gone vanished, the market remained and only needed someone to give it a booster dose. As I was mulling various possibilities, I had a visitor from one of the airlines that had folded up during the big aviation shake-out. The visitor had been at the helm of operations of Gujarat Airways. He said he wanted to come and congratulate me and doff his hat. ‘You have the guts, Captain! Hats off to you!’ he said when he met me. I asked him about his airline and why it had to close. He said it had been a small operation largely within Gujarat and Maharashtra, flying to smaller destinations. The airline had a small fleet of turbo-props with a seating capacity of ten to twenty.
Pilots are an airline’s most critical asset. If you have no pilots; you don’t operate. Within the community of pilots there exists a social hierarchy. The smaller the aircraft, the lower the prestige the pilot commands, besides a relatively lower salary. Career pilots are continually seeking to fly bigger planes because this enhances their image in the drawing room and brings in greater monetary returns and professional advancement.
My visitor said that underlying the failure of his airline was the lure of a better career for pilots. Fifteen pilots, all that the company employed, came to his office one morning and said they were resigning their jobs en masse. Jet Airways had poached them.
The ability to sense danger is a positive spur. It pumps up the adrenalin and impels you to act. If it could happen to Gujarat it could happen to Deccan. I realized that I must act without losing a single moment, and did.
I decided to order fifty or sixty aircrafts, thereby resolving two problems in one go. I would stave off competition and create that kind of confidence in the future of the airline that the competition could not dream of creating; they were not equipped for such an attack from the flanks. By taking this course of action I would not only retain pilot resources but attract fresh talent, and experienced talent, from the competition; would be the predator rather than the prey. I felt a rush of adrenalin.
Ramp up? Yes, I had decided that. But, how was I to do it?
I sat with Mohan to do some homework. An aircraft from Airbus Industrie had a listed price of roughly $55million. We would have to muster $3.3 billion to order 60, a staggering figure.
Mohan has the unusual ability to make the most impossible task seem within reach. He is able to intuitively break down a huge problem into smaller, do-able sub-problems. He never lets the enormity of a problem overwhelm him, breaking it down, into components that come tagged with a timeline. In this way, you don’t take the problem head-on but in parts, and in the language of the EMI with which most people are familiar, Mohan is able to see further. He comes up with a revenue stream in cases in which the lay person sees a humongous cost overhang.
With regard to the task of buying sixty aircrafts, Mohan reasoned as follows. Aircraft manufacturers ask for an upfront payment from the buyer of 15 per cent of the sale value of the aircraft payable over a period of twelve to twenty-four months. Banks are willing to finance the entire cost in tranches. Mohan worked on the assumption that although we would be ordering for the serial manufacture of sixty aircrafts, they would be delivered to us at the rate of ten aircrafts a
year. He saw a possible way of cycling the finance on an annual basis: when the commitments were met for the first year we would roll it on for the next year, and so on.
He hit upon a brilliant idea. He suggested that we pay a deposit of one per cent upfront for the entire sixty aircrafts. He then figured a staggered payment schedule. We would first pay a 15 per cent deposit on the first ten aircrafts. This schedule would be accomplished over a gradually deferred span, beginning with twelve months for the first, fourteen months for the second, and so on. Once the deposit requirement for the first ten aircrafts had been addressed, it would be possible to recycle the deposit successively for the eleventh, twelfth and so on. For example, the deposit paid on the first aircraft would go to pay to the eleventh aircraft. He worked out a way of directly operating a lien between the bank and the manufacturer. We would service the interest on the deposit but if for some reason we defaulted, the manufacturer would return the money to the bank when he had sold the aircraft to some other buyer.
Mohan saw the possibility of creating these kinds of financial linkages that benefit all parties, with the least risk to any. The aircraft maker sells and makes money; the bank receives its interest and its lien is secured, and we get the aircraft at our terms. It was a coup in financial thinking: the 15 per cent deposit and recycling it in the Indian context. He spoke to bankers of SBI, and they were agreeable to this kind of arrangement.
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