The Hindu Business Line : Air Deccan bets on volume game

OUTSIDE Air Deccan Managing Director Capt G.R. Gopinath's office, there is a poster showing Capt Gopinath wearing boxing gloves. With nearly 11 more low-cost airlines planning to take wings within two years, Capt Gopinath would need more than fighting spirit to stay in the ring.

In an interview with Business Line, Capt Gopinath says that costs are common to every airline. But one needs to handle it differently to sustain one's business model.

It has been nearly 18 months since you started off your operations. What do you think works in this industry and what doesn't?

Frankly, it has been a roller coaster drive so far. Once the phase of being an entrepreneur ends, you need funds to continue the show. In the developed market, it is easier to start a low-cost airline because the fundamental recipe is there. Airports are large, ... the traffic doesn't get held up because of congestion. Here it is over-regulated. Therefore everyone said it won't work here.

But our vision was to get even train passengers to switch over to our airline. It has worked so far. We handle 1,000 passengers a day now. By February end, we would be handling 100 flights a day and would have flown 1 million passengers by March 31. I must admit that the Government was very helpful too. Instead of red tape, we received a red carpet welcome when started the airline.

... and what doesn't work.

I thought we were over ambitious to an extent. We overestimated certain things, ... for example coordination among various agencies in the Government.

We have grown from one person to 1,000 persons too quickly. We learnt as we went along. There were two ways of doing things. Either we set up everything, hire people, hire planes and get everything organised and then start the airline. But we realised that if we did all that, we would start spending even before we started earning anything. That plan could have gone out of hands. Therefore we kept fine-tuning, learning and correcting ourselves as we went along.

In Hubli, we spend just half an hour. We realised that we didn't need a huge staff there. We outsourced the functions to our agent who receives a two per cent commission for his work.

But we realised we had to face some quality issues. We are learning on the job all the time.

Do you think you can sustain your low cost model at a time when the competition is hotting up. More low cost airlines will be launched. Some of them could be better at managing the business model.

We now know how to position ourselves . Look how hotels increased their room rents just because the demand went through the roof. But we did it differently. We increased our flights rather than increasing fares when the demand went up. We have to stay focused even if the demand goes up.

We want to increase our profits through higher volumes even if the margins are low. We want to play the volume game. When the oil prices went up, others increased fares by 15 per cent. We brought it down by 10 per cent. Within 18 months, our market share is about 8 per cent now.

Our fixed cost gets amortised over a number of times if we fly more. For example fixed cost will get divided over 20 flights. More players will do good to the economy and the market will expand. Hence, we will benefit too.

Costs are common to everybody. But the way you handle it makes the difference. You always try to do a better job. If you fly 25 per cent more times, your costs are lower by 18 per cent. Our distribution costs are between 7 per cent and 8 per cent. With others, it is sometimes as high as 20 per cent.

We let others advertise inside our planes and even outside it. Nearly 5 per cent of our revenues come from such advertisements and through sale of food items and other products. We even give commission to our airhostesses.

How does your pricing structure work?

For a Bangalore-Delhi flight, about 40 seats are between Rs 500 and Rs 2,000, depending on when you book your tickets. About 140 seats are priced between Rs 2,500 and Rs 6,000. The bottom 40 seats go away a month earlier. We have a software, which is built on the purchasing requirement of the people. It is a complex pricing mechanism.

With other airlines between Rs 500 crore and Rs 1,000 crore are locked up as receivables.

In our case, we have the money in the kitty first before the passenger flies. We could even reduce the fares below Rs 500 if the situation is right.

When will the IPO come through. How much do you plan to raise. How much funding have you got. Is it $50 million or $40 million. What will be your revenues by the end of this fiscal?

Hopefully we should go for an IPO within 18 months, though the condition states that we must go in for an IPO within five years. We have got funds worth $50 million from ICICI VF and Capital One.

Out of this, $10 million is optional. Depending on the market conditions, we have the option to draw this money. We expect to raise between $250 million and $300 million through the IPO.

We had projected that we will make about $100 million in revenues. It will be less. May be about $80 million because we had issues like lesser number of aircraft etc.

Will you ever buy A380?

Why not. I think A380 is good enough to fly in the domestic market.

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