'Even astrology seems respectable now'

Q&A: G R Gopinath

As the pioneer of the low-cost carrier (LCC) model, Captain GR Gopinath is used to be in the limelight. But last week, his maiden public issue just about scraped through and his share fell nearly 80 per cent after listing. Questions are now being asked as to whether the LCC boom is all but over. Gopinath talks to Business Standard about life after the IPO. Excerpts:

Why didn't you postpone the issue?

Nobody had a clue as to what was coming. It's easy for analysts now to find reasons why the market crashed and project tough times ahead. Their forecasts now make even astrology look respectable. Two weeks before the IPO opened we started our roadshows across the world and we went to all the top investors from Goldman Sachs, Tempelton, to Fidelity. The only question they asked was whether the Indian economy would get pulled down by the Left.

There were no doubts about our LCC model, after all we have a 16 per cent market share and by the end of the year we will carry over a billion passengers a month, which is more than Indian, and we have flights in over 56 airports, which is again more than Indian.

In the crucial 3-4 days did the fund managers walk out?

We met over 100 fund managers who were ready to put in money. A well-known Indian institution had taken board approval to invest Rs 220 crore in the issue, based on the assumption the IPO would be oversubscribed ten times. But when the market fell they decided to put in only Rs 22 crore since there was no chance of oversubscription. The FIIs and mutual fund crowd were concentrating more on liquidating stocks and putting in money in a new issue was not their focus. But we had to go through with the IPO since we needed the funds, and we could always go back after six months if it was undersubscribed

How much less premium did you get?

The price we wanted was Rs 175, but merchant bankers fixed it at Rs 148, so what we got was Rs 27 less, or about Rs 60 crore less, a figure we can live with. The price of the share is a reflection of the market "" Biocon has fallen, Reliance Petroleum is down, so is Jet.

Many experts say that this marks the end of the honeymoon with the aviation story, the LCC story. Your balance sheet shows losses of over Rs 60 crore.

This is utter nonsense. Infrastructure companies take time to make profits "" you can see the same story in telecom. In India, only 2 per cent of the population flies, we have not even touched the surface. There are LCC companies across the globe like Ryan Air or South West that are making money continuously.

But in Europe, you have separate airports for LCCs and cheaper landing rights ...The LCC cost structure is not too different from scheduled airlines and that is why they have been able to match tariffs of LCCs on many routes.

That's rubbish. It is only in Europe that you have alternative airports that charge lower navigational charges. Virgin and EasyJet land in normal airports, only Ryan goes to alternative airports. LCCs do many things that scheduled airlines can't "" we have 70 employees per aircraft, Indian has over 400 and Jet over 170. We have an internet-enabled reservation system, scheduled airlines offer e-ticketing but it is based on a proprietary reservation system for which you have to pay commission. Around 90 per cent of their tickets are sold through travel agents to whom they pass on margins of 5-6 per cent. I don't. That is why my cost per available seat per kilometre is only Rs 2.45 compared to the competition, which is Rs 2.80. My average yield per passenger is $62, what I need to make profit is to get it up to $67""there is a $5 gap that we have to cross.

Have you stretched yourself by going to so many destinations without the necessary fleet? This shows in terms of cancellations and delays.

If I remained small, the competition would have killed me by simply lowering fares in the limited number of markets that I operate in. It is because I scaled up in no time that they have not been able to kill me. My competition has more aircraft but they do not have my cost of operation, so if they compete with me in all the markets they will get killed before me. A large part of the IPO money is to address the problems that we have been facing, so we want to set up a large engineering centre, have hangers, create a maintenance centre and, of course, improve inventory so that we have enough spare parts on hand.

In every market that I have entered, the competition has been forced to lower rates. They were charging Rs 19,000 between Delhi and Thiruvananthapuram. I came in and dropped the price to Rs 10,000 and they had to reduce to compete. Similarly, I reduced tariffs on the Bangalore-Cochin sector from Rs 4,800 to Rs 3,000; they also had to come down.

Companies like Jet have reduced tariffs to just marginally higher than yours. Is that a challenge for you?

Jet has not changed its business model. It still continues to give you gourmet meals, provide you with executive lounges etc. So they have the same business model and costs, but have lowered tariffs. This emanates from a temporary insecurity in the market place. I think after some time they will stop competing with me "" I am catering to the mass market and first-time travellers, Jet is catering to the upper end of the market. Their cost structure is different from mine.