Negotiating Styles
Why did Kingfisher not get it right?
'I have negotiated with Gopinath, Wadia, Mallya, Goyal and Bhatia, and I can honestly tell you the most professional among all of them was InterGlobe,' says Harwood, 'because they just knew what they wanted and the reason for this was Rakesh. He would say, "I have done this a hundred times, young man, I will tell you how I will structure this deal."' Mallya, in stark contrast to Gangwal's forensic style, negotiated his aircraft deals on his yacht named Indian Empress while it was anchored in Monaco. 'You sit on his boat, have a glass of champagne, talk about the number of aircraft, and three glasses later, it becomes thirty [aircraft]. Vijay is larger than life and loves to negotiate in a personal setting,' Harwood says. 'The difference between him and Bhatia is that Bhatia is all about doing it professionally-let's have a meeting, let's sit around the table, let's have an agenda, let's minute everything, let's follow it up, etc. But Vijay is about sitting on a boat in Monaco, having a few drinks, building a personal relationship, and then talking business.'
Mallya would also be surrounded by many of his loyalists and advisors from his liquor business, United Breweries group, when the deal was being framed. 'Ravi Nedungadi (a long-time aide of Mallya and CFO of his liquor business who passed away in 2022) would be there, as would be several of his friends who would float in and out of the discussions aboard this 311-foot-long yacht, then go off to sunbathe while he carried on with the discussions,' recalls Harwood. 'Someone would walk in and say let's have dinner now, and despite being at an important point in the negotiations, he would stop for dinner. I have to say, if you ever want to negotiate in style and pure class, that's the way to do it. Mallya's belief was that if he could get you on board, put his arm around you, and manage you, you would do a good thing for him.'
And that's how he negotiated his deals.
'We have sat at his homes in Goa, San Francisco and Mumbai. You worked with what his schedules were and what he required. His and InterGlobe's were two completely different styles. I am not saying one is right or wrong,' says Harwood, 'Just that they are completely different. If asked to bet on one of them, though, you would have to bet on the professional one. What's happened with Kingfisher is extremely sad, though. When it started, it had the potential of becoming the Emirates of India. I have to say, that's what it was for the first six months, and then the cracks started to appear. It's extremely sad and nobody would wish that upon Vijay, but he is a smart cookie despite the trouble he is in.'
IndiGo gained significantly from Kingfisher's exit, expanding its footprint. One of the key reasons for Kingfisher's death was also a badly worded contract with its engine makers. When Pratt and Whitney engines started developing snags in 2010, Kingfisher planes started getting grounded for repairs while IndiGo's contracts ensured they were getting paid for those snags by the engine maker. Such contracts helped IndiGo a lot even though they may have bruised some of its vendors. For example, former CEO of GE India and country head, GE Commercial Aviation Services (GECAS), T.P. Chopra, financed aircraft deals worth more than US$1 billion in 2005 and 2006 but with IndiGo, he revealed, GECAS started on a very bad note. Why? Gangwal.
'Rakesh knew everyone in GE, including then vice-chairman, David Calhoun, and my boss Henry Hubschman, for twenty years. I remember he had said a long time ago that he would start an airline in India, buy lots of planes and work with GE. GE aircraft engines and GECAS, which finances aircrafts, are completely different arms of the big world of GE. So, the engine guys started talking to the airline about engine sales, and we (GECAS) talked about aircraft financing,' said Chopra. These were the engines for the 100-plane order.
The negotiation was going so well that GE was sure it would close the deal soon. But a few months later, IndiGo bolted and decided to go with the rival International Aero Engines (IAE) engines.
'That obviously left a fairly bad taste in the engine manufacturer's side,' adds Chopra, 'Especially since they had come through the vice-chairman. That was in bad taste-placing a big order, and then going to somebody else. I think we backed off from the aircraft financing discussions for a long time, about nine months, not because of acrimony, but because we were upset that we had lost the deal.'
However, Chopra remained in touch with the other promoter Rahul Bhatia.
'About eight weeks before the delivery of the first plane, I asked him about the financing of their first few planes. Bhatia said it would be difficult, being last minute and because they were already way down the road with the Royal Bank of Scotland. I told him to give us a chance, we will make it happen. We took off. Some guys in Ireland, Riyaz Peer Mohamed (then CFO), Aditya Ghosh (then InterGlobe Enterprises' legal counsel who later became IndiGo president), and us, we cut the deal down in four to six weeks. The process was crunched to weeks instead of months; otherwise, they would have closed it with the Royal Bank of Scotland anyway. We financed the first six planes for IndiGo. The rest is history.'
If you look at the history of Indian aviation, however, it is full of financially distressed airlines, crying for funding. Most Indian airlines have had almost no cash in the bank (often because the promoters have siphoned off money and bought farmhouses and London flats with it) and are always making losses while IndiGo, which has lower costs than its rivals, has over US$2 billion in free cash-and growing.
In 2022, as the effects of Covid-19 were waning, IndiGo, who had lost nearly US$1.5 billion during this black swan event, did not ask for any government credit line unlike SpiceJet and even the Nusli Wadia-owned Go First.
Gangwal's foresight and acumen has given IndiGo an additional source of revenue. IndiGo buys a plane at a discounted price of, say, Rs 100 crore apiece in bulk. This plane starts getting built in the factory a few months before the date of delivery. Closer to the delivery date the airline, when it has to make the full payment, it sells the plane to an aircraft leasing company for, say, Rs 172 crore. It leases back the same plane for six years or more. This gives the airline around Rs 72 crore in the bank every time an aircraft is delivered. IndiGo, according to a person who has worked on their deals, makes around US$10-12 million per plane or roughly Rs 80 crore in this fashion-the reason for them continuing to take delivery of new planes during the pandemic when most of their fleet was grounded.
In an industry where the oil price and US dollar exchange rates can break your back fairly quickly, this money is a godsend, not just during pandemics but in normal times too. It becomes the airline's cushion, enabling it to meet financial emergencies and expand aggressively, and increasing its capacity to bear losses, especially on newer routes. As IndiGo grows, however, it will gradually start looking at owning its planes like Air India because it does not need the up front cash anymore with enough on the books and the business itself throwing up profits every year.
IndiGo is, therefore, a story of smart financing and placing big bets so much so that it has been dubbed an aircraft trading company.
It now has a fleet of over 350 and nearly 1,000 aircraft on order. Harwood clearly did the right thing by agreeing to meet Bhatia two decades ago.
Tarun Shukla, Sky High: The Indigo Story Harper Business, an imprint of HarperCollins India, Gurgaon, 2024. Hb. pp. 272. Rs. 699
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