Podcast | Digging Deeper: Is IndiGo headed the Jet Airways way?

Rima M. | Rakesh Sharma

A rather compelling headline but are we really heading towards another crisis in the Indian aviation sector?

Rhea Arora's 19 May piece in Qrius retells how the IndiGo crisis came under the spotlight after promoters Rakesh Gangwal and Rahul Bhatia moved the NCLT (The National Company Law Tribunal) over mounting disagreements

The piece tries to highlight what it calls the Indian aviation sector’s beleaguered state and on this edition of Digging Deeper, we will try and focus on just that.

Internal cracks?

Rhea writes how India’s largest airline with 46.9% of the market share, IndiGo is facing internal managerial struggle as it continues to report losses. And that the airline’s two main promoters, Rahul Bhatia and Rakesh Gangwal, have hired lawyers to resolve a dispute between them on whether the airline should adopt double-aisled aircraft or code shares.

IndiGo, the piece reminds, also cancelled flights in March after it fell short of pilots to operate newly acquired carriers, and clearly failed to capitalise on Jet’s temporary shutdown.

The story began when The founders Rakesh Gangwal and Rahul Bhatia co-founded IndiGo in 2006.  The piece informs that Gangwal holds 37% and Bhatia has 38% of InterGlobe Aviation, the airline services company that runs IndiGo. The remaining equity is with the public, financial institutions, and other investors.

Who is Gangwal? He is an aviation veteran and has worked with United Airlines in 1984 and Air France before being appointed CEO and Chairman of US Airways Group. He was also, the piece informs, named by  Forbes magazine as the 775th richest billionaire in 2019 and the 70th richest in India in 2015.

And Bhatia? The piece informs that in 2018, Bhatia took over as the airline’s interim CEO while new candidates were being vetted. This January, Ronojoy Dutta was named IndiGo’s new CEO. Like Gangwal, Bhatia has also been  featured on Forbes’ list of billionaires—he ranked 504th in the world and 41st in India in 2018.

Firstpost was among the first sources to report that  Gangwal had issues with  Bhatia’s influence over the airline’s operations,  executives and management. However, Ronojoy Dutta had made a much publicised statement where among other things, he said that Gangwal did not want to take control of the airline. In the statement, Gangwal was cited  and we quote,"To put to rest the messaging on the fact that the RG group is attempting to renegotiate the shareholders’ agreement (SHA), I am placing on record that the RG group stands by the current SHA, which in any case expires this October.”

The pair is however, as has been reported widely,  also reportedly arguing about the future of the airline and weighing whether  to add superior, double-aisled aircraft or deal in code shares.

Says Rhea and we quote, "Bhatia wants to invest in a double-aisled carrier that can fly non-stop for over 10 hours and make passengers more comfortable, while Gangwal wants to focus on code shares, a commercial arrangement where two or more airlines sell seats on a flight operated by one of them under their own flight code.

Bhatia and Gangwal have now enlisted JSA Law and Khaitan & Co law firms, respectively. "

Mint, we learn, spoke to  Pavan Kumar Vijay, founder of advisory firm Corporate Professionals,  who said that the emphasis will be on the effort   to first resolve the differences within the boardroom over the question of who controls the company.”

Under Section 241 of the Companies Act, informs Rhea, a shareholder can take other shareholders to task if the former alleges that the company is being run according to the latter’s interests only. While this drama unfolds in the background, IndiGo  announced this February that   30 flight cancellations would unfold   till March and in  2018, the airline also cancelled close to 2,000 flights after safety concerns rose about their engines.

Notes of dissonance

There have been conflicting stories emerging from the IndiGo  battlefield. While Business Standard said IndiGo will be adding 100 new aircrafts this year at a rate of nine aircraft a month, there were comments from observers about how the airline would need  to hire about 2,000 more pilots.

IndiGo COO Wolfgang Prock-Schauer on the other hand,  told Financial Express that the airline has hired more pilots, who will be joining in April and can help correct the ratio of piloting crew to aircraft.

Rhea quotes  Prock-Shauer, “We are sticking to the growth forecast given to investors. There was a slight mismatch in the projected and actual availability of pilots. But we are on our way to set things right by April.''

A Rediff  report says that  IndiGo has asked recruiters to focus on pilots from Latin America and West Asia where airlines are trying to reduce their costs and laying off staff. However, hiring foreign pilots needs to undergo a more stringent approval process, which is adding to the delay, adds Rhea.

The Economic Times on the other hand found that IndiGo had invested in expensive software that organises pilot rosters for maximum productivity, so the airline could coast in the interim with a smaller crew. However, the new schedules were hectic and impacting pilots’ personal lives.

There have been reports about disgruntled pilots  deciding to form  a union though the management has set up a committee to look into their grievances. There is also the question of  a rise in salary costs that the company will have to deal with in the face of the fact that the company reported in 2018, its lowest quarterly profit since it launched its IPO in 2015. Rising fuel costs and a depreciating rupee have made future projections sluggish with the company's fuel expenses spiralling by 54% and transactions for other unrelenting expenses like airport rent, maintenance, and refuelling  made in the US Dollar.

The expansion plans seem unrealistic and former CEO Aditya Ghosh’s resignation did not help matters. Stories about rude staff and faulty engines  have muddied the waters further.

With all the unresolved issues on their plate,  IndiGo has  not maximised the gains from Jet Airways’ absence in a competitive market unlike  SpiceJet,  that moved in for the kill, and took over routes to Kathmandu, Hong Kong, Colombo, Bangkok, Dhaka, Jeddah, and Riyadh.

The conflict over Jet's global flying rights

There is more to this story though. Money  Control has recently reported that the government had decided that Air India would get half of Jet's slots on high-demand routes and the rest would be given to carriers ranked on the basis of flight frequency which is measured in available seat kilometres (ASKs).  Here too IndiGo has not had an easy time. The Economic Times reported that.and conflicts have cropped up between IndiGo and its main domestic rivals over the method of distribution of grounded Jet Airways' foreign flying rights among them by the Aviation ministry.

This strategy is currently benefitting IndiGo as it is the market leader but its main rivals - SpiceJet, Vistara and GoAir - have voiced their objection to the aviation secretary Pradeep Singh Kharola, saying that this move would create a monopoly.

"While the decision on the award of foreign flying rights of Jet Airways temporarily to other carriers has been taken, the opposition by airlines to the AIC is being discussed," a source from the aviation ministry said.

We quote the Money Control piece, " State-run Air India has been allotted around 5,700 weekly seats on the India-Dubai route, over 5,000 on the India-Qatar route and 4,600 additional seats to and from London. This is about 50 percent of Jet's quota on routes."

While, a SpiceJet spokesperson said, "This is temporary allocation. The objective is to immediately provide flights for passengers who are paying high fares, mostly to foreign airlines. This objective is fulfilled by those airlines that can provide immediate capacity and who have slots at both origin and destination.The rule referred to was made in 2005 with the objective of protecting incumbent carriers at the time, primarily Air India. The rule is not relevant to the temporary allocation that is being done at this time. The ministry has already ignored this rule by allotting some of Jet's traffic rights to Air India on a temporary basis."

While most industry members believe that IndiGo will get the slots as it has the most market share, the bigger issues are  caused by differences within the company even though IndiGo’s CEO Ronojoy Dutta has been at pains to state that despite the rumbles, the company's growth strategy remains unchanged.

Anirban Chowdhury wrote in an ET report that  Ronojoy Dutta believes , the company has a “great track record of resolving issues” and that  in any strong and well-managed company there will always be differences.

Sources have told ET and as we have said before in not so many words,  that the differences stem from multiple reasons including a shareholders agreement skewed heavily in favour of Bhatia as well as differences in their respective visions for the future of the airline.

We quote, "The agreement, which expires in October, gives Bhatia’s holding company InterGlobe Enterprises (IGE) the right to appoint the chairman and key managerial personnel, including the managing director, chief executive officer and president of the company. It also has the right to nominate three non-independent directors, one of whom will be non-retiring."

And as we have said before, in the statement, Dutta has cited Gangwal as saying that the RG Group which represents his and his family’s holding has “no interest or desire” to take control of the company or to renegotiate the shareholders’ agreement.

Dutta has said the promoters and the board have “worked as a team in making the management changes” and that not every management change should be seen as a sign of “dissonance” at the top.

Dutta acknowledged that Bhatia is represented by the law firm J Sagar Associates and Gangwal by Khaitan & Co. But he added that have been on retainer by the founders since IndiGo’s IPO in 2015."

Damage Control

On May 18, Money Control had also cited  Reuters to share  CEO Ronojoy Dutta   statement that we have been quoting from.  He said and we quote, ”We are all very much united in vision, purpose and direction as we move forward to build a world class (airline).

I would like to forcefully address these baseless speculations as they are not in the best interests of our shareholders, our employees and the travelling public.

It is true that IndiGo has gone through a number of changes in a continuum that stretches from Aditya Ghosh, to Greg Taylor to a team of highly skilled expatriates to me... But all great companies go through periods of transition as they evolve from one phase of their growth to another and a little bit of turbulence during these transition phases is neither unusual nor unwelcome."

Whether these statements can quell the gathering storm is however another matter as    a sharp fall in IndiGo's shares earlier this week was noted by investors who feared that exit of one of the promoters could impact the airline's growth.

The faultlines have been sighted and it is up to the company to make sure that they don't swallow the brand equity which has kept it afloat thus far in rather challenging times.