"We have built an airline which is the second largest in the country and has more than 20 per cent market share" Capt. G.R. Gopinath MD, Air Deccan

Captain G.R. Gopinath is no stranger to adversities or crises. In fact, when Air Deccan's maiden flight was grounded because of a minor fire in August 2003, most people wrote off the former silkworm breeder and his low-cost carrier as a non-starter. But Gopinath simply brushed aside the embarrassment, saying to himself: "he who walks, stumbles". In its three-and-a-half years of existence, both Air Deccan and Gopinath have walked a lot and stumbled, too. Last year, in particular, they did a lot of the latter. A weak market ensured that Air Deccan's Rs 373-crore IPO had to be extended but it did mobilise the target amount. Delayed flights and allegations of overbooking have led to a lot of negative publicity. And, to make matters worse, the company has been bleeding money. The Bangalore-based airline posted a loss of Rs 213 crore for the third quarter ended March 2007 on revenues of Rs 457.45 crore. The question on everyone's lips is: can Air Deccan survive? And if it does, the next question is: can Gopinath retain control of his baby? Crucial to both questions is the ability of the airline and its promoters to raise $100 million (Rs 410 crore) over the next few months-this money is essential if Air Deccan is to survive as an independent airline.

The man himself declines to discuss too many numbers, but industry analysts believe that the company is cash-strapped. Says a Mumbai-based analyst who tracks the aviation sector: "The airlines business is extremely capital intensive. Given the speed at which Air Deccan has been burning cash and given the losses it has been posting over the past few quarters, the airline will have to raise money within the next two months; otherwise, it may become history."

Those are ominous words, but Gopinath does not give the impression of a man standing at the edge of a precipice. "Air Deccan will raise $75-100 million (Rs 307.5-410 crore) within a month. We are looking for a strategic investor who has a long-term vision for the industry rather than one who will come in for only two or three years," he says. The company has mandated Mumbai-based Edelweiss Capital to identify suitors and raise the amount. Gopinath refuses to name the potential investors, but says there is more than one and that the process of due diligence is on. Sources close to the deal say that private equity firm Texas Pacific Group (TPG) and Anil Ambani's Reliance ADAG are among those interested.

"The man doesn't know what he's talking about. He runs a publicly listed company and I am expressing interest" Vijay Mallya Chairman & CEO, Kingfisher Airlines

Liquor baron and Kingfisher Airlines boss Vijay Mallya is also said to be interested in a possible buyout. Reacting to Mallya's interest, Gopinath, who is said to be close to the former, said: "He has no right to talk about taking over Air Deccan." Speaking to BT aboard the Airbus A380 demonstration flight from Delhi to Mumbai recently, Mallya retorted: "The man doesn't know what he's talking about. He runs a publicly listed company and I'm expressing interest; the crucial word here is interest. That is not a crime to the best of my knowledge. Tell me, if someone expresses a desire to take over UB, can I stop him from expressing that interest?"

Just as the war of words seemed to be peaking, Gopinath did a volte face, and, in a 15-minute speech at the second anniversary celebrations of Kingfisher, said: "Our airlines complement each other," and went on to feed Mallya some cake. Does that mean that a deal is in the offing? It's a tantalising thought, but neither party is saying anything more on the topic. But there's a strong business rationale for a marriage between the two. Current government regulations stipulate that an airline must have been operational for at least five years before it can fly on foreign routes. Air Deccan, which began operations in 2003, will become eligible to do so next year. So, taking it over will give Mallya the wherewithal to fly abroad-something he really wants to do. And being taken over by Kingfisher will give Air Deccan access to funds it so badly needs. However, this rationale may come apart if the government relaxes the "no flying abroad before you're five" rule to three years. At the time of going to press, there was distinct possibility of an announcement to this effect being made. So, a possible deal depends on several imponderables that will become clearer only with time.

Incidentally, it's not that Mallya, or anybody else wanting to take over Air Deccan, really needs Gopinath's blessings. The promoters-Gopinath, Capt. K.J. Samuel and Vishnu Raval-own a combined stake of a little more than 22 per cent. The balance is held by the public at large. There has been speculation in the media that Lachmandas Ladhani, who owns more than 11 per cent in the company, may be interested in cashing out. There are also at least three other shareholders who own between 7.5 per cent and 13.5 per cent stakes who may be tempted to sell out at the right price. Gopinath, who himself owns about 11 per cent, however, puts up a brave face. "Look at Infosys (Technologies). A promoter like (Non Executive Chairman and Chief Mentor) N.R. Narayana Murthy has a very low shareholding in it (for the record, Murthy and his family own 5 per cent in Infosys and the promoter group controls 16.54 per cent). It's not a question of who is in control but what's good for Air Deccan. And finally, it's a decision of the shareholders. If they don't want you there, then you have no business being there," says Gopinath.

"We understand that India is a really competitive market. We do keep a close eye on our customer airlines" John Leahy Vice President (Sales), Airbus

For now, though, the official position is that Air Deccan is looking to sell a 15-25 per cent stake in itself for $75-100 million (Rs 307.5-410 crore). "We have been able to raise funds whenever we needed to," says a confident Gopinath. Besides the IPO last year, Air Deccan had, in 2005, mobilised $40 million (Rs 184 crore then) by placing equity with ICICI Ventures and private equity firm Capital International. "Today, Air Deccan has a lot of suitors because in a short span, we have built an airline which is the second largest in the country and has more than 20 per cent market share. It also has the largest route network covering 65 cities," he says.

These are undoubtedly Air Deccan's greatest strengths but are also partly responsible for the distressing financial position it finds itself in. "Air Deccan started off with very little capital-perhaps only a few lakhs. The only option it had was to grow as fast as possible and gain market share and create scale to challenge the existing players. Otherwise, it simply wouldn't have survived," says Kapil Kaul, CEO, Centre for Asia Pacific Aviation (CAPA) Indian Subcontinent & Middle East, an aviation consultancy. "But that kind of growth does not come without consequences; it burns a lot of cash."

Competitors like SpiceJet know that Air Deccan is in an unenviable position. "Capt. Gopi is a really nice guy, but just look at his books; Air Deccan lost over Rs 200 crore on revenues of less than Rs 500 crore in just one quarter. In earlier quarters, it made money by leveraging its planes and selling seats months in advance, but last quarter there was no 'other income' to hide the real state of its finances," says Ajay Singh, Director, SpiceJet, who attributes Air Deccan's higher costs to a complex fleet of both ATR and Airbus planes. "It operates in several stations which have only one flight a day. This complexity, of both fleet and network, has added hugely to overheads, like having to service several maintenance bases; then, if a plane breaks down in such a place, the only way to deliver spares is by road," says Singh, adding that this leads to cancellations and delays-and a consequent downgrading of the brand. "SpiceJet has costs that are 25 per cent below Deccan's, despite the fact that we don't sell seats as cheaply as Air Deccan," he adds.

Mallya, who claims that Kingfisher has among the highest per-passenger yields, of Rs 4,500, in the industry, says that Air Deccan loses Rs 300 per passenger. "From what I've heard, Air Deccan has a per-passenger revenue of Rs 2,600 against a per-passenger cost of Rs 2,900," he says.

"SpiceJet has costs that are 25 per cent below Deccan's, despite the fact that we don't sell seats as cheaply as Air Deccan" Ajay Singh Director, SpiceJet

In a bid to ease its cash flow problems, Air Deccan has struck a $100 million (Rs 410 crore) deal with two European banks, under which it has assigned its contract with Airbus for the supply of 60 aircraft in favour of a Special Purpose Company. The money, the first installment of which it has already received, will come in over the next 15 months in four tranches. But this ploy has its share of detractors. Several airlines around the world are desperate to buy new Airbus planes which are in short supply; and Air Deccan will have to match the higher prices that other potential buyers will doubtless offer to take delivery of the planes it had ordered. So, though Gopinath's "innovative deal" has got Air Deccan some cash respite, it may come in the way of its future expansion plans. Airbus, too, is keeping a close watch on these developments. John Leahy, Vice President (Sales), Airbus NA, was cautious while responding to BT. "We understand that India is a really competitive market. And while we only sell planes, we do keep a close eye on our customer airlines," he says. Airbus, obviously, isn't the only one. Several rivals, investors and others are also doing the same.

Now, for the second question on many people's lips: will Capt. Gopinath continue at the helm if a strategic investor steps in?

Senior industry executives are not very sure about Gopinath's future. "After having burned so much money, and gambling Air Deccan's future expansion for cash upfront, it will be extremely surprising if someone lets Gopinath retain a say in the management of the airline," says a top executive in a rival airline. But the Air Deccan chief is not without his backers. "Capt. Gopinath has become a brand ambassador for Air Deccan and the Indian low-cost airline industry. Moreover, he has the experience of dealing with the government, policy makers and the bigger competitors in the business. Whoever buys in will do well to keep Gopinath at the helm," says an other industry executive who asked not to be named.

So, what does the future hold for Air Deccan and its founder? CAPA's Kaul believes that Gopinath, "the Mohinder Amarnath of Indian aviation, the man with most comebacks", will be in a great position to exploit market conditions once fundamentals (fuel costs, airport infrastructure, etc.) improve. He expects that process to begin by late 2008 and gain momentum by 2010. But to survive that long, Air Deccan will have to immediately secure a war chest of $100-$150 million (Rs 410-615 crore). And whoever invests this money will want a say in how the airline is run… which brings us back to the question: can Gopinath survive? A clearer picture will unfold over the coming days.
-additional reporting by Kushan Mitra