Is there an absolute limit to turbulence? IndiGo is being hampered by a revolving door and a bad bet

Is there an absolute limit to turbulence? IndiGo is being hampered by a revolving door and a bad bet

There was no sadness in IndiGo CEO Rono Dutta’s voice when he announced a record loss in the summer of 2021.

Dutta was happy, even though India’s only dividend-paying airline had lost INR6,000 billion in the last few years.

If you look at IndiGo, I think this is almost like a “Cinderella moment.” Dutta, 69, told analysts that the bottom line looks terrible, but soon, things will get better. IndiGo is increasing its cargo operations, replacing its planes with more fuel-efficient ones, and has been a reliable carrier even in bad times, Dutta told them.

But things haven’t changed for the 16-year-old airline in many ways, even a year after that phone call. IndiGo is expected to report its fourth-quarter results in a few weeks, bringing its three-year losses to a whopping INR12,000 crore.

We are talking to more than a dozen people who know a lot about how the airline works to show that something else isn’t good. Behind the scenes, there’s a question mark about whether IndiGo underestimated the impact of the infectious disease, and now it’s getting hurt because of poor management.

When Manet Paes used to be the deputy managing director of Indian Airlines, he said that IndiGo was in a terrible place right now.

You become more at risk when you have a lot of customers like Jet Airways, and Indian Airlines did. “Also, new airlines are coming up, and Jet Airways is thinking about restarting,” he said.

The largest airline in India is hurtling toward turbulence because it has a ceiling far above its rivals that it can’t reach.

A bad choice

In 2020, an IndiGo passenger who flew from China to India tested positive for coronavirus when they landed in India. As the virus spread, all the airlines, including IndiGo, went into a group. IndiGo’s board asked the management to cut costs by 10% to 15%. SpiceJet and Nusli Wadia’s Go First put their employees on leave without pay when they didn’t make money.

To save money, the airline laid off 15% of its employees and cut the salaries of the rest by up to a third of their pay. Those who were pilots and engineers were not laid off.

People who know about the subject say that IndiGo’s management thought SpiceJet, which was short on money at the time, was going to go under in the pandemic, but they didn’t want to be named. It didn’t take long for IndiGo to keep its pilots up to date on their training so that when the market opened up, it could go into full-on expansion mode as soon as it was ready.

IndiGo, which pays pilots about INR2,500 million a year, thought the pandemic would soon be over and the skies would open again. As the pandemic could last until 2024, a former board member suggested that the size of the group should be reduced, and the idea was quickly thrown out.

IndiGo could also take a risk on this strategy because it had a lot of money, and SpiceJet didn’t have that kind of money. As a result, the airline kept taking money out of its free cash reserves and sold some of its plans to pay for its debt.

There was a lot of data that IndiGo’s cash reserves almost doubled. They went from INR2,000 crore in March 2016 to about INR4,400 crore in March 2017. INR7,000 crore in March 2018 and INR8,900 crore in March 2020 made it to INR7,800 crore as of December 2021, which is the last date. Was this war chest bigger before the pandemic? If not for the pandemic, it might be now.

In this case, a person who knows what the airline is thinking says that they would look at this money loss as an investment in getting more market share.

IndiGo’s market share didn’t go up as much as people thought it would because SpiceJet and Go First both made it through the pandemic.

IndiGo has 55% of the market share in India’s domestic market, while Air India, Vistara, AirAsia India, SpiceJet, and Go First make up the rest.

Thus, it is very likely that the aviation ministry was more willing to listen to the needs of the weaker airlines than the stronger ones. In an unprecedented move, the ministry put limits on the number of flights and the prices of flights in a market that had been unregulated. This was done to avoid a Jet Airways-like situation. This ensured that strong airlines like IndiGo and Vistara (who also wanted no cap on fares) couldn’t start a price war and bring SpiceJet to its knees, which would have been bad for them.

IndiGo’s size also worked against it in other ways, like when it was too big.

Due to its size, the airline was able to see that it was vulnerable when they were talking to plane rental companies. IndiGo was different from other airlines, which tried to change payment terms and sometimes refused to pay because of “force majeure.” IndiGo kept paying everyone.

This is how we run our business: We have a lot of planes on the order that we need to sell or lease back to make money. Many of our aircraft will have to be sold or leased back in the future. A fifth person who knows about this says that many of these good deals are because of relationships. They also didn’t want to be named.

This means that IndiGo has more planes than anyone else in the world. They now have 275 planes in their fleet. Many planes from a long-term order are sold to an aircraft lessor and leased to IndiGo every time they are sold. IndiGo makes between $5 million and $10 million right away.

IndiGo didn’t stop paying its plane leases. Instead, the airline focused on making future deals with plane-lease companies better. IndiGo asked for reasonable lease rates, better payment terms, early lease termination rights, etc. It added about 60 planes to its fleet and sent back about 70 old-generation aircraft that were no longer in use.

IndiGo may have been unable to change its contracts because it had bought many of these planes in bulk and at a low price. So, original equipment manufacturers (OEMs) may not have been willing to give in without risking money.

They could have saved a lot of money and made more money for shareholders if they had held off on some deliveries. This made their work more expensive, he says.

Airbus A320ceo: IndiGo also couldn’t speed up the time it planned to bring back its older-generation Airbus A320ceo. It said that maintenance units were shut worldwide, so they were not taking planes for pre-delivery checks.

This meant that the airline kept paying the lease fees when the planes were with it, even though they were not being used. Could it have worked this out with the plane’s owner and asked for a suspension? As for what the airline did, it’s not clear what it did, but it wants to be rewarded for its excellent work.

There was a lot of money spent.

Fifth person: “No, not enough, but you can’t do much about it.”

IndiGo didn’t answer any of the specific questions sent for this story.

A house where there is no peace

Indian budget airline, which has always been hiring to make sure its planes take off as soon as possible, had to deal with a big problem. A few things went wrong after the airline’s management cut costs by 15%, but it was still a good move. There was a time when the airline fired about 150 senior cabin crew members who came back to the airline complaining. When it turned out that they weren’t supposed to be fired, the people who had just joined were supposed to be.

Many airport and ground staff were asked to leave, and the airline paid them about six months’ worth of pay for this year. This wasn’t the first time, though. Even after the 9/11 attacks, IndiGo’s founders Rahul Bhatia and his father, Kapil Bhatia, always put the needs of their employees first. This is even though the InterGlobe group was smaller back then than it is now.

As a result of this, the airline didn’t plan the layoffs very well because a few months later, the same people who had been fired started getting calls from the airline. After all, flights had started again, and the lack of cabin crew was so bad that it affected flight operations.

Then, there was even more bad news. IndiGo said a few weeks ago that it had given a lot of stock to its senior managers during the pandemic when it was cutting salaries for its workers. ET Prime did an analysis, taking into account a share price of around INR1,900 and the fact that for each share, the executive needs to pay around INR800; these shares will add up to a lot of money.

CEO Dutta will get 1.85 million shares worth INR20 million; 1.4 million shares worth INR15 million; 1.3 million shares worth INR14 million; 1.2 million shares worth INR13 million; 86,000 shares worth INR8 million; and 1.2 million shares worth INR13 million to other top executives. This is the total number of shares given out (valued at INR1.98 crore).

According to a sixth person who knows about the situation, the shares will come over four years. They are split up so that the executive only gets about 10% of the claims in the first year, and in the fourth, they get about 40%. This way, the executive will work hard to make the right decisions for the airline. He won’t get next year’s shares if he leaves. This person adds that many of the company’s most influential people are also likely to get stock.

This announcement came after telling employees that their salaries would not be fully restored yet. Many pilots didn’t like it, and they even made memes about the airline’s senior managers, which hasn’t happened at IndiGo in a long time.

VP Mittra, who had been keeping the flock together by looking out for pilots’ interests and even going out with them, was in the line of fire.

Mittra tried to get the management of IndiGo to hire Jet Airways pilots a few weeks before the airline went bankrupt in 2019. He offered them INR35 lakh as a sign-on bonus. Angry with the offer, IndiGo pilots told him that they would not accept it. He convinced the airline’s management to give them a 10% raise just before the pandemic started. He also wanted to keep IndiGo pilots from being fired, and he even tried to help during pandemic emergencies. Everyone was happy with this method.

But when Mittra was given shares worth INR15 crore, he looked terrible. He was telling pilots to save fuel whenever possible and be patient with salary cuts simultaneously.

As the CEO of Indian Airlines, Paes says, he would not have taken the shares offered to him or let anyone else get them until things calmed down.

In this case, “the optics are not very good.” “It’s like “me first and forget about the rest,” he says, adding that it’s a good place for people to get angry. INR35 lakh: “If IndiGo can pay that as a sign-on bonus, then Air India and Akasa will be able to hire IndiGo staff too.”

There were threats from the pilots that they would form a union, and IndiGo told them what would happen if they did that. Many people were unhappy because some junior officials were “counselling” the pilots instead of Mittra, who was in charge of the planes.

So why is IndiGo so sensitive to unions and social media? Despite all this, they haven’t raised salaries.

Because the airline has already lost a lot of money, it is terrible for them. Second, a person who works for a rival airline hiring pilots says that IndiGo may have done a demand and supply calculation. This official says that out of 25,000 planes globally, about 19,000 are in the air, and the rest are on the ground. Before the gap can be filled, one plane usually needs 12-14 pilots, which means there is still a long way before that can happen.

“We are waiting for the Middle East to open up to the world fully.” Many people will go. An IndiGo pilot who asked not to be named said that hiring started there.

One of the largest churns ever

When it comes to pilots, there is a demand-supply gap. IndiGo’s senior management has also changed significantly in the last four years, which is unusual. This is the third time in a row that the airline has had three chief financial officers leave simultaneously! This is how it worked: Rohit Philip left the airline in 2019, and Aditya Pande went on to work for a small company in 2021. This year, Jiten Chopra left the way for Gaurav Negi, who is now in charge of the team.

“People who work for you are more likely to hurt you when you have a big market share, like Jet Airways did. We at Indian Airlines have known this for a long time now. Another thing: Jet Airways is considering restarting, but Air India (owned by the Tatas) and Akasa (owned by the Akasa) are both coming soon.”

Manet Paes, an ex-deputy chief executive officer of Indian Airlines, said this.

In addition, IndiGo’s chief commercial officer, Willy Boulter, who was in charge of the airline’s cargo project, is leaving the company in a few weeks, even though the airline’s first freighter plane will arrive next month.

Many people who were thought to be the next level of leaders have also left the company. As for Shilpa Bhatia, the airline’s chief sales and revenue officer, she went back to SpiceJet a few months after joining IndiGo. Priya Mehra, the airline’s legal head, has joined Akasa Air, run by Rakesh Jhunjhunwala and is also run by her former boss and boss at IndiGo, lawyer Aditya Ghosh. Its treasury and investor relations head Ankur Goel joined Akasa Air; its vice-president of revenue management, Ankur Garg, joined AirAsia; and its digital director Nitin Sethi has joined the Adani Group. These are all jobs that IndiGo’s people used to work at.

People come and go all the time. Relationships have not been made, and unions will take advantage of this, Paes says.

It all started in 2018 when Rakesh Gangwal and Rahul Bhatia, two promoters, got into a fight. There has been a lot of turnover at the top. In the past, Gangwal approved or brought in most of the top hires. Since then, Bhatia has made sure that his people run the show. Trust and loyalty have become more critical, and this is because they are more critical now.

As an example, look at the current CEO of the company. During the 1980s, Gangwal and Dutta worked together at the consulting firm Booz Allen in the US. They had worked together across the aisle. Later, Dutta was hired by United Airlines. Gangwal then moved to United Airlines as its head of flight schedules, and later Dutta was hired by United. Bhatia knew both of them very well because his company was the general sales agent for United Airlines in India. So when Bhatia was looking for a replacement for Greg Taylor in 2018, he chose Dutta; even though Gangwal didn’t like it, a person who knew about it said.

For Dutta, who went on to run United Airlines for three years and Air Sahara for four years, the chance to run an airline after more than a decade must have been too good to pass up. Because of this, he might have realised very quickly that he is not in charge of everything.

During a meeting of the top management at IndiGo, a department head who was giving a presentation on how to get the best results was “ridiculed” in front of everyone else by the head of another department, says a person who was there and didn’t want to be named.

“The tone was almost racist,” this person says.

Dutta, who is described by people who work with him as a “father figure” who is “very likeable” and “consultative” but “weak in taking harsh decisions,” did not do anything. Instead, he told the person who was angry later that he had talked to the other official privately and that this kind of thing would not happen again. Then, at the very next meeting, the same thing happened.

IndiGo’s CEO expressed regret again when the same departmental head asked him to at least do what IndiGo said he would do.

Because Rahul [Bhatia] is not listening to me, he said he would talk to Rahul. He said he couldn’t do anything and he apologised, this person says.

Dhuta did not say anything about this episode.

The department head who was insulted quit.

Dutta is the highest-paid airline CEO in India. He got INR23 crore in annual pay, including a bonus of around Rs 5.6 crore, when IndiGo lost about Rs 230 crore in 2019-20. This is more than the CEO of TCS, which makes INR40,000 crore in profits every year. Until December 2023, when he’ll be 71.

During this time, Dutta joined IndiGo. The airline’s promoters were fighting, the competition was weak, there were no brand or union issues, and the airline was on cruise mode. And this could be his last job.

Isn’t like Jack Welch, says a person who works with him when they say that. Some people agree with him.

This is true of Dutta, who drives an XC90 Volvo. He is also very picky about when things are done. In the words of one official, “He is there at 8:55 am for a meeting at 9:00.”

How does he measure up to Rakesh Gangwal, who is like him?

As someone else says, “They’re like chalk and cheese.” This person also says that Rakesh is a person who takes a stand and doesn’t back down from it, even if people don’t like it.

The bottom line is:

Steve Forte, the former CEO of Jet Airways, says that a CEO loses control if there is a lot of outside help.

In Forte’s words: “I think Dutta is feeling very alone and unsure how to move forward.” “Interference from the higher-ups will be the most difficult thing to fix,” he says. All communication between the board and the company has to go through the CEO’s office, and there isn’t anyone else. Otherwise, the CEO won’t be in charge.

That may be ideal, but the message from the swanky Emaar-Capital MGF’s Tower in Gurugram, where IndiGo moved its headquarters during the pandemic, isn’t what you think. Dutta will now report to Bhatia as the airline’s new managing director, which means that Bhatia is in charge.

That’s what I was going to say, but Dutta seems to have realised it’s better to be realistic in his fourth year.

IndiGo, SpiceJet, Go First, AirAsia India, and Akasa compete for the same customer in India. Full-service carriers Vistara and Air India, on the other hand, are going after more high-end customers, like business travellers.

People say this is becoming a Game of Thrones.

Game of Thrones doesn’t have a happy ending like Cinderella’s story. The evil Night King dies, and the Iron Throne is burned to ashes by the dragon in the end.

There are more and not fewer “Night Kings” to deal with as the pandemic comes to an end. In IndiGo’s “Iron Throne,” their eyes are fixed.

edited and proofread by nikita sharma