Aviation is like a horse, held back by a jockey through tax reins: Jeh Wadia

If the Indian roads were better, the country would have by now had its US equivalent of a Greyhound bus service. Instead, the House of Wadias decided to foray into civil aviation. The investment has paid off well for one of India’s oldest family conglomerates. Jeh Wadia, the younger son of Nusli Wadia, who manages GoAir, spoke to DNA, recently. Excerpts:

What attracted the group to aviation?
Our perspective was very simple. We evaluated all transportation verticals. We concluded that rail is not going to be privatised anytime soon.

And the road network in India is very inefficient for a bus service. We are 20-25 years away from a good road network.

We checked if potential exists in India for a Greyhound-like service (Greyhound is the largest bus operator in the US).

There is potential, but the problem is the dependency on government roads is too high.

Ultimately, travel time on a bus can be decreased only by increasing the speed. You can do that only if you have safety and safety depends on a pothole-free road.

Then we evaluated aviation and found the dependency on the government was only limited to the airport.

Ultimately, an airport is only a mall on a runway. How difficult is that to create? It is much easier than creating roads, canals and waterways, much easier than upgrading the infrastructure required for faster trains.

Was that the clincher?
We looked at demand too. See, the total aircraft owned by Indian operators was only about 320-340. Compare that with Southwest, a low-cost carrier (LCC) in the US, which operates 700 planes, or Ryanair (a similar airline in Europe), which operates 298 aircraft. China operates approximately 1,500. So one airline in America has twice what we have in India and one airline in Europe has nearly the same number.

We then looked at seats. In 2004-05, approximately 14 million seats were sold in India versus Ryanair, which sold 48 million. In the last fiscal, 54 million seats were sold in India while Ryanair alone sold 75 million.

So just one airline in Europe carries 45% more seats than all Indian operators put together. That, to me, was a huge opportunity.

If we look at seats projected for 2020, we would be at 150 million at an average 10% rate of growth.

Today, 12 low-cost carriers in Europe carry 175 million passengers. With all the aircraft orders as of today, India would have approximately 700 aircraft by 2020 - something Southwest already has today.

So it was a complete no-brainer and we decided to lau1nch the airline in 2005. Remember, Southwest, Ryanair and the Chinese have had this fantastic demand/ result/ performance despite having very strong competition from very efficient bus and train services. Today, no more than 1% of the Indian population travels by air.

You have taken measured steps in your first six years, while competitors have gone for costly acquisitions. How do you look at the next six years?

The low-cost model is the only one that’s sustainable. A majority of the seats sold in India today are by low-cost carriers.

In the last 5-6 years, they have wrested majority from the full-cost carriers.

Our Vision 2020, essentially, would be to bring in new aircraft. We have showed the board and shareholders how we have a very efficient operation and we have been Ebitda (earnings before interest, taxes, depreciation and amortisation) positive for the last two years and profitable in the last fiscal.

We decided to buy 72 aircraft starting 2015 and all of them will be delivered by 2020. Our order book is of 92 aircraft as of date.
So what is the strategy up to 2015?

We are evaluating and coming up with an alternative fleet plan to service Tier-II and III cities more efficiently. Today we service close to 19 cities.

You said GoAir has been profitable in the last fiscal. But then there are rivals who haven’t been able to meet their fuel bills. What brings this difference?
Sticking to the low-cost model is the key. There is also this belief that profitability for an airline cannot be sustained for long.

Southwest made money betting on fuel futures. It is the only airline which has been making money every year for the last thirty years or since inception.

There has never been a loss. Ryanair has been profitable for the past ten years. You will also note that more low-cost carriers have a higher market capitalisation than full-cost carriers. That is a function of profitability.

One has to understand which part of aviation is not profitable and which is. Not everybody is losing money.

Yes, there are some good years and some bad. Ultimately, fuel is 40% of our total cost. This is because of taxes. Air turbine fuel (ATF) is not a declared good and therefore we pay 29% tax.
Anywhere outside India, say Singapore, the fuel cost for an airline is just 21%, which is what it should be. The government should take a view on this to maintain 8% GDP growth. Aviation is like a horse held back by a jockey using tax reins. Because taxes are high, our average cost of ticketing is high, which Rs4,000- 4,500 for Mumbai-Delhi; it should be Rs3,000.

Are there any other issues?
There are a few. Policy, for one; specifically, outsourcing policy. Today, it restricts us from outsourcing engineering, ground handling and security.

Infrastructure movement is created from two perspectives — one is you put brick & mortar and create infrastructure and the second is you use an existing brick & mortar and improve the management of it.

A runway is built for 50 turnarounds, why are we doing only 37?
There is always a difference between management and infrastructure. The management is what gives you
short-term efficiency improvement, while for long-term efficiency, infrastructure has to be improved.

Today, when people say infrastructure they should define whether it’s the management of it or simply the infrastructure itself.

It’s like there are more people working at an airport than passengers transiting.

Why?
Because of policies. Each airline has its own security staff. Instead, there should be one or two agencies appointed as security providers so that there is no duplication.

Abroad, one or two agencies handle an airport and manage the entire ramp. In India, this is not allowed.

If I were to be allowed to outsource, I would outsource and reduce my manpower overnight by around 800 people.

How do you plan to fund your aircraft order?
Through equity and debt. Equity has been tied up, debt would be more on case-to-case basis.

We have multiple funding options like sale and leaseback, among others.

From an industry perspective do you think funding availability is an issue for other players?
Subject to valuation, there is no shortage. But there is a cost and some people think the cost of equity is too high at this point. We believe debt is cheaper at the moment.

What worries you and keeps you awake?
I sleep very well, like a baby. Yes, I would like to see improvements in terms of infrastructure and other policies that I spoke about.

But I am quite content. We have progressed in terms of policy  improvements and improved the management of infrastructure and the government is doing a commendable job.

For example, five years back, if you were circling above Mumbai airport for 45 minutes, it is not more than 15 minutes on average today. Now translate this into rupees. Earlier, we were burning Rs3 lakh extra per day per aircraft on fuel burn.

That’s Rs9 crore a month lost due to poor infrastructure. Today, this figure would be abour Rs3 crore, so we have improved by two-thirds.

Going forward where do you see GoAir in terms of market share?
Market share is not something I am really focused on, but if you ask me the number we would be looking at, it would be 10% to 12% in five years from about 6% now.

Whom do you regard as a competitor?
They are all competitors. In some months, IndiGo does better than Kingfisher, some months we do better than IndiGo and so on.

In terms of performance, because we are all very aggressive in the way we manage our performance, we all are very competitive.

When I say all, I mean the five, not six. Air India is not a competitor.

Any role models that you have — as a company and as a person?
A role model for me in terms of business would definitely be my father. As far as my value system is concerned it is my mother. I have always looked up to Nanaji Deshmukh, who has always influenced my life in every way possible. Under his teaching there has been a tremendous impact on my life.

In terms of a company I admire Google. If you are looking at new economy businesses I would name Google and Apple for their innovation and wealth creation.

What attracted the group to aviation?
Our perspective was very simple. We evaluated all transportation verticals. We concluded that rail is not going to be privatised anytime soon.

And the road network in India is very inefficient for a bus service. We are 20-25 years away from a good road network.

We checked if potential exists in India for a Greyhound-like service (Greyhound is the largest bus operator in the US).

There is potential, but the problem is the dependency on government roads is too high.

Ultimately, travel time on a bus can be decreased only by increasing the speed. You can do that only if you have safety and safety depends on a pothole-free road.

Then we evaluated aviation and found the dependency on the government was only limited to the airport. Ultimately, an airport is only a mall on a runway.

How difficult is that to create?
It is much easier than creating roads, canals and waterways, much easier than upgrading the infrastructure required for faster trains.

Was that the clincher?
We looked at demand too. See, the total aircraft owned by Indian operators was only about 320-340.

Compare that with Southwest, a low-cost carrier (LCC) in the US, which operates 700 planes, or Ryanair (a similar airline in Europe), which operates 298 aircraft.

China operates approximately 1,500. So one airline in America has twice what we have in India and one airline in Europe has nearly the same number.

We then looked at seats. In 2004-05, approximately 14 million seats were sold in India versus Ryanair, which sold 48 million. In the last fiscal, 54 million seats were sold in India while Ryanair alone sold 75 million.

So just one airline in Europe carries 45% more seats than all Indian operators put together. That, to me, was a huge opportunity.

If we look at seats projected for 2020, we would be at 150 million at an average 10% rate of growth.

Today, 12 low-cost carriers in Europe carry 175 million passengers. With all the aircraft orders as of today, India would have approximately 700 aircraft by 2020 - something Southwest already has today.

So it was a complete no-brainer and we decided to launch the airline in 2005.

Remember, Southwest, Ryanair and the Chinese have had this fantastic demand/ result/ performance despite having very strong competition from very efficient bus and train services.

Today, no more than 1% of the Indian population travels by air.
 

You have taken measured steps in your first six years, while competitors have gone for costly acquisitions. How do you look at the next six years?
The low-cost model is the only one that’s sustainable. A majority of the seats sold in India today are by low-cost carriers. In the last 5-6 years, they have wrested majority from the full-cost carriers.

Our Vision 2020, essentially, would be to bring in new aircraft. We have showed the board and shareholders how we have a very efficient operation and we have been Ebitda (earnings before interest, taxes, depreciation and amortisation) positive for the last two years and profitable in the last fiscal.

We decided to buy 72 aircraft starting 2015 and all of them will be delivered by 2020. Our order book is of 92 aircraft as of date.

So what is the strategy up to 2015?
We are evaluating and coming up with an alternative fleet plan to service Tier-II and III cities more efficiently. Today we service close to 19 cities.

You said GoAir has been profitable in the last fiscal. But then there are rivals who haven’t been able to meet their fuel bills. What brings this difference?
Sticking to the low-cost model is the key. There is also this belief that profitability for an airline cannot be sustained for long.

Southwest made money betting on fuel futures. It is the only airline which has been making money every year for the last thirty years or since inception.

There has never been a loss. Ryanair has been profitable for the past ten years. You will also note that more low-cost carriers have a higher market capitalisation than full-cost carriers.

That is a function of profitability. One has to understand which part of aviation is not profitable and which is. Not everybody is losing money.

Yes, there are some good years and some bad. Ultimately, fuel is 40% of our total cost. This is because of taxes. Air turbine fuel (ATF) is not a declared good and therefore we pay 29% tax.

Anywhere outside India, say Singapore, the fuel cost for an airline is just 21%, which is what it should be.

The government should take a view on this to maintain 8% GDP growth. Aviation is like a horse held back by a jockey using tax reins.

Because taxes are high, our average cost of ticketing is high, which Rs4,000- 4,500 for Mumbai-Delhi; it should be Rs3,000.

Are there any other issues?
There are a few. Policy, for one; specifically, outsourcing policy. Today, it restricts us from outsourcing
engineering, ground handling and security. Infrastructure movement is created from two perspectives — one is you put brick & mortar and create infrastructure and the second is you use an existing brick & mortar and improve the management of it.

A runway is built for 50 turnarounds, why are we doing only 37?
There is always a difference between management and infrastructure. The management is what gives you
short-term efficiency improvement, while for long-term efficiency, infrastructure has to be improved. Today, when people say infrastructure they should define whether it’s the management of it or simply the infrastructure itself. It’s like there are more people working at an airport than passengers transiting.

Why?
Because of policies. Each airline has its own security staff. Instead, there should be one or two agencies appointed as security providers so that there is no duplication. Abroad, one or two agencies handle an airport and manage the entire ramp. In India, this is not allowed. If I were to be allowed to outsource, I would outsource and reduce my manpower overnight by around 800 people.

How do you plan to fund your aircraft order?
Through equity and debt. Equity has been tied up, debt would be more on case-to-case basis. We have multiple funding options like sale and leaseback, among others.

From an industry perspective do you think funding availability is an issue for other players?
Subject to valuation, there is no shortage. But there is a cost and some people think the cost of equity is too high at this point. We believe debt is cheaper at the moment.

What worries you and keeps you awake?
I sleep very well, like a baby. Yes, I would like to see improvements in terms of infrastructure and other policies that I spoke about. But I am quite content. We have progressed in terms of policy  improvements and improved the management of infrastructure and the government is doing a commendable job. For example, five years back, if you were circling above Mumbai airport for 45 minutes, it is not more than 15 minutes on average today. Now translate this into rupees. Earlier, we were burning Rs3 lakh extra per day per aircraft on fuel burn. That’s Rs9 crore a month lost due to poor infrastructure. Today, this figure would be abour Rs3 crore, so we have improved by two-thirds.

Going forward where do you see GoAir in terms of market share?
Market share is not something I am really focused on, but if you ask me the number we would be looking at, it would be 10% to 12% in five years from about 6% now.

Whom do you regard as a competitor?
They are all competitors. In some months, IndiGo does better than Kingfisher, some months we do better than IndiGo and so on. In terms of performance, because we are all very aggressive in the way we manage our performance, we all are very competitive. When I say all, I mean the five, not six. Air India is not a competitor.

Any role models that you have — as a company and as a person?
A role model for me in terms of business would definitely be my father. As far as my value system is concerned it is my mother. I have always looked up to Nanaji Deshmukh, who has always influenced my life in every way possible. Under his teaching there has been a tremendous impact on my life.
In terms of a company I admire Google. If you are looking at new economy businesses I would name Google and Apple for their innovation and wealth creation.