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Jet vs Kingfisher: The battle for No.1 slot
Anjuli Bhargava in New Delhi
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December 01, 2007
On October 28, at a ceremony to unveil Air Deccan's new-look aircraft in Mumbai, chairman of United Breweries [Get Quote] group and Kingfisher Airlines, Vijay Mallya, said with characteristic flourish: "We have given the full service carriers a run for their money. Now, we will give the low cost carriers a run for theirs."

Though he did not refer to any one airline, it was clear his statement was directed at Jet Airways [Get Quote] and Jetlite (formerly Air Sahara). Ever since Mallya launched Kingfisher in May 2005, making it number one in India has been a foregone conclusion; it's the world's biggest carriers he wants to take on.

Kingfisher's meteoric rise has taken rival and unquestioned number one domestic carrier in the country, Jet Airways, quite by surprise. Used to competing with only Sahara (never a worthy opponent anyway), Jet enjoyed several years of unfettered success after it had trounced Indian Airlines's monopoly and market, becoming India's premier airline since 1993.

This supremacy has now been challenged by a nimble and aggressive Kingfisher which, in just two years and following Mallya's buyout of Air Deccan, is commanding the same market share as Jet Airways and Jetlite.

He may not publicly admit it but Goyal's troubles began soon after Kingfisher took to the skies. "If Naresh Goyal had a magic wand, he'd probably wish away the last two years. Few things have gone right for his airline since the second half of 2005," says a close associate who was on his board but has since resigned.

In Mallya, Goyal appears to have found his first worthy opponent. If Goyal is well connected and knows how to keep the politicians beaming, Mallya is "not exactly an orphan".

If Goyal has managed to hire professionals and build a brand, Mallya is a past-master at building brands. And if Jet has never had a problem raising money before, Mallya has group United Breweries (with a market capitalisation of $5 billion) backing him.

In its initial avatar Kingfisher was aiming to be a low-fare carrier, but soon after its launch Mallya converted it to premium service, taking Jet head-on. Mallya is spending money like water (the airline lost Rs 400 crore in the first year) and has left no stone unturned to grab Jet's market, launching direct advertising campaigns asking Jet fliers to convert to Kingfisher, luring them with miles, better food and a slicker, cooler yet equally efficient option.

Mallya is proving to be "maniacal" about being on time; every delay is examined threadbare in a much dreaded early morning conference which he conducts over the telephone with his senior executives, no matter which part of the world he's in.

When Kingfisher started, many in the industry had questioned its survival. "Not only has it survived," says Kamal Choubey, officer on special duty to civil aviation minister Praful Patel, "one simply cannot deny that Kingfisher's product is the best in the industry."

There are few who appreciate Jet's subtle, quiet efficiency when it's up against Kingfisher's flamboyance. Gopal Sarma, CEO of Feedback Ventures, who accumulated 400,000 miles on Jet Airways' frequent flier service, says he now often chooses Kingfisher simply because its service on the ground is so superior.

He received a Kingfisher Gold card in the mail and has already accumulated 80,000 miles on it. "If I call Kingfisher and ask to be put on a flight in two hours, they give me incredible service. With the amount I travel, I appreciate things like this," he says. 

Other than the corporate flyer, Kingfisher is trying to attract the young, upwardly mobile Indian who aspires to fly Kingfisher simply because he identifies with Mallya and his style statement of living life kingsize. Mallya's passion for his airline (some call it obsession) is very clear.

In 2006, Jet's initial troubles were compounded by its messy buyout of Air Sahara which many feel was simply a move to thwart Kingfisher from acquiring it. Against the advice of his senior colleagues, Goyal offered Rs 2,300 crore (Rs 23 billion) for it, a pretty high price for the airline.

"It was like a bee in his bonnet. Once he set his mind to it, he refused to back down, even though everyone warned him it wasn't a great buy," says a senior official who has since left Jet.

As was widely predicted, Jet's share price reacted adversely and has never recovered to what it listed at. The company's total market capitalisation following the announcement of the Sahara deal fell from over Rs 10,000 crore (Rs 100 billion) to Rs 4,558 crore (Rs 45.58 billion).

The moment the deal was called up, the share price recovered somewhat - a clear indication of what the market thought of the Sahara buy, but even today it is trading below the price at which it listed.

At roughly the same time the civil aviation ministry threw open international routes to private carriers. Jet saw this as a natural extension to its business (and one where it enjoys first-mover advantage) and ordered new aircraft.

With competition rising and losses deepening (in the first half of 2006-07, it totted up losses over Rs 100 crore), it needed to raise money and the intention was to do that through foreign currency convertible bonds (FCCB) of $400 million.

But with the share price languishing in the Rs 600-800 range, Goyal would have been forced to dilute a larger portion of his equity than he was willing. So, the issue was postponed.

Around the same time as Jet announced its buyout of Sahara, Air Deccan listed. By then Goyal had seen Air Sahara at close quarters and even he realised it was not worth the money he'd committed - but withdrawing proved harder than he'd expected.

"As the court battle with Sahara proceeded, it was far from evident what the final judgment would be. I think he (Goyal) chose to go in for a known position rather than an uncertain one, which could be worse," says a Jet official, who was privy to the goings-on.

These events coincided with a bloodbath in fares in the domestic market as Air Deccan cut prices to take on new competition, and the new competition cut prices to take on Air Deccan.

"All the players - full service or low-fare - were sucked into it, so obviously everyone started making losses," says Kapil Kaul, CEO of Centre of Asia Pacific Aviation. With losses on domestic operations rising and the launch of international operations - which will pay off only later - most investment firms and brokerages are maintaining a "reduce" position on Jet stock.

Says Gautam Roy, aviation analyst with Mumbai-based financial services firm Edelweiss: "We are not very optimistic on Jet's immediate prospects. It is more a long term story." It has now been two years since Jet has been trying to raise $400 million through some form or the other (earlier through an FCCB, now a rights issue) and it's proved more elusive than Goyal could have imagined.

Although Jet officials say that by end January, they should be able to raise the funds, industry sources say they'll only believe it when they see it.

Kingfisher's chief financial officer, A Raghunathan, argues that this is one of Kingfisher's big strengths vis-�-vis Jet. "Obviously, our own balance sheet is not strong enough. The group's backing is a pillar for us." He says that the airline has got Rs 500 crore (Rs 5 billion) in equity, loans and guarantees from the group to raise finances.

Jet loyalists are quick to point out that using group funds to get into a sector where you bleed is not good business sense, and that Jet has raised over $2 billion in the past from international loans on its own strength, passing the intense scrutiny of lenders.

Then, during the middle of this year, Mallya made a calculated move, buying out Air Deccan for what many feel is a "song", to deftly match Jet and Jetlite's marketshare.

So, while Jet's management has been struggling to make sense of what it inherited in the Sahara deal, Mallya is capitalising on Deccan's advantages and has entered a segment that's sure to give returns in India.

What has compounded problems for Jet is its chairman, Goyal's centralised style of functioning (according to sources he only trusts board member and confidant Vic Dungca, based in London), leading to an exodus at the middle and senior management levels over the last two years.

Often, major decisions exclude top officials, so the joke in Jet is that "whenever anything of significance happens, senior officials are the last to know"! "To be an able general, you have to carry your troops with you. That Goyal hasn't been able to do," says a former board member of Jet.

With Kingfisher and several other career options coming up, what started off as a steady trickle has become a virtual flood. Goyal's problems on this front intensified when four senior executives of the airline resigned together in April 2007, including highly trusted vice president for corporate and public affairs, Nandini Verma, who'd spent 20 years with Jet.

The latest who's planning to abandon the Jet stable and jump onto the Kingfisher bandwagon is Charles Soon, head of airport services, who after being publicly castigated by Goyal for a flight delay has been in a huff and is looking to quit.

Eight former employees that Business Standard spoke to said that the chairman's style of functioning "left a lot to be desired". (Executive director Saroj K Datta and chief executive officer (CEO) Wolfgang Prock-Schauer refused to comment on this, arguing that disgruntled employees will have grouses.) In contrast, barring erratic timings and odd schedules, United Breweries group and Kingfisher airline executives don't have many complaints against their chairman. Several Kingfisher senior officials are old UB hands who have spent 25-30 years with the group.

However, as Saroj Datta puts it, people come and people go. He says that Jet's attrition rate has been constant and that in any industry with competition and new opportunities, things like this will happen.

"We have 10,000 employees. Even if 100 people leave, it's not very significant. We had seen it and have been well prepared for it," says he. "Yes, people are leaving, but are loads falling?" asks a Jet source. Like rival Kingfisher, Jet Airways is a one-man show (without Naresh Goyal or Vijay Mallya, both companies would be rudderless), making it a shared weakness. 

But unlike Kingfisher, which is yet to build a strong foundation, Jet already has one. It has a phenomenal network and will expand by 20 aircraft from April 2007 to March 2008 (it now has 70 aircraft).

According to Wolfgang Prock Schauer, the last two years have been tough for the entire aviation industry in India, not just for his airline, and he doesn't think that the rise of one airline - with India and its gigantic market - has to necessarily coincide with the fall of another.

"While things may look rosy for Kingfisher right now, Jet has been through and survived worse," says a former Jet Airways board member, his point being that Mallya should not underestimate Goyal's strengths. "I have never known a man so persistent once he's made up his mind. If Naresh Goyal wants to talk to you, no matter which corner of the world you are in, he will get you," says the former Jet board member, adding that after he's got what he wants out of you, it may be a long while before you hear from him again.

Goyal has a phenomenal network across the world, knows his business like Mallya knows liquor, and never forgets a face, name or number. A hard taskmaster, he expects a lot from his staff. The Sahara acquisition in retrospect looked better than one would imagine: the airline had ordered 10 B737-800s, which in today's market would fetch a premium, it has gained two hangars in the process (which Jet was finding difficult to get) and has entered the lower-end market segment where growth is concentrated today. Twenty-one of its 24 aircraft are up and running and a turnaround looks within reach, Jet officials believe.

The other factor in Jet's favour is a recognition of Kingfisher's strengths, especially in terms of quality. CEO Prock-Scaheur says: "We have to take the product and the quality of its service very seriously." but he maintains that none of this is reflecting on Jet's loads - "Our business class loads have not gone down and our Jet Privilege membership is expanding rapidly. Yes, instead of people saying 'I fly only one airline', they now choose. But that hasn't made any material difference to us," he says, arguing that his airline's strong brand and obsession with quality and consistency will stand the test of time.

The airline business the world over is cyclical, primarily about keeping costs in check to ensure survival. And here is where Jet Airways officials feel it has a distinct edge over rival Kingfisher. In the end, they feel, this one factor alone will separate the wheat from the chaff.

What Works, What Doesn't

Jet's Strengths

Jet's Weaknesses

Kingfisher's Strengths

Kingfisher's Weaknesses

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