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External Forces Shaping the Future of the Airline Industry

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But a year later, at the age of 52, Gopinath began service in south India with a leased 48-seater, $10 million in investment and a conviction that India's burgeoning middle class, which was already buying color TVs and cell phones, would buy air tickets.

Barely two years into its operation the no-frills airline, Air Deccan, has grown from one aircraft to 19 and from one daily flight to 123. It has placed a $1.1 billion order with Airbus and will get an aircraft a month for the next 64 months. In its first full year of operation, ending in March, the company flew 1 million passengers and had revenues of $75 million. Projected revenue for this year: $250 million.

Also, in 2004 the company raised $40 million in private equity from ICICI Venture Funds Management, India's largest private- equity player, and Capital International, an arm of the huge Los Angeles money manager Capital Group. Air Deccan is looking to go public over the next few months. "This is not the story of Air Deccan's growth--it's the story of the growth of India," says Gopinath.

His success in the fast-growing aviation industry has set off a gold rush. Two new airlines--Delhi-based SpiceJet Limited and beer baron Vijay Mallya's Kingfisher Airlines--started flying in recent months. Several new players are waiting in the wings--including Indigo, backed by U.S. Airways' former chief Rakesh Gangwal, and GoAir, which is backed by Jeh Wadia from the controlling family of the giant Bombay Dyeing & Manufacturing.

"Everybody knew that India was a big market--but Gopinath went out and actually proved it," says Kapil Kaul of the Center for Asia Pacific Aviation, a consultancy. "He led the way--and led it successfully."

The man behind the upstart airline traces his roots to a village in the southern Indian state of Karnataka, where his father was a schoolteacher. His own education veered into nearly eight years in the Indian army. Tired of regimentation, he veered again, into silk farming on a family plot.

The transition from the cocoon to the cockpit came in 1995 when he teamed up with a friend from his army days, Captain K.J. Samuel. The two of them decided over a game of squash that India needed a heli-charter company. So Gopinath and Samuel started one, with the Deccan name (drawn from the plateau upon which Bangalore sits, the company's headquarters then and now).

That venture would take Gopinath to Arizona to meet a helicopter tour operator at the Grand Canyon. Observing the busy airline terminal at Phoenix's Sky Harbor, he was struck by the realization that all of India, the second-most-populous country in the world, was handling half as many daily flights as this one hub.

"There was a business staring in my face--I didn't need a McKinsey to tell me that there was a market," says Gopinath. Nearly 15 million Indians do distance travel by train every day--as opposed to 50,000 passengers who fly. Even if 5% of India's train travelers upgraded to air travel, it would create a boom in the industry, he reasoned.

But the takeoff was shaky. When the plane was started for Air Deccan's inaugural flight, a fireball erupted from one of the engines, caused by fuel buildup in the exhaust. "We had the entire media and the BJP [the ruling party at that time] national president at the event," recalls Gopinath. Not to worry. The engine was switched off and the flames were extinguished, but the flight was rerouted to Bangalore instead of to Vijayawada, the intended destination.

An overambitious route map would hobble Air Deccan. Frequently engineering support had to be flown in to remote corners of the country after a breakdown. Also, flights were canceled because of low loads. Gopinath says these issues have been sorted out. The average load factor is now around 90%, he says. And some unprofitable routes have been dropped.

Investors--Gopinath and Samuel between them hold about 40%--believe that Air Deccan's focus on the masses will pay off. "If you offer a product or a service at an affordable price where you are addressing the midmarket segment, the acceleration and the growth are phenomenal," says Renuka Ramnath, chief executive of ICICI Venture Funds. Some see 25% annualized volume increases over five years for Indian air travel.

This bullishness was apparent in the staggering $11 billion in total plane deals placed by Indian airlines at the recent Paris Air Show. Earlier Boeing had bagged a nearly $8 billion order from state-run Air India.

But profitability remains an issue. Competitor SpiceJet is offering "Red Hot" special fares for $18 to $20 on key metro routes. (For the first 99 days of its operations it offered fares as cheap as Rs.99--about $2.) Air Deccan has countered with its own giveaways and is selling at least some tickets for about $17 on every flight. (Costs per seat kilometer are 4.5 cents, according to the company, versus 4.2 cents for U.S. budget carrier JetBlue.) The airline says on its Web site that it has sold more than 100,000 such tickets.

Full-cost airlines like state-run Indian Airlines, Jet Airways and Air Sahara are also responding with tiered fares that compare with budget carriers'. "It's difficult to sustain these prices," says Balbir Mayal, president of



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