The smell of success

DURING AN ANNUAL MEETING of the top 500 Airbus executives in Paris in January, Rahul Bhatia, group managing director, InterGlobe Enterprises, announced a 180 aircraft order—the largest firm order in aviation history and, at $15 billion (Rs 678 lakh crore) the largest ever monetarily for Airbus. Bhatia and Rakesh Gangwal, his partner in IndiGo, India’s largest low-cost carrier, and a division of InterGlobe, were special invitees to the event. Gangwal, former president and CEO of US Airways who owns an undisclosed part of IndiGo, jested about Bhatia’s bravery (a firm order cannot be altered) as the announcement was made.

Brave, he is. Foolhardy, he isn’t. In the last two decades, Bhatia has defied logic and built the privately held InterGlobe into a $1.5 billion business, including an airline that actually makes money. Financial year 2010 filings with India’s civil aviation regulator, the Directorate General of Civil Aviation, show that the Rs 2,665 crore IndiGo made profits of Rs 550 crore, with a margin of 25%, the envy of the rest of the industry. A similar performance is expected this year too. In comparison, industry leader Jet Airways, with a domestic market share this March of 25.4% compared to IndiGo’s 19.5%, posted a net loss of Rs 467 crore in fiscal 2010, and a marginal profit of Rs 9.69 crore in 2011. Analysts say IndiGo is worth nearly Rs 9,000 crore if it were to list—which is a distinct possibility given the need to fund the Airbus deal. Jet (FY2011 sales Rs 12,777 crore), is worth Rs 3,853 crore. IndiGo president Aditya Ghosh says the company is considering various financing options, which include “an IPO”.

Notoriously media shy, Bhatia divides opinion. While many suspect a large chunk of IndiGo’s profits have come from the sale and lease-back of aircraft, they do not dispute the operational efficiency of the Delhi-based carrier, or its success in creating pull through smart ad campaigns that promote near-consistent on-time performance. A senior airline industry executive adds that Jet’s Naresh Goyal considers Bhatia to be a serious threat, adding that IndiGo may well overtake Jet soon. This year IndiGo will start flying to Singapore, Muscat, Bangkok, and Dubai.

Others point to his sale and lease-back deal as an indication of his business acumen. Even as he negotiates the big purchases with the aircraft manufacturers, he also structures deals with leasing companies to sell the aircraft to them as soon as they are delivered, only to lease them back. This sale, done at a premium to the negotiated price between Airbus—he currently flies 39 of its planes—and IndiGo, helps IndiGo net a profit on each plane before it starts flying, and avoid debt in what is otherwise a highly capital-intensive industry.

“It is a concept IndiGo has applied well. Their success has made others examine this model closely; other carriers went for outright purchase of aircraft, funded by large amounts of debt,” says Amber Dubey, director, aerospace and defence, at audit and consultancy firm KPMG.

Bhatia is now making a big push into creating India’s largest travel conglomerate. He’s always had interests in hotels, travel technology and outsourcing, ticketing, and restaurants. But now he is tying them up together. The big move he’s made is plucking Michael Whitaker a year and a half back from United Airlines, where he was managing international affairs, and making him InterGlobe Enterprise’s CEO. Whitaker’s mandate is to make InterGlobe behave like a conglomerate.

Bhatia and Whitaker have known each other for 15 years, and often discussed the idea of working together. As business expanded, Bhatia was looking for someone who could exploit synergies within InterGlobe, and Whitaker was his natural choice. “As a corporate resource, I have no favourite child. I think it is important that we bring a linkage between the group companies,” Whitaker says.

This April, he unveiled their new corporate logo—a point from where six lines of different colours, signifying the six group companies, emerge. It signifies the hub-and-spoke model in the travel industry. Almost overnight, the earlier logo—the letters I and G stylised in a pyramid form—was replaced on visiting cards, stationery, offices, website, etc. To Whitaker, the group was crying out for this. “The earlier logo didn’t do justice to the diversified nature of the group or its ambitions in the travel industry,” he says. He roped in Circus, a brand consultancy in London with clients such as Body Shop, Virgin Atlantic, and Selfridges, and Mumbai-based design house Grandmother (Bacardi Breezer, VU, etc.), to craft the new identity.

Now on the agenda is reconstituting InterGlobe’s board with more external directors in line with its ambitions. InterGlobe Enterprises is really a holding company, with presence in six different businesses—airlines (IndiGo), ticketing (InterGlobe AirTransport), travel IT, and business process outsourcing (InterGlobe Technologies), local sales reps for ticketing systems such as Galileo (InterGlobe Technology Quotient), hotels (InterGlobe Hotels), and luxury goods (The Established). Two of these have other shareholders—IndiGo (Rakesh Gangwal), InterGlobe Hotels (Accor) while another, InterGlobe Technology Quotient is a franchise for Travelport, a travel IT services firm. Being privately held, the exact structure of the partnerships is opaque, as is InterGlobe’s funding trail. All Bhatia says is he “employed a mix of funding options over the years to support growth”.

Think of InterGlobe as an end-to-end travel company on whose technology tickets are booked, on whose planes you fly, and at whose hotels you stay. “I don’t think anyone in the world is creating a travel conglomerate such as InterGlobe, especially when you take the ticketing and back office operations into account,” says Kiran Rao, executive vice-president, marketing and contracts, and president, India, at Airbus.

Through the 1960s and ’70s, travel conglomerates were common. Pan American World Airways established the InterContinental Hotels & Resorts and TWA acquired the Hilton Hotels in 1967 as airlines increased international routes. However, with aviation becoming increasingly complicated (partly because of the oil shock in the early 1970s), and with the arrival of large independent hotel chains, airlines were forced to concentrate on their primary business. Which is why Bhatia’s approach piques interest.

HIS JOURNEY STARTED in central Delhi, on the ground floor of 66, Janpath. Behind the faded yellow shutters, thick with Delhi’s dust, is where InterGlobe got its start. Bhatia’s father Kapil Bhatia was one of the partners at Delhi Express, a travel agency. He struck out on his own in 1989, founding InterGlobe as a travel agency. Bhatia, who had returned after completing his studies at the University of Waterloo, Ontario, Canada, a few years earlier, joined in.

Pankaj Tandon, who runs Tans Travels and Tours, a travel agency nearby in Janpath, remembers Bhatia as a “calm young man”, usually in a white kurta pyjama: “For a travel agent to make such an impact is noteworthy. His employees used to tell me about his passion to start an airline right from the days when the sector was first thrown open for private participation.” In the ’90s Bhatia even had long conversations with owners of ModiLuft, one of India’s first airlines after de-regulation, and claims that he would have chosen the low-cost route if things had worked out then.

Something else did work out. Like Naresh Goyal, he became a general sales agent (GSA), starting with South African Airways and, later, for several others. The GSA business clicked, and Bhatia then established Galileo India, a distributor for the international Galileo ticketing system. “Building something in India from the ground up is a challenge. The years from 1991 to 1994 were tough. Then one thing led to another,” Bhatia says, who still prefers white kurta pyjamas, and abhors suits. “Since the ’90s, we’ve seen the economy evolve. Over time, we saw opportunity in various facets of travel and decided to tap into them.”

The GSA business and then Galileo gave Bhatia an inside track into how the travel business was shaping up here. “Since we are the GSA for the domestic market, the trends we see there are fed through to IndiGo. We also do the market research for their network development,” says Sid Sharma, CEO, InterGlobe AirTransport.

And like many other entrepreneurs, Bhatia bet on the aspirations of India’s growing middle class. “Growing into the conglomerate that it is today was a logical progression,” says Whitaker, adding, “InterGlobe has seen relationship-based growth. Our GSA business helped us create relationships that led to other opportunities. As with Galileo, those same relationships grew to the IT and travel technologies. Then came the foray into hotels and aviation.”

At the Paris Air Show of 2005, Bhatia, though little known outside, shook the aviation world by announcing he was buying 100 Airbus A320s. Many questioned the wisdom of such a large order for a startup airline in a crowded market where flying penetration was among the world’s lowest. But Bhatia and Gangwal had a plan. They didn’t try to grow too fast and focussed on creating a consistent service quality within the low-cost carrier framework. (Gangwal wasn’t available for comment.)

Controversy followed. G.R. Gopinath, the original low-cost advocate and founder of Air Deccan, accused Bhatia of conflict of interest in 2007, when InterGlobe Technologies was managing the IT systems of Deccan even as IndiGo took to the skies. In his autobiography, Simply Fly, Gopinath wrote: “Bhatia’s IGT had my airline’s data which he could use in planning his routes and pricing which could trigger the collapse of my airline [...] we realised we were [...] ‘made suckers’.” Bhatia, back then, chose not to react.

Now he says, “I take these things philosophically. I could have responded that if we were to take cognisance of the data of his business, we would be foolhardy to set up an airline.” Gopinath’s exit—Air Deccan was sold to Kingfisher in 2007—helped Bhatia’s cause. Air Deccan had a marketshare of 23% under Gopinath. The Kingfisher-Air Deccan combine now has a 19% share.

BHATIA’S APPROACH TO RUNNING the conglomerate is somewhat unique. The way his group is structured allows the individual companies to pull in individual partners or investors. “I believe that individual businesses should be puritanical,” he says. “This is what made me look at hotels as a venture separate from the IndiGo brand.”

InterGlobe Hotels was inspired by insights similar to the ones that led to IndiGo’s birth—an under-penetrated market set to boom. Uttam Dave, president and CEO, InterGlobe Hotels, explains the thinking. “The logic was that there is an emerging middle class, which will look for high quality at high value. The customer who flies in IndiGo is the same one who stays in our hotels,” he says.

In 2004 (a year before the airline was started), InterGlobe signed with French company Accor to set up the Ibis economy hotels. The two companies have two joint ventures, one for developing property, in which InterGlobe has a 60% stake, and the other, in which the Indian company is a minority owner, to manage Accor’s properties here.

The real push though, is happening now. Three hotels (one each in Gurgaon, Pune, and Mumbai) are already running. Another seven are expected to come up this year. The ultimate objective is to build 19, with 3,100 rooms in all. Accor Asia Pacific chairman and CEO Michael Issenberg says InterGlobe is exactly the partner they wanted. “It is no secret that Accor has entered India previously and failed.” (In the 1990s, its franchise deal with the Mahindra & Mahindra group flopped.)

Achin Khanna, associate director with HVS, a consultancy that specialises in hospitality, believes that the economy Ibis brand is a smart choice. “Ibis will work in India just like a Hampton Inn, Fairfield by Marriott, or Holiday Inn Express would,” he says. “If you look at the Gurgaon property, it’s doing a Rs 5,500 average rate (per night). In other words, they are offering a lower-end product, at rates which are nearer to a mid-market hotel. This is double what Ibis charges anywhere in the world.”

Bhatia’s also set up a hotels fund. It will finance seven more hotels (including two of the 19 Ibis) with 1,800 rooms shared across the Novotel, Ibis, and Pullman brands (all Accor labels). Once it begins operations (in 2012), this venture’s initial assets are expected to be valued around $325 million. Bhatia’s already found a partner here. Pacifica Partners, a joint venture between Host Hotels and Resorts Inc. and the real estate investment arm of the Government of Singapore Investment Corporation, acquired a 36% stake in the venture last year, while the remaining 64% was carved equally between Accor and InterGlobe.

Yet, the relative financial independence of the companies doesn’t come in the way of the group working as one. Bhatia meets his A-team every month, exchanging notes on trends that could affect their businesses. These meetings, originally Bhatia’s idea, are aimed at getting companies help each other. “It’s a great platform,” says Sharma.

This is usually followed by dinner at one of Bhatia’s restaurants in and around Delhi, such as Nooba, Piccadelhi or the China Club. At a recent gathering, the 2010 merger of Continental Airlines and United Airlines was discussed. United outsources some of its IT needs to InterGlobe Technologies; Continental, for its part, believes in building IT capabilities in-house. And since they were now in charge, the impact of the merger—to be completed in 2012—on InterGlobe Technologies was discussed. (There’s been no impact so far.)

Sometimes, market intelligence is shared. InterGlobe AirTransport has Sri Lankan Airlines as a client, which is building a large maintenance facility in the island. “IndiGo plans to make use of it. That’ll prevent expensive and long maintenance flights across to Singapore,” says Sharma. (IndiGo’s planes periodically fly to Singapore for repairs.)

The individual outfits also draw on each others’ strengths. The public success of IndiGo for example, has meant it’s easier to pitch to potential clients in the other businesses. Vipul Doshi, CEO of InterGlobe Technologies, a 4,000-strong firm that has grown at 35% annually over the past four years, agrees. “Within the aviation world people have a positive view of the group because of the airline’s success,” he says, “and that’s something that we take advantage of. People often ask us how we are helping the airline.”

Knowing when to mix and when to keep things separate is how Bhatia defines the spirit of the conglomerate.
“The synergies come in the HR, finance, and IT systems. There are synergies in terms of relationships with travel agents for Galileo, AirTransport, IndiGo, and even InterGlobe Technologies. Also you create opportunities for people to move across various verticals within the group,” explains Whitaker.

Yet, IndiGo crews stay at the Gurgaon Ibis, but not at the one in Mumbai. “It’s like any other arm’s length competitive relationship for us. They don’t stay with us in Mumbai because they get a better option elsewhere,” says Dave.

ULTIMATELY, INTERGLOBE WILL be shaped by Bhatia’s philosophy. He’s known to give his managers a free hand. Each manager runs his business with little interference from the top, nearly like an entrepreneur would, says Whitaker. Dave says that Bhatia’s leadership style is based on empowerment. “We have the freedom to drive the business the way we want to. There is oversight at the board level and Rahul sets the standard high. It doesn’t matter if you are an economy hotel; you have to perform like a Ritz-Carlton. He doesn’t get involved in the nitty-gritty.”

But there is one Bhatia principle—that each business prepare for the long term. “I have never seen a company that has a longer term focus than InterGlobe. It is in the DNA of the company. In a commercial negotiation, length of time becomes important,” Whitaker says.

A bit like the Airbus order, which should take care of IndiGo’s needs till 2025.