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Corporate May 14, 2013

The spectacular fall of Vijay Mallya and Captain Gopinath

By Cuckoo Paul

India's biggest lender, the State Bank of India is in a unique position this month. It is pulling the plug on two amazing entrepreneurs. Both extremely passionate businessmen who launched startups that aimed for the sky. Sadly, both failed rather spectacularly and the bank and other lenders and suppliers aretrying to pick up the pieces.

Capt Gopinath and Vijay Mallya may seem like chalk and cheese. The first is probably India's most vocal champion of the aam janata, much before Arvind Kejriwal came on the scene. The second is synonym for good times...or was.

Theirs are stories of entrepreneurial capitalism as they spotted opportunity way before anyone else did and strove to create wealth for themselves as well as others.

More recently, though, the stories have also been about their struggle to keep their businesses afloat.

SBI's auction of real estate and other assets pledged by Capt Gopi for Deccan Cargo and Express Logistics (DCEL) is slated for the end of this month. The bank is trying to recover Rs 211 crore, classified as a non-performing asset. This will probably be from sale of real estate pledged to the bank. Over the seven years, after he sold Air Deccan, Capt Gopi has launched and failed at a string of aviation-related ventures. Never one to give up, he was very close to starting Air Deccan Version 2, with a bunch of foreign investors early this year. The plan was to be announced once his non-compete clause with Kingfisher ended in February. But this nevermaterialised. The investors developed cold feet after the surprise launch of the much stronger AirAsia-Tata LCC. It was tough to keep lenders at bay and everything began unravelling rather fast thereafter.


Capt Gopi has launched and failed at a string of aviation-related ventures.AFP

Many of the problems with Capt Gopi's recent businesses Deccan 360, Deccan Shuttles (Gujarat) and Deccan Charters were a result of the entrepreneur's management style-much of it was evident in the way his airline was run.

Though, SBI's losses are entirely on another level with Vijay Mallya and Kingfisher Airlines. The public sector lender leads a consortium of 17 banks that have an outstanding loan of about Rs 7,000 crore. About Rs 1,000 crore of this has been recovered and the bank is now moving to liquidate Mallya's personal guarantees.

There are obviously lessons to be learnt from the rather well-documented failure of the two entrepreneurs. Their career trajectories are intertwined in a rather tragic-comic way after Capt Gopi sold his airline to Mallya. Both have no love lost for each other. Capt Gopi says of Mallya that "he killed my airline and I think then he killed his own."

Closer scrutiny shows many amazing parallels in their management styles. Here are the simplest ones that we've pieced together from ourconversations with the two entrepreneurs over the past decade and this week(with the benefit of hindsight) with senior managers and investors whoworked with them.

#Problems of Micro-management

Everyone who worked with Capt Gopi agrees he is a visionary-he was able tospot the potential for LCCs, at a time when everyone else was saying it justcouldn't be done in India. But arguably, his biggest failure was that theinability to take a step back once the airline was up and running. He had his finger in almost every part of the airline operation. From dealing withthe regulators and politicians in Delhi to the airport managers in Hubli andKolhapur he did it all. This was so when he operated just two aircraft, andalso when he had 22. One senior manager remembers how Capt Gopi kept it up,even after he had sold the airline to Kingfisher. He was still on the board,with a small residual stake and it was embarrassing how he still tried torun the airline, he says. Mallya had already signalled that he intended tojettison the low cost model. But Capt Gopi would continue urging colleaguesto do what he said. One person remembers being asked to do a massive cheapticket sale to draw in more passengers.

Being unable to delegate is an even more severe problem with Vijay Mallya.He was hugely involved with Kingfisher, and this may have been the biggestcontributor to the downfall. Stories about him personally selecting the crewand their uniform are by now urban legends of the Indian airline industry.

But line managers say there was much more. Even when there were people hired to do a job, he would get very closely involved. Monitoring ontimeperformance daily did not simply mean that reason for delays on every singleKingfisher flight were sent to his Blackberry, but he would call up from allaround the world, to check on the reasons and make changes in schedules/timings. The problems were compounded because Mallya also had UB's liquorbusinesses to run. His time was at a premium, and most of it was devoted to'personally' looking after details of the airline.

#Mucked up operations

Three years into Air Deccan's journey, the airline was in an operationalmess. It had acquired a bad reputation for cancellations, lost bags and very poor ontime performance. Thousands had bought into Capt Gopi's dream of'Everyone can fly', but were upset by the poor delivery. Complaints piled upand violence at the check-in counters was not uncommon. In 2005, he triedfixing this by bringing in a brand-new team of expats, mostly from Europe,headed by Warwick Brady as chief operating officer. For a time Brady and histeam were able to patch up the system, but this didn't last. Resentmentbuilt up between the expats and the local (Indian) employees. The problemswere never sorted and by the time they left, the brand had lost its sheen.

At Deccan 360, which was in the express logistics business, the problemswere more severe. The airline was unable to sign up the big-ticket anchor customers that were so critical to provide cargo that would fill the planes.This was despite hiring a team with strong logistics and aviation background. The venture folded up by 2011.

At Kingfisher, the problems were, if anything, larger. Even before breakingeven on domestic flights, Mallya had quickly started international operations-using rights from Air Deccan. He launched flights from threeIndian cities to London. He ordered planes worth billions of dollars, and began drawing plans towards long-haul flights to cities in Africa, Asia,Europe and North America. As it turned out, this was too much too soon. As the global financial crisis deepened, corporate traffic tanked and therewere simply not enough people flying. The long-distance flights with a
handful of passengers on the international routes guzzled fuel and money! Atone time the London flights amounted to a quarter of the total losses. Even when the going got tougher, pride dictated Mallya's business decisions. Hewouldn't cut the London flights until March 2012, by which time losses haderoded the net worth completely.

#Poor organization structure/ processes

In both cases, people at various levels reported directly to the entrepreneur. Air Deccan never had a CEO, and the COO (chief operating officer) was the top executive. But the power was always with the founder. One former COO, says he was nothing but a dummy.

At Kingfisher, the confusion was even more widespread. There airline neverhad a real CEO, until Sanjay Agarwal was appointed in 2011, by which timethe airline was already in a downward spiral. It has had COOs at variouspoints, but with little power. "Irrespective of their designations, dozensof people in the organisation reported directly to Mallya," says onevice-president, who is still with the airline. The boss had direct equationswith some people and their power in the company came from their proximity to him, he says. Many senior employees, including the CFO, admin head and legal head, were never on Kingfisher payroll. They came from UB and remained that way. There were active fights for turf, as the mini-CEOs fought with eachother.

Mallya's legendary 'management after sunset' style did not help either. "Itwas crazy how so many decisions were taken at midnight," says a sales headwho quit last year. The sad part was that we'd be waiting for him from 3 pm,doing nothing, he says.

#Slow response to external changes

Capt Gopinath's latest venture, Deccan Shuttles-aimed at linking smallercities in Gujarat with charter services-almost didn't take off. The
government changed its rules, disallowing wet-lease (leasing with crew) ofaircraft. This was done even while Capt Gopi's planes (and crew) were on theway from Europe, and stranded in Muscat. The service which finally startedwith a nine-seater Cessna Caravan could never breakeven. It wound up thismonth.

Mallya's dream for Kingfisher and his aviation business was King-size. Hewas in talks to buy a light jet manufacturer in the US and had personally begun negotiating slots and space for Kingfisher lounges in airports aroundthe world. He dreamt one day of being able to fill up his A380s with passengersfrom India. The financial meltdown changed all that. At first people simplycut down their travel, when they started they chose LCCs. Mallya was unableto respond in time.

As Tolstoy said, `Happy families are all alike; every unhappy family isunhappy in its own way.' The parallels we've listed out, between the way the two Bangalore entrepreneurs did their business, are certainly not the onlyreasons why they failed. There are scores of others, and not all of them canbe documented here. The airline business is complex anywhere in the worldand even more so in India. It burns cash fast, is highly regulated andproduces a commodity that is worth nothing if not sold in time. Making asuccess of it is no small beer.

Cuckoo Paul writes for Forbes India

by Cuckoo Paul

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