IndiGo crisis is a result of internal conflict and shortage of pilots
By: Rhea Arora
Tags: Indigo, Aviation, India, Business

After Jet Airways suspended its operations, the IndiGo crisis has hit the headlines, highlighting Indian aviation sector’s beleaguered state.

India’s largest airline by market share, IndiGo is facing internal managerial struggle as it continues to report losses. The airline’s two main promoters, Rahul Bhatia and Rakesh Gangwal, have hired lawyers to resolve a dispute between them on whether the airline should adopt double-aisled aircraft or code shares.

IndiGo also cancelled flights in March after it fell short of pilots to operate newly acquired carriers.

IndiGo is currently India’s largest airline, as it owns 46.9% of the market. But it has not been able to capitalise on Jet’s temporary shutdown because of its own issues.

Meet the founders

Rakesh Gangwal and Rahul Bhatia co-founded IndiGo in 2006. Gangwal holds 37% and Bhatia has 38% of InterGlobe Aviation, the airline services company that runs IndiGo. The remaining equity is with the public, financial institutions, and other investors.

Gangwal has extensive experience in the aviation industry. He worked with United Airlines in 1984 and Air France before being appointed CEO and Chairman of US Airways Group. Forbes magazine also named him the 775th richest billionaire in 2019 and 70th richest in India in 2015.

In 2018, Bhatia took over as the airline’s interim CEO while new candidates were being vetted. This January, Ronojoy Dutta was named IndiGo’s new CEO. Like Gangwal, Bhatia is also featured on Forbes’ list of billionaires-he ranked 504th in the world and 41st in India in 2018.

What are Gangwal and Bhatia bickering over?

According to Firstpost, Gangwal has reportedly taken issue with Bhatia’s influence over the airline’s operations, because the latter has more control over the executives and management.

However, Dutta made a statement clarifying that Gangwal did not want to take control of the airline.

“To put to rest the messaging on the fact that the RG group is attempting to renegotiate the shareholders’ agreement (SHA), I am placing on record that the RG group stands by the current SHA, which in any case expires this October,” said Gangwal, according to Dutta’s statement.

The pair is also apparently arguing about the future of the airline-to add superior, double-aisled aircraft or deal in code shares.

Bhatia wants to invest in a double-aisled carrier that can fly non-stop for over 10 hours and make passengers more comfortable, while Gangwal wants to focus on code shares, a commercial arrangement where two or more airlines sell seats on a flight operated by one of them under their own flight code.

Bhatia and Gangwal have now enlisted JSA Law and Khaitan & Co law firms, respectively. Experts say the pair hiring lawyers is a sign that they will be moving the National Company Law Tribunal (NCLT) to resolve the dispute.

Pavan Kumar Vijay, founder of advisory firm Corporate Professionals, spoke to Mint and said, “First, efforts will be to resolve the differences within the boardroom as one of the issues that arises is who controls the company.”

Under Section 241 of the Companies Act, a shareholder can take other shareholders to task if the former alleges that the company is being run according to the latter’s interests only.

IndiGo cancels flights amid pilot shortage

In February, IndiGo announced that its 30 flight cancellations would create ripples till March. In 2018, the airline also cancelled close to 2,000 flights after safety concerns rose about their engines. However, it has since expanded its operations without making a corresponding increase in hires.

Business Standard said IndiGo will be adding 100 new aircraft this year at a rate of nine aircraft a month. To make this pace of growth sustainable, the airline needs to hire about 2,000 more pilots.

IndiGo COO Wolfgang Prock-Schauer told Financial Express that the airline has hired more pilots, who will be joining in April and can help correct the ratio of piloting crew to aircraft.

“We are sticking to the growth forecast given to investors. There was a slight mismatch in the projected and actual availability of pilots. But we are on our way to set things right by April,” said Prock-Shauer.

A report in Rediff added that IndiGo has asked recruiters to focus on pilots from Latin America and West Asia where airlines are trying to reduce their costs and laying off staff. However, hiring foreign pilots needs to undergo a more stringent approval process, which is adding to the delay.

The Economic Times also found that IndiGo had invested in expensive software that organises pilot rosters for maximum productivity, so the airline could coast in the interim with a smaller crew. However, the new schedules were hectic and impacting pilots’ personal lives.

The pilot staff were rumoured to have formed a union. However, IndiGo’s management has set up a committee to look into their grievances and calmed the desire to unionise for the time being.

IndiGo already accounts for 38% of the number of pilots employed by domestic carriers and, with the news hires, is expecting a rise in salary costs as well.

Why is IndiGo struggling?

In 2018, IndiGo reported its lowest quarterly profit since it launched its IPO in 2015. Experts have attributed the airline’s losses mostly to rising fuel costs and a depreciating rupee.

IndiGo’s fuel expenses rose by 54%.

Fuel accounts for a large part-almost 40%-of an airline’s expenses. India is also the world’s third largest oil importer and has a dependency on external oil reserves. Hence, oscillating oil prices create sharp financial pressure on an airline.

As much of the expenditure of an airline, such as airport rent, maintenance, and refuelling is incurred overseas, transactions are made in the US Dollar. Hence, the sliding rupee spells trouble for Indian airlines, who end up paying more after currency conversion.

Moreover, IndiGo has also been struggling with its finances because of its expansion efforts. Former CEO Aditya Ghosh’s resignation also threw a spanner in the works, because it was set against the background of complaints against rude staff and faulty engines.

Impact of the crisis

With the Gangwal versus Bhatia saga, IndiGo has been unable to capitalise on Jet Airways’ shutdown like its competitors, namely SpiceJet, have. Moreover, customers have been inconvenienced with flight cancellations, and the airline’s current roster is feeling overburdened and overworked because of the lack of pilots.

Jet’s lenders are still in the process of finalising bidders to takeover. However, as the lenders refused to provide emergency funding to the airline, Jet has been forced to temporarily shut down.

Following this, SpiceJet, one of Jet’s competitors, took over routes to Kathmandu, Hong Kong, Colombo, Bangkok, Dhaka, Jeddah, and Riyadh-strategic moves that IndiGo missed out on because of internal strife.

Regardless, IndiGo is reassuring its investors that the management is adept at resolving internal conflict and will continue to do so.

Originally published at https://qrius.com on May 21, 2019, by Rhea Arora