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Post Info TOPIC: The Air Deccan business model


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The Air Deccan business model
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Great takeoff, delayed landing



May 15, 2006



Business Standard





Deccan's LCC model is a good one, but it could take time to play out.

 

The Indian skies have never seemed so crowded. Flying Indians across the country today are five full service carriers (FSCs) and three low-cost carriers(LCCs).

 

A couple of LCCs are scheduled for takeoff in the next six months while a few more airlines are waiting in the wings. Nobody is complaining though, with fares falling and more flights and airlines to choose from, it's a case of 'the more the merrier'. Even though it might mean congested airports, delayed departures and some frayed nerves.

 

India's first no-frills carrier Deccan Aviation has cashed in on this travel boom, capturing a market share of 16 per cent in less than three years. The company has big growth plans: it plans to add one aircraft a month for the next 60 months.

 

To build some infrastructure and de-leverage its balance sheet, Deccan is tapping the market with its initial public offering for an amount of Rs 368-430 crore.

 

That translates into a market capitalisation of Rs 1,470-1,717 crore. Which doesn't appear unreasonable compared with Jet's Rs 8,281 crore for a 35 per cent market share and its tremendous brand equity with business travellers. Or the Delhi-based LCC Spice Jet's Rs 1,315 crore, for a share of just 6 per cent.

 

However, while Deccan has a competitive advantage in that it is the first mover in the LCC space and has already contracted aircraft, it is unlikely to turn profitable in a hurry given its capital expenditure of around Rs 2,000 crore each year, for the next few years.

 

The sky's the limit
India is, by some estimates, the third fastest growing domestic aviation market in the world: in FY05, it grew by 27 per cent over the 13 per cent in FY04 (Source DGCA). Industry watchers predict that total air traffic in India will rise by five million passengers each year over the next ten years.


 

The reason for the high forecasts lies primarily in the low base. But, beyond that, the projections are aggressive also because no-frills carriers such as Deccan have created a whole new flying population, thanks to their affordable fares.

 

And a rapidly growing middle-class, with higher disposable incomes and soaring aspirations, is willing to spend.

 

Thus, by 2010 India's carriers are expected to fly 40-45 million travellers, compared with an estimated 22 million passengers flown in FY06. And the share of LCCs, according to one estimate, should be touching close to 40-45 per cent from around 23 per cent at present.

 

The cost-side story
The LCC model is one that factors in lower costs and higher load factor, which allows it to stimulate demand with lower fares.


 

The idea is to operate a point-to-point route and price fares about 30-35 per cent lower than the competition. While fixed costs such as aviation turbine fuel (ATF) costs which account for approximately 40 per cent of total costs and aircraft lease rentals cannot be controlled, LCCs save on other fronts.

 

For instance, they do not serve free food and drink on board, outsourcing these instead. Their ground handling costs, too, are lower.

 

Most importantly, as Warwick Brady, COO, Deccan, points out, they save about 10-15 per cent on distribution costs. Aviation analysts say LCCs have an operating cost advantage of around 25 per cent vis-a-vis FSCs in the initial phase of operation which could be better as the airline grows in scale.

 

Thus, the CASK (cost per available seat kilometre) for an LCC would be around Rs 2.80 per km while for an FSC it would be around Rs 3.70 per km.

 

Selling online
Deccan has created its own airline distribution system selling seats on the Internet instead of opting for a global distribution service (GDS) such as Galileo or Amadeus.


 

A GDS, Brady says, would cost an airline approximately $7 or Rs 310 per customer, whereas for Deccan the cost works out to between Rs 26 and Rs 27 per passenger.

 

Deccan has also opted out of a BSP (billing and settlement plan), creating instead, a payment gateway so that tickets are issued on direct payment (through credit cards or a deposit account by a travel agent).

 

As Captain Gopinath, managing director, points out, the company has also set up a 24/7 call centre, which now accounts for nearly 10 per cent of sales. The airline saves 3-4 per cent commission payable to travel agents and another 2-3 per cent otherwise payable to IATA. Deccan has a 4,000-strong non-IATA agent network and has also tied up with a 110 Reliance Web World outlets for ticket sales.

 

Saving on aircraft and crew
Internationally, LCCs have a fleet with just one kind of aircraft, so that costs are lower. However, Deccan operates both the 180 seat Airbus A320-- for the more lucrative trunk routes as also the ATR turboprop --in both 48 and 72 seat sizes--for shorter routes to smaller towns. So, its costs would be somewhat higher than those of an airline with just one type of aircraft.


 

However, turboprops attract lower sales tax on fuel as also lower navigation fees: moreover there is no landing fee for aircraft with less than 80 seats. In addition, since its Airbuses are all similar, Deccan is also able to save on inventories and maintenance, procedures and fit-outs.

 

With a severe shortage of pilots and engineers, Deccan cannot control salary costs beyond a point. However, with a smaller crew and fewer staff at the airports--- because ticket handling has been outsourced--- Deccan's staff strength has been kept at the minimum level required.

 

According to Brady, Deccan's people per aircraft ratio is currently 70 compared with 160 for Jet, 200 for Kingfisher and 400 for Indian. However, the company has roped in experienced people from airlines such as Ryanair and easyJet, incentivising them with stock options.

 

Sweating the asset
Deccan is able to increase daily utilisations by keeping the turnaround time shorter. This is possible because it does not serve food on board, which reduces the time required to clear and clean the aircraft after a flight.


 

The longer the number of hours it flies averaging 12 hours a day, currently the larger the number of available seats it has to sell.

 

According to Brady, Deccan's utilisation is at least 20-25 per cent better than that of FSCs. Also, the single-class configuration of the aircraft allows for a larger number of seats, and the seat density is estimated to be 15 per cent higher than that for FSCs.

 

FSCs typically have two classes, resulting in a lower number of seats, though the business class seats are priced at a premium to protect revenues. Deccan has attempted to tap different revenue streams such as advertising on the fuselage, head rests and baggage tags.

 

Not faring too well
Deccan hopes to turn EBITDAR (earnings before interest, tax, depreciation, amortisation and rentals) positive in FY07 turn in a cash profit in FY08. At the current scale of operations, the management claims that Deccan needs to operate at a load factor of 75 per cent to break even operationally.


 

Deccan's loads are slightly lower at around 72 per cent, in line with the industry average. Currently, its revenues per day are believed to be around Rs 4.5 crore, on yields (revenue per passenger) of around Rs 2,800 for the Airbus and yield per passenger of Rs 2,000 for the ATR.

 

Yields will be under pressure for some time and are unlikely to improve in the near term considering the aggressive fleet expansion and new entrants in an already challenging price environment. The RPKM (revenue passenger per km) is expected to go up to 5,647 mn in FY07 from 2,189 mn in FY06 for an increased fleet size. 
 




DECCAN AVIATION

Rs crore
(Year to march)

2004-05
2005-06E
%
change 

2006-07E
%
change

2007-08E

Revenues 
307.90
850.00
176.00
2333.00
174.40
3458.00

EBITDAR
32.00
-65.00
-
378.00
-
706.00

EBITDAR Margin (%)
10.40
-
-
16.20
-
20.40

Adj PAT/(Loss)
-16.80
-125.00
-
-25.00
-
110.00

Equity 
73
73
-
98
-
98

Price (Rs) 150-175

Issue : Rs 2.45crore
 367.5-428.75

Source: Analysts Estimates

 

Airpockets
With 260 flights a day to 52 destinations, Deccan has come a long way. It has done most things right, especially geting a good deal for its purchase of aircraft $36-$38 mn for the Airbus.


 

As Capt Gopinath explains, it's because the company ordered such a large number of aircraft on time that it managed a discount of 15 per cent, saving the company nearly $2bn-$3bn in the process.

 

However, key risks lie in higher fuel prices. While Deccan can pass on some of it, higher fares might stymie demand. The increasing competition in the sector, especially in the LCC segment Jagson Airlines and IndiGo are scheduled to take off in the next six months could put pressure on yields.

 

Already, FSCs are reacting to the entry of LCCs by lowering fares. While scale will work to Deccan's advantage, the company must manage to achieve high loads continuously without cutting fares. That will not be easy with the poor state of the infrastructure at the airports. So, while Deccan has had a great takeoff, it could take time to land.

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KCM


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Typical to Government departments, Indian is overstaffed more than twice over as compared to Kingfisher/Jet Airways. There is a tremendous opportunity there to trim some excess staff there.


- Vivek


>> According to Brady, Deccan's people per aircraft ratio is currently 70 compared with 160 for Jet, 200 for Kingfisher and 400 for Indian. However, the company has roped in experienced people from airlines such as Ryanair and easyJet, incentivising them with stock options.



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The article has covered most of the points. Will other LCCs take note of it or continue with their models?


And hard work also counts.


Bhargavi



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Ask Air Deccan, what's thier investment on CEO Warwick Brady? He costs them a bomb!


bhargavi



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I think even 9W's CEO is a fat-pocket guy right?

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All Top posted Guys take home Hefty Packages.


regds


MEL



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Air Deccan has invested bomb on Brady. Their other staff payment is strikingly low.


 



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Any idea what r the figires like?

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