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Monday, May 15, 2006

The turbulences


While the strengths and opportunities of the Deccan aviation offer are encouraging, investors will have to keep track of the following risk factors:

Possibility of price wars

The growth of the low-cost carrier market has attracted several new entrants into the market. Since the entry barriers are low, players such as SpiceJet, GoAir, IndiGO (from Interglobe), Yamuna Air or Kerala Airways, have filed flight plans. If they all do take off, the low-cost airline market may be heading into a price war. In effect, if the seat capacity grows faster than demand, the airfares generally weaken leading to lower revenues per customer. Similar trends are also in evidence when new carriers operate new routes.

Jet Airways set off the consolidation in the airline space recently with the acquisition of Air Sahara. Once complete, the integration process is likely to offer Jet Airways greater clout over operations.

ATF prices

Aircraft fuel expenses accounted for nearly 34 per cent of Deccan Aviation's total expenditure in the first eight months of 2005-06, up from 27 per cent for 2004-05. The surge in aviation turbine fuel prices over the past year is expected to have an adverse impact on the company's bottomline. Since November 2005, the ATF prices have appreciated 11 per cent, after marching up 17 per cent between April and November. The inability of the company to enter into price hedging arrangements for fuel supply owing to government regulations is likely to affect its financial performance.

This is likely to get compounded in the near term by congestion in airports, lack of landing facilities and parking slots as Deccan Aviation scales up capacity.

As the industry is also staring at a paucity of trained resources such as pilots and cabin crew the company may find it difficult to control staff costs.

Managing growth

For Deccan Aviation, a big challenge will be in terms of managing the new fleet growth. Unless the company is able to maintain high utilisation of aircraft and keep operating costs low, the financials will take a hit. For the eight months ended November 30, 2005, on total revenues of Rs 518.28 crore, the company incurred operating losses, with a net loss of Rs 123.68 crore.

External variables

The airline industry is impacted to a large extent by economic fundamentals, geopolitical variables and external events such as the SARS or the bird flu. Events such as an economic downturn, India-Pakistan political standoff or SARS have in the past led to a slump in passenger traffic and directly impacted the financial performance of airline companies.

Similarly, accidents or extensive government regulation can influence operational performance.