| | First low cost airline of the country coming up with an IPO. Has 16% market share |
| Air Deccan is the first low cost airlines in India. The Airline was the first one to revolutionise air travel in the country whereby even a common man could fly. The Air line now is coming with an IPO to set up a training centre, hangar facility and basic medium level of maintenance checks at Chennai and debt repayment. Setting up of training centre and maintenance facilities should help the airline in reducing its costs to some extent.
Air Deccan currently has about 16% of the airline market with Jet being the market leader with a little over 36% market share. Air Deccan's connectivity however is one of the best in the industry as the flies to 53 destinations across the country. The only other airline which flies to more destinations is Indian Airlines. IA flies to 58 destinations but that is using a fleet of 70 aircrafts. Air Deccan flies to 53 destinations with just 29 aircrafts. Air Deccan has ordered for a few more aircrafts which will take its total to 35. Out of these 11 are Airbuses A 320 and the balance are ATRs (both 48 and 72 seaters). |
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| Three sources of revenues. Advertising revenue growing in a big way; Management is a strength. |
| Air Deccan is a low cost airline which offers no frills service unlike the Full service carriers (FSCs) like Jet Airways, IA or Kingfisher. A no frills service would mean that the Airline would not provide any in-flight service like meals or drinks. A passenger could nevertheless have it by paying for it. This also becomes a source of revenue for the Airlines.
Air Deccan basically gets revenue from 3 sources like Ticketing, Onboard service and Advertising, with ticketing obviously contributing the most. The Onboard service though contributes a very small percentage of revenues. The Airlines virtually uses every space for advertising. Air Deccan get revenues from advertising both outside and inside the aircraft. Air Deccan even gets its baggage tags and seats covers sponsored which reduces its costs to that extent. The Airline hence leaves no stones unturned when it comes to generating revenue. This is a good strategy considering it being a low cost carrier.
The management is extremely good and one can give them extra points for that. The COO of the company was previously with Rian air, one the most successful LCC in Europe after South West airlines in North America. |
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| LCCs have low maintenance cost, having ATRs helps Air Deccan reduce that even further. Rising ATF price is a risk though |
| A Low cost carrier (LCC) manages to be one by adopting various strategies to reduce its costs. Fuel cost is something which none of the airlines can reduce and this happens to be about 35-40% of the expenses. If the government allows hedging ATF then it could reduce the cost to a certain extent. The LCCs reduce their costs by utilising the aircrafts for more hours in a day than an FSC. Air Deccan utilises its aircraft for about 12-13 hours a day compared to Jet which utilises its aircrafts for about 9 hours.
Most LCCs use an Airbus A320 or A319, which have only an Economy class and hence more seats than any other aircraft. Typically an A 320 aircraft would have about 180 seats while the same aircraft with a FSC would have about 120-140 seats including Business class and First class. Although realisations are higher in Business class and First class the seats are seldom full, hence reducing the yields.
LCCs use Internet as a medium to sell tickets rather than using selling agents and hence save on commission expenses which are as high as 12-14% of sales. Air Deccan has a marketing tie up with HPCL to sell tickets at all its petrol stations. The Airport charges vary slightly depending on the aircraft but it is significantly lower for an ATR. An ATR being a small aircraft, typically with a seating capacity of about 48, has lower landing, maintenance and handling charges. The Indian government is promoting connectivity of small cities with the metros and hence has some exemptions for the ATRs. The government has waived landing charges for ATRs and the handling charges too are just 4% compared to 7% for Airbuses. This is a big saving.
Hangar and maintenance charges are again huge costs for the airlines. Air Deccan can reduce this to a certain extent as it is setting up its own Hangar and maintenance facility using the money raised from the IPO. Air Deccan has another cost advantage compared to the other airlines by having lower average manpower per aircraft for maintenance. Air Deccan has about 70 people per aircraft for maintenance which is lowest in the industry. SpiceJet, another LCC, is closest at 160 per aircraft followed by Jet at 180 and Kingfisher at 200 and IA at 400 per aircraft. |
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| Industry not matured yet and valuations seem to be on the higher side. Suggest avoiding for the time being |
| Air Deccan in the eight months of FY06 has done revenues of Rs 478 crores with a net loss of Rs 123.86 crores. The Airline currently operates with an overall load factor of nearly 73% while the breakeven load factor being 75%. The overall load factor being lower the breakeven load factors indicates that not all routes have broken even. In the meantime it also indicates that certain routes are operational at load factors much above 75%. Typically a route takes about 24 months to breakeven. Hence from here on, if the airline does not introduce new routes; we can safely assume all existing routes to breakeven in next 24 months. Higher ATF price is a big risk for the airline and that makes us a bit cautious.
The airline despite all the positives seems to be over valued. We compare the Airline industry on the basis of their market cap to sales ratio and while doing that we find Air Deccan highly priced. Considering the higher end of the price band the Airlnes market cap would be about Rs 1700 crores which is nearly 3 times the Ex FY06 revenues of Rs 600 crores. Meanwhile at the lower end of the price band the ratio would be about 2.5 times the sales. This again is expensive compared to the market leader Jet Airways which trades at a ratio of about 1.5:1.
The idea of a LCC is still a concept and it isn't a success yet and there is increasing competition not only from the other airlines but also the train AC 2 tier and AC 3 Tier. And that is because of a simple fact that the masses still prefer travelling by train. The biggest competitor for the LCCs is the AC two tier and three tier. However this could also be seen as an opportunity for the airlines who would move to airlines from trains. Although LCCs were a hit in North America and Europe, it is also likely to be a success. However for Deccan we would be positive given that what it has done so far on the business but the valuations is what deters us. The risk reward does not seem to be in favour. The current infrastructure and the hurdles of increased competition justifies a lower valuation. We are cautious on this and would suggest avoiding the IPO. This stock at a lower level would be another story. For now we are not buyers here. |