Deccan Aviation

Deccan Aviation

Today's Pick - Deccan Aviation

We recommend a sell in Deccan Aviation from a short-term perspective. It is evident from the charts of the stock that it has been on a long-term downtrend from its December 2007 peak of Rs 335.

However, after a corrective up move from Rs 100 level to Rs 155 level (between late March 2008 and early May 2008), the stock met with a resistance at around Rs 155 and resumed the long-term downtrend. Subsequently, the stock breached the 50 and 21-day moving average and continued to decline.

Currently, the stock is hovering around Rs 100 level, likely to penetrate this level and decline. The daily and weekly momentum indicators are featuring in the bearish zone, supporting the downtrend. The moving average convergence and divergence is also featuring in the negative territory, in line with the downtrend.

Our short-term forecast for the stock is bearish. We expect the stock to decline further until it hits our price target of Rs 90 in the approaching trading sessions. Traders with short-term perspective can sell the stock while keeping the stop-loss at Rs 106 level.

via BL

Deccan Aviation: Accept

Shareholders of Deccan Aviation can tender their shares to the open offer being made at Rs 155 per share by Kingfisher Radio, UB Overseas and UB Holdings. Deccan Aviation has achieved impressive revenue growth on the back of strong expansion in passenger traffic and a rising share of low-cost carriers in the domestic aviation market. However, the company’s losses at the operating level have continued to widen due to aggressive fleet and network expansion amidst a highly competitive environment.

There is little clarity at this juncture on when the company may turn in positive per share earnings. There is also considerable uncertainty about the likely business model and strategy that may be pursued for Deccan Aviation, after its acquisition by the UB group. It may, therefore, be prudent for shareholders to use the open offer to encash their holdings.

Profitability under pressure

As India’s leading low-cost airline, Air Deccan connects over 65 domestic destinations through 332 flights with a fleet of 43 Airbus 320s and ATRs. The airline has about a 22 per cent share in the domestic passenger traffic. Deccan Aviation’s revenues have grown from Rs 62.9 crore in 2003-04 to Rs 1,627 crore in the nine months ended March 2006-07. Over the same period, profitability has deteriorated, with the company moving from marginal profit of Rs 6 crore to loss of Rs 173 crore at the operating level. High fixed costs on account of fleet acquisition and a sharp spike in fuel costs, amidst pressure on air fares with the advent of new entrants are key reasons for the company’s deteriorating profitability.

In this context, the recent consolidation moves in the sector, with Jet Airways acquiring Air Sahara and the Indian Airlines- Air India merger, could endow domestic carriers with greater pricing power. However, the benefits from such consolidation to Air Deccan could be restricted on two counts. Relying as it does mainly on price-sensitive travellers to drive growth and maintain viable utilisation levels, Air Deccan may have limited headroom to hike fares without impacting its yields. Intense competition from new entrants such as IndiGo and Go Air and aggressive capacity additions among low cost carriers could also set a cap on very sharp or sustained fare hikes in this segment.

Early turnaround?

Though the preferential allotment of equity to the UB group will bring in cash of Rs.545 crore, it also expands the equity base required to be serviced. Any savings on fixed/maintenance costs due to synergies with Kingfisher Airlines and a route rationalisation exercise between the two providers could also aid an early turnaround of Air Deccan’s operations. However, Kingfisher Airlines is itself a recent entrant to the sector and its latest available financials (March 2006) show significant operating losses. Therefore, it is difficult to say if, and when, the benefits of synergies from its alliance with Kingfisher, will flow to investors in Deccan Aviation.

Shareholders should, however, note that the offer price does not seem to factor in possible gains from a turnaround in Deccan Aviation’s operations. The offer price of Rs.155 is at a 8.3 per cent premium to the stock’s current market price and values the company at an enterprise value of about Rs 2,800 crore, which is about 1.7 times yearly revenues.

Kingfisher Girls on Deccan :)

UB Group could strengthen its position in Air Deccan by raising its stake in the low cost carrier to 51% in the next few months—making the price warrior a subsidiary company of the group.

The Bangalore-based liquor conglomerate, which runs Kingfisher Airlines, bought a 26% stake in Air Deccan in early June and is on schedule to make an open offer for 20% more that opens next week. Besides this, sources say, other investors are willing to sell about 4-5% stake, taking the UB group holding up to 51%.

The open offer price of Rs 155 is Rs 14 higher than the Deccan Aviation stock price on Friday. The stock has been rising since the two firms shook hands to clinch the deal, and it is widely expected that the alliance will help the airline cut losses.

An absolute majority will enable the Kingfisher group to take major decisions to synergise operations of the two carriers. Airline sources said, one of the major decisions is expected to be in respect to whether the Air Deccan brand will be retained for future operations.

Asked about it, Kingfisher chairman Vijay Mallya said a decision on the issue will be taken only after a formal market evaluation. Kingfisher is in the process of commissioning a market study on the value of the Air Deccan brand in terms of the customer perception in various parts of the country.

“Our liquor business is all about brands and we have a good understanding of their value. We wouldn’t like to go in for a re-branding if there is value in the existing brand,” Mr Mallya said. The airline industry has been abuzz with rumours for the past fortnight that Air Deccan will be rebranded as Kingstar of KingAir.

Air Deccan chairman GR Gopinath dismisses any talk about re-branding of Air Deccan. Speaking to ET, he said, “The Air Deccan brand is synonymous with low-cost travel in India.”

Captain Gopinath said the joint marketing campaigns to drive home the strengths of the Kingfisher-Air Deccan group would continue, he said. “We would like to impress on air travellers the advantages they get while flying the Kingfisher-Air Deccan combo,” he added.

Earlier this month, the group unleashed a ‘King Power’ campaign in newspapers and hoardings all over the country. The branding focuses on the combined strength of the two airlines in terms of their common network and reach.
The colours used were Kingfisher’s bold red and white with no trace of Air Deccan’s blue and yellow.

Industry analysts feel that the Air Deccan has substantial brand equity in smaller towns and cities across the country, given its connectivity to 65 destinations across the country—majority in Tier II and III cities—with over 350 flights a day.

Currently teams from both Air Deccan and Kingfisher are constantly looking at ways to reduce operating costs through sharing of resources and getting better bargains from suppliers. “We have gained significant discounts on insurance payouts due to our joint approach,” the Air Deccan chief said.

Similarly, talks with other suppliers are also on to get a better deal. Re-scheduling of routes is the other priority of area for both the teams, he added. The Kingfisher-Air Deccan group currently has a fleet of 71 aircraft, including 41 Airbus aircraft and 30 ATR aircraft. The group offers about 537 daily flights, connecting 69 cities.

How Deccan boards Kingfisher biz class

Economic Times

It was in early May that Vijay Mallya decided to change the course of Indian aviation. He called Captain Gopinath, the founder and chairman of Air Deccan, and tried to make him an offer difficult to refuse.

Air Deccan’s back was on the wall: it had only a month’s cash left; it had defaulted on payments worth over Rs 200 crore to various partners like simulator providers, spare engines suppliers and maintenance firms. Time was running out, but not the Captain’s tenacity.

He refused the deal and said, “I am from Mars and he is from Venus.” He then shot off an e-mail to all Deccan employees requesting them to dismiss all speculation about any merger or alliance with Kingfisher. All of a sudden, the deal seemed to be over. There were gloomy faces at Vijay Mallya’s headquarters. At Deccan, the situation was desperate.

The company needed a partner quickly, raise some money so it could continue to fly. The offers from the Anil Dhirubhai Ambani Group (ADAG) and Texas Pacific Group (TPG) had their own share of problems. ADAG wanted majority control of 51%. Captain Gopinath rejected the idea outright: he simply didn’t want to give up control.

Also, he didn’t want to get swallowed in the ADAG apparatus where Deccan would be just another investment. TPG would bring in the money but offered no real synergies which Mallya’s Kingfisher provided. There were a few other private equity players in the fray as well.

“But picking up a stake in Air Deccan would have forced us to do an open offer. This would have increased the size of the deal and we were not ready for it,” said a senior executive from an airline who did not wish to be quoted. As the deal size got bigger, these financial investors fell off their bikes.

Edelweiss Capital, Deccan’s advisors then swung into action. The firm had done some work for Kingfisher in the past, and had some idea about its operations. A rapport also existed between senior Edelweiss and Kingfisher executives. Using their goodwill with the Mallya camp, they persuaded Mallya to adopt a different tack.

They pointed out the synergies between Deccan and Kingfisher and the benefits of consolidation in a industry reeling under severe cost and margin pressures. Mallya, meanwhile, was also thinking along similar lines. He realised that his first approach was too strong and had put Gopinath on the defensive. It had made Kingfisher look like a predator. The public statements about his interest in Deccan had only elicited a sarcastic response from Gopinath.

Another factor was also weighing on Mallya’s minds. If he failed, Deccan will have no option but to do a deal with any of the other investors. ADAG, with its money and muscle, would be a formidable competitor. Backed by the younger Ambani’s almost limitless fund-raising abilities, Deccan could continue playing the price warrior.

Dirt cheap tickets would be dumped in the market, further worsening the financial position of all airlines. Mallya decided to turn on the humility tap and let the charm flow. As he hopped across London, Glasgow, Monte Carlo and Paris, he resumed conversation with Gopinath. With the help of some advisors, Mallya worked on Gopinath.

He dropped all talk of acquisition, takeover or merger. He adopted the line of a friendly investor. He also refrained from public statements that would irk Gopinath or other investors. His team, meanwhile, was preparing the ground along with Edelweiss. They pitched the deal as an investment by UB Holdings, not Kingfisher Airlines.

This was crucial in order to persuade Gopinath that a more flamboyant rival is not taking over his company. It was a different Mallya who phoned Gopinath early last week. “Would you consider it if I come in as an investor?” he asked. “May be we can come in with minority stake and then raise our holding through an open offer,” he told the Captain.

As Gopinath began to understand Mallya’s proposition, the king of good times made his killer move. “You continue as the chairman. This is probably the first time in my life that I am sitting as a vice-chairman in any company I have been involved with,” Mallya is said to have told the Captain.

Gopinath liked the idea. The alternative, ADAG, was simply not acceptable to him. But there was something he needed to resolve. Air Deccan’s original backers, including Lachmandas Ladhani, who were believed to have opposed plans to sell stake to the UB group. Mr Ladhani, one of the original investors in Air Deccan, has a 11% holding in the company. He managed to carry the day taking with him Mr Ladhani as well as the financial investors, ICICI Ventures and Capital Partners.

While Mr Mallya may have been persuasive, there’s another man who wanted Captain to do the deal: Kiran Rao, the executive VP of Airbus. Considering that Air Deccan has placed an order for 62 A320 aircraft amounting to $2.4 billion, Airbus reportedly was concerned about the pre-delivery advance payments from the cash-strapped Air Deccan.

So, a meeting reportedly took place in Europe early this week between Mallya and Airbus officials. The final decision was taken in consultation with Airbus officials. With everything going for the deal, Captain Gopinath decided to give up the spartan efficiency of Air Deccan to board the Kingfisher business class. While the Air Deccan brand remains, and the two companies will operate “independently”, it is clear that the days of price warriors are over.

At the press conference to announce the deal in Mumbai on Friday, it was clear who the dominant partner was. The venue was flooded with Kingfisher colours of red and white, and the Kingfisher girls had been thrown in for more colour. With the exception of the airline’s CEO and CFO on the dais, Air Deccan was hardly in evidence.

Edelweiss - Air Deccan

Edelweiss - Air Deccan

Ask RJ - Indotech Transformers, HCC, Angel - Deccan Aviation

Ask RJ - Indotech Transformers, HCC

Angel - Deccan Aviation

No Frills, No Profit

In Spicejet's operations centre at its office in Gurgaon, company director and part-owner Ajay Singh is showing off the airline's impressive on-time performance. Pointing at a board full of numbers, he queries a nearby employee and tells this correspondent: "Only one delay today, and that too because of air traffic control (ATC) issues."

But while SpiceJet, and the three other budget carriers in India, Air Deccan, Indigo and GoAir, improve their on-time performance, their financial performance leaves a lot to be desired. Singh, in whose airline Tata Sons investment arm, Ewart, recently acquired a 10 per cent stake, laughs when he says: "No-one is making money, it is a bloodbath, but at least we are losing less money than the others and even make a marginal operating profit." SpiceJet, which has a fleet of 11 aircraft currently, expects to have 17 by year-end.

Another airline that has definitely not slowed down its growth plans is Indigo Airlines. Promoted by the Delhi-based travel services firm Interglobe, Indigo burst onto the scene with a huge 100-aircraft order at the Paris Air Show in 2005. So far, nine aircraft have been delivered and Bruce Ashby, CEO of the airline, expects six more by the end of the year. "By 2008, we should have a fleet of 23 aircraft." However, ask him if he is making money, and he shrugs: "This is not a business where you can expect to make money for the first 18-24 months. In the current environment in India, with infrastructural issues, that time frame might get slightly extended." However, Ashby did point out that Indigo hopes to turn the corner soon.

So what's the problem? "Customers only care about the lowest fare, there is little price elasticity for fares on a particular sector," says Jeh Wadia, MD, GoAir. "And the health of the industry is being compromised by things like sales tax on aviation turbine fuel (ATF). Over 42 per cent of my costs today are on ATF; if the government brought ATF under value-added tax (VAT), we would start making a profit overnight."

GoAir recently reduced its fleet from seven aircraft to five and the number of stations it serves from 13 to 11. While some in the industry see this as a sign of weakness, Wadia strongly quashes these rumours. "Our plans were always to bring in additional capacity every winter, because in winter we can bring in aircraft that are being underutilised in Europe at low-lease costs for the peak season in India." Wadia adds that GoAir expects delivery of its first brand-new aircraft from Airbus later this year

That said, Ashby and Singh both believe that a good customer experience can allow airlines to charge a certain premium. "SpiceJet is rarely the cheapest airline on a particular sector," Singh points out, while Ashby says: "In this industry, it is all about getting the job done with no hassles; if you do that time after time, the word spreads, and it gives us the ability to charge a slight premium."

Samyukth Sridharan, Principal Sales and Marketing Officer, Air Deccan, believes that fares will start climbing, "We believe that the low-cost industry has seen a bottoming out in costs and we will see prices begin to rise over the next 12-18 months." Air Deccan plans to increase ancillary revenues to 25 per cent of the company's topline within the next four years. "That will allow us to fiddle with fares," adds Sridharan.

However, while GoAir, Indigo and SpiceJet work on the tried and tested single-aircraft type, low-cost model, Air Deccan utilises its ATR aircraft on smaller sectors, prompting one rival to quip that the airline was "trying to be a jack of all trades", Sridharan, however, has confidence in the model. "We believe the ATRs give us access to smaller airports and the latent market in tier-II towns

The low-cost bunch has now also to contend with higher interest rates, which will result in a shrinkage in disposable incomes among the middle class. "There might be a short-term impact, but people will still travel in the long term", Wadia says. Sridharan is more forthright, "The alternative is to spend hours and even days on a train or bus."

Robey Lal, Country Manager, India, International Air Transport Association (IATA), believes that India remains a bright spot for the global aviation industry. "Policy decisions to liberalise markets have stimulated an enormous market. Consequently, India ranks amongst the top six fastest growing markets in the world." However, Lal adds: "In domestic markets, we see more scope for movement." Gautam Roy, aviation analyst, Edelweiss Capital, believes that pricing power will only come back if capacity is reduced. "I believe there needs to be a degree of common-sense consolidation in the industry. Even though planes are travelling full, the seats are being sold at unprofitable prices right now."

A few airlines share that view. "In the current environment there is space in India for (just) a couple of budget carriers," Ashby points out. "I think there is a market for two full-service and two budget carriers, plus the government airlines and maybe a couple of niche carriers, so I fully expect some consolidation," Singh adds. Any guesses on who will still be in business this time next year?