Deccan Aviation: Best of the lot? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Deccan Aviation: Best of the lot?

Apr 10, 2007

Despite the robust growth witnessed in the Indian aviation market, domestic airlines have been incurring huge losses. Besides overcapacity and the resultant price-war, there are other problems plaguing the industry like higher sales taxes on ATF (aviation turbine fuel), inadequate airport infrastructure and manpower shortage. With this in mind, we try to analyse the business model of Deccan Aviation Ltd. (DAL), the pioneer of low cost aviation in the country and see where the company is heading into the future. About the company

DAL commenced its operations as a chartered service provider (helicopters and fixed-wing aircrafts) in 1997. In 2003, it entered the scheduled airline business through the launch of Air Deccan - India's first low-cost-no-frill airlines. Starting with a single ATR aircraft, Air Deccan presently has a fleet of 43 aircrafts (18 Airbus A320 aircrafts and 25 ATR Turboprop aircrafts). In November 2006, Air Deccan garnered a market share of 20% (in terms of number of passengers carried), thereby becoming the second largest domestic scheduled airlines after Jet Airways (35% share). DAL has the largest network in India covering 64 destinations through 308 flights (as of March 2007). In the chartered business, it is the largest private sector operator with a fleet size of 11 (9 helicopters and 2 fixed-wing aircraft). This business provides services for company charters, tourism, medical evacuation and off-shore logistics. In FY06, the contribution from the scheduled airline business stood at 95%, with the chartered business contributing the rest.

Two-fleet strategy: Although DAL's business model is based on other successful low cost carriers (LCCs) worldwide; there is a considerable difference when it comes to fleet strategy. Unlike other LCCs, DAL operates two types of aircrafts, ATR Turboprops (connecting secondary airports) and Airbus A-320 jets (on trunk routes). Although a single fleet strategy reduces cost of operations, in case of DAL, the two-fleet strategy seems to have paid off. This strategy not only allows it to benefit from regulatory provisions (lower sales tax of 4% on ATF for Turboprops with less than 80 seats as opposed to an average 25% to 30% for bigger aircrafts, no landing fees and reduced navigation fees), but also expands the potential market for the company since most of the airports in smaller cities lack runways to handle bigger planes.

Ancillary revenues: Non-ticket revenues, which are called as ancillary revenues have become an important source of revenues for LCCs in Europe and throughout the world. Some of the examples of ancillary revenues are onboard sales (food and beverage), excess baggage, pre-assigned seats and in-flight magazine advertising. Currently, ancillary revenues accounts for 9% of the total revenues for DAL. The company plans to take it up to 25% to 30% in the next three years. Towards this, the company has already tied up with coffee chain Cafe Coffee Day and travel website Travelguru.

Pruning non-fuel cost: DAL has taken a number of initiatives to prune down its non-fuel operating costs. Some of these initiatives include increasing the proportion of tickets sold online (savings in terms of commission paid to travel agents) and setting up of a pilot training centre in Bangalore (reduced the training cost). The company recently tied up with an airhostess training institute (Frankfinn) as an exclusive cabin crew partner to tide over the problem of manpower shortage. As per the contract, only Frankfinn students will be recruited as cabin crew by the airlines with up to 400 placements guaranteed each year during the contract. This will help DAL in saving the recruitment costs and also help it earn revenue for the in-flight training that they will provide. DAL is also looking to tie-up with foreign firms to set up MRO (maintenance, repair and overhaul) facilities in India.

Particulars Deccan Aviation Jet Airways Spicejet
ASKMs (m) 3,632 10,683 1,827
RPKMs (m) 2,668 7,873 1,542
Load factor (%) 73.5% 73.7% 84.4%
Revenue per ASKM 1.91 4.69 2.19
Cost per ASKM (ex-lease rentals) 2.78 3.31 2.21
Price to Sales 0.6 0.8 1.1
Notes: 1. ASKMs - Available seat per kilometre, RPKMs - Revenue passenger kilometres
2. Data for Deccan Aviation, Jet Airways (domestic operations) and Spicejet is for the fiscal year ending June 2006, March 2006 and May 2006 respectively.
3. Price to sales have been calculated on trailing twelve month (TTM) sales except for Deccan Aviation, for which the 9MFY07 sales has been annualised.

What to expect?

We believe that the mayhem created in the Indian skies due to entry of new players (competition) and rising ATF seems to be settling down. We believe that DAL has one of the most robust business models, which makes it less vulnerable to most of the problems faced by the industry. In terms of infrastructure constraints, the company is least dependent on metro airports. DAL operates smaller airplanes on the non-metro routes, thereby benefiting from lower cost structures (savings in terms of lower sales tax of 4% on ATF and reduced landing and airport charges). Also we believe that akin to the telecom growth story, it will be non-metro routes that will drive the future growth, which augurs well for the company.


Equitymaster requests your view! Post a comment on "Deccan Aviation: Best of the lot?". Click here!

  

More Views on News

MSTC IPO: Should You Bet on This State-Run E-Commerce Player? (IPO)

Mar 13, 2019

Should you subscribe to the IPO of MSPC Limited?

Hindustan Aeronautics IPO: Yet Another Play on India's Defence Sector (IPO)

Mar 14, 2018

Should you apply for the IPO of state-run military aircraft maker Hindustan Aeronautics?

Bharat Dynamics IPO: Worth Betting on Defence Manufacturing? (IPO)

Mar 12, 2018

Should you apply for the IPO of Bharat Dynamics, India's first state-owned missile manufacturer?

More Views on News

Most Popular

Multibaggers of the Next Decade (The 5 Minute Wrapup)

Feb 26, 2020

The one key ingredient to be seen amongst top multibaggers of the next decade.

The Next Few Days Are Crucial for Smallcap Investors - And 3 Must-Buy Stocks (Profit Hunter)

Feb 19, 2020

While I have been writing about the rebound in smallcaps for quite some time now... I have shied from the question - When exactly is the smallcap rebound happening. Well, the answer is now.

The Top 8 Trading Mistakes You Should Avoid (Fast Profits Daily)

Feb 18, 2020

Avoid these mistakes and your trading will turn much more profitable.

Corona Virus Could Trigger a Rally in this Stock (Profit Hunter)

Feb 20, 2020

A company which benefits from crude oil and coronavirus - if you would like to know more about it read this.

This is What You Must Know as an Options Trader Today (Fast Profits Daily)

Feb 27, 2020

How you can stay on top of the challenges as an options trader.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms

KINGFISHER AIRLINES SHARE PRICE


Jun 22, 2015 (Close)

TRACK KINGFISHER AIRLINES

  • Track your investment in KINGFISHER AIRLINES with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MORE ON KINGFISHER AIRLINES

KINGFISHER AIRLINES 5-YR ANALYSIS

COMPARE KINGFISHER AIRLINES WITH

MARKET STATS