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September 03, 2006

Can Air Deccan overcome the competition?

Business Today has a profile of low-cost airline pioneer Deccan Aviation post its turbulent May IPO.

To put it simply, while Deccan is low fare, it's not quite low cost. Blame it on the nature of the industry and Deccan's own peculiar problems. Running an airline is an extremely capital-intensive proposition. It costs anywhere between $225,000-$325,000 (Rs 1.06-1.53 crore) per month to lease an Airbus A320, which is what Air Deccan flies on longer routes. Maintenance costs (including mandatory 'maintenance reserve') can be as much as $150,000 (Rs 70.5 lakh) per plane for labour charges alone, with spares being billed additionally. Employee costs (essentially pilot wages) can be as high as 11 per cent of operating revenues. Fuel costs take another third off the revenues. Do the math, and this is how Deccan's costs are expected to break up as a percentage of revenues in 2005-06: Fuel, 47 per cent; lease rentals, 15 per cent; employee and maintenance expenses about 10 per cent each; and commissions about 5 per cent.

...Gopinath knows only too well that market share alone does not mean much. To become a profitable low-fare airline, Deccan needs to wring cost out of its system. In fact, that was the primary idea behind the IPO. For instance, of the Rs 373 crore raised, Rs 133 crore will go towards repaying debt, saving Deccan Rs 8-9 crore in annual interest charges. Brady also says that the airline will invest about $25 million (Rs 117.50 crore) over the next couple of years in a 60,000-sq. ft hangar in Chennai, engineering facilities and a pilot training centre in Bangalore or Hyderabad. "The hangar facility is important for us to undertake routine maintenance in-house to cut costs," says Andy Daines, Vice President (Engineering).

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.