Airlines India, Indian Airlines

Domestic airline companies are sinking deeper into losses despite the substantial growth in passenger volumes. Over-capacity, stiff competition and high fuel costs have ensured that the unbridled enthusiasm of airline promoters, who have been trying to beat each other in new aircraft orders, is greatly misplaced.
Introduction of new aircrafts and new routes have helped Air Deccan to emerge as the second biggest domestic airline behind Jet Airways in recent months. But the growth has come at a heavy financial cost to the airline and its net worth has seen significant erosion.

Deccan Aviation Limited, which operates Air Deccan, has reported a net loss of Rs340.55 crore for 15-month ended 30 June 2006, which is way above analyst estimates. Operating revenues were at Rs236.39 crore for this period.

Air Deccan’s managing director Capt G R Gopinath toold CNBC-TV 18 that rising fuel costs have put Air Deccan through turbulent times.

“The aim was to deploy aircraft and gain market share so that when the turbulence is over, it will help us for future expansion and growth and profitability. We have deployed 20 aircrafts in the last 18 months,” said Gopinath.

The company had extended its accounting period by three months for the last financial year as it has changed its accounting year to June-May from the current financial year.

The losses would have been even higher if the company had not resorted to accounting policies, which the auditors have objected. The company has reported other income of Rs115.41 crore for the 15-month period, of which its auditors have qualified an amount of Rs49.03 crore. The auditors have also objected to deferring some expenses and not making provisions for balances or advances, which have not been confirmed by counter-parties.

Fuel expenses for the 15-month period was Rs625.45 crore, or 50.59 per cent of operating revenues. Aircraft lease expenses and other direct operating costs were Rs719.18 crore or 58.17 per cent of operating revenues.

Staff costs were Rs170.62 crore and selling and general expenses were Rs109.12 crore, resulting in an operating loss — without considering other income — of Rs387.98 crore.

The company paid an interest of Rs31.95 crore and depreciation charges were Rs32.28 crore for the 15-month period.

The decline in fuel prices may provide some respite to the company in the current quarter, but it remains to be seen whether crude oil prices would remain at these levels or decline further over the medium term. Aircraft lease costs and other direct costs would remain high and the airline needs to expand its revenues at an even faster rate to reach break-even levels.

Weak financials of the airline would affect its ability to finance future aircraft acquisitions. The management remains confident that sufficient finance can be raised from overseas sources to finance the large orders placed with Airbus and ATR over the last one year.

The company had come out with an IPO during the April — June 2006 quarter at a price of Rs148 per share. The stock declined substantially after its listing, but has seen a recovery in recent weeks as oil prices receded. The stock is currently trading at around Rs100 per share — a discount of more than 32 per cent over the issue price.

However Warwick Brady, COO, Air Deccan, said that the low cost carrier is positive about making up for losses through lower operating costs.

“I think one of the key advantages of being low cost is that our costs are almost 50 per cent lower than the full service carrier, which gives one a strategic advantage that one can enjoy where you can simply charge lower fares and make money,” Brady told CNBC-TV18.

During the day Deccan Aviation, which dropped nealy 6% recovered its loss in late trade and closed up nearly 5%. Deccan Aviation has given ace returns among aviation stocks from 23 Aug 06 to 22 Sept 06. It has given more returns than its peers and the BSE Sensex. The company has given 28% returns, while the BSE Sensex has given 7% return.

Most of the aviation stocks are nearly 100% away from its 52-week high. However, Deccan Aviation is 33% away from it 52-week high

Deccan aviation is also trading above its simple moving averages. Its 30 days moving average on BSE is Rs 90.42 and 50 days moving average is Rs 83.68.

Today it closed at Rs 110.90, up Rs 5.15, or 4.87% with volumes of 18,51,816 shares, compared to its five-day average of 5,65,141 shares, an increase of 227.67%. It has touched an intra day high of Rs 113.80 and an intra day low of Rs 96.65.

Company
% return from 23-08-06 to 22-09-06
52-wk high
% diff from 52-wk high to CMP

Deccan Aviation
27.97
148.05
33.50

Jagson Airlines
1.13
44.9
100.89

Jet Airways
16.41
1280
95.30

SpiceJet
22.54
89.9
95.43

Sensex
7.28
12671.11
4.08

Groups: Air Transport

Company
Last Price
Mkt Cap (Rs Cr.)

Jet Airways
655.40
5,658.07

Deccan Aviation
110.90
1,088.82

SpiceJet
46.00
847.96

Jagson Airlines
22.35
23.80

Deccan Aviation is India’s largest private sector charter aviation company with a network of bases spanning seven locations across the country. Promoted and operated by senior officers from the Indian Army Aviation, Deccan Aviation launched services from the corporate base at Bangalore in September 1997. The company boasts a fleet of 9 helicopters and 2 fixed-wing aircraft deployed across its bases at Bangalore, Mumbai, Delhi, Ranchi, Hyderabad, Surat, Katra (J&K), and Sri Lanka.

Today’s Declaration

Director of Finance of Deccan Aviation, MG Mohan Kumar says that the net loss of Rs 110 crore from April-June was due to the induction of five aircraft.

The company is targeting market share of 25-28% by FY08. The company need control the cash burn and likely breakeven by FY08. In the next 15 months, the company will take delivery of about 7 airbuses and about 8 ATRs.

The company is raising USD 100 million in this financial year, which will give a cash flow for about 15 months. They are building up a sizeable network for the country on a low cost basis so that the public can depend upon the large network as well as the low fares.

They also expect ATF price to decline by 7-8% at least from October.

Expert Views

Sharmila Joshi of Asit C Mehta, “The numbers of Deccan Aviation weren’t good and while people expect them to make a bit of a loss, this was a slightly larger loss than what market expected. But if the stock corrects a little more from here then it will look attractive again. Two things have to be kept in mind. One is the fact that if one looks at the kind of order, the kind of airlines that all these airline companies have ordered for, which are all likely to come in the next couple of months or in the next year or so. It is quite staggering-share numbers or airlines that have been ordered.”

She further added, “The industry seems to be poised where they are expecting better infrastructure and lots more air traffic to happen in the next couple of years. The industry says it could be the biggest boom that one has seen. So if one were to believe that then low cost airlines like Air Deccan would be able to take advantage of that. Because of this negative surprise that had come with these bad numbers, one has to look at a price maybe corretcing from here by another 10-15%.”

Technical Analyst, Rajat K Bose, “Deccan Aviation is on a corrective swing now. But the major support area is around Rs 91, the low today for it was Rs 90.35 at the NSE. This is the level unless it goes below this then the stock would not be all that bad it can once again bounce back. If it can manage to cross Rs 101 and trade above that then its corrective swing would be considered over since the low has already been posted at Rs 90.35.”

Gaurang Shah of Geojit Financial Services, “If one go to see not only domestically but the airline industry overall the world scenario has not being doing very well. We have been going quite comfortable as far as the crude oil prices because 38-42% of the ticket pricing goes into the aviation turbine fuel. But given the fact that this industry we are quite underweight on, there are better sectors to look at whether it is Deccan Aviation or Jet Airways or SpiceJet.”

He further added, “I don’t think the sector can perform going forward, given the fact that they have got huge plans also coming up. If they are going to sustain these kinds of losses year on year, I don’t know going forward what is going to be the outcome for the investors. So not very gung-ho about this particular sector.”

Deccan Aviation has posted a net loss of Rs 340 crore in the 15-month period to June, reports CNBC-TV18.

However Warwick Brady, the COO of the company said that the low cost carrier is positive about making up for losses through lower operating costs.

“I think one of the key advantages of being low cost is that our costs are almost 50% lower than the full service carrier, which gives one a strategic advantage that one can enjoy where you can simply charge lower fares and make money,” said Warwick Brady, COO, Air Deccan.

However, Air Deccan’s Managing Director GR Gopinath said that rising fuel costs have put Air Deccan through turbulent times.

“The aim was to deploy aircraft and gain market share so that when the turbulence is over, it will help us for future expansion and growth and profitability. We have deployed 20 aircrafts in the last 18 months,” said Gopinath.

Jet Airways (Q, N,C,F)* India has approved declaration of dividend for the financial year 2005-06 at the rate of 60% that is Rs 6 per equity share.

The board has approved reclassification of authorized capital of the company from Rs 200 million divided into 130 million equity shares of Rs 10 each and 70 million preference shares of Rs 10 each to Rs 2,000 million divided into 180 million equity shares of Rs 10 each and 20 million preference shares of Rs 10 each.

The board has decided to re-appoint Javed Akhtar, Saroj K Datta, Ali Ghandour and Victoriano P Dungca as directors of the company.

The board has appointed Yash Raj Chopra, Shah Rukh Khan and Dr. Pierre J Jeanniot as directors of the company, each liable to retire by rotation and re-appointed Saroj K Datta as executive director of the company.

The members have approved the alteration of memorandum of association of the company.

The board at the 14th annual general meeting (AGM) of the company held on September 20, 2006 approved the above mentioned matter.

Deccan Aviation has posted revenues of Rs.1352 and a net loss of Rs.340 crores for the year ended June 06. The financial year period is from April 05-June 06.The overall financial performance in the period was impacted by various factors including the increase in fuel and other input costs and introduction of 20 new aircrafts and the addition of 56 new routes besides rising personnel costs.

With a fleet of 34 aircrafts and 55 destinations as of 30th June 2006 the airline carried over 4.4 million passengers, over the 15 month period and emerged as the second largest airline with a market share of 21.2 % in June 2006.

Capt G R Gopinath, MD, Deccan Aviation, said “This strong market share is of strategic advantage, as it will be the springboard for our future expansion, growth & profitability, besides insulating us from the turbulence in the domestic aviation industry.” In addition to this a strong focus on improving the product which started early this year under the leadership of Warwick Brady -Chief Operating Officer who joined from Ryanair has started showing results.

The improved product consistent over the last few months has resulted in a nation wide perception change campaign titled ‘Have you flown Air Deccan recently? Its WOW!

Said Mr Mohan Kumar, Director Finance, ‘We have had a robust growth in our seat factor averaging 85% in the peak seasons. However the benefits of higher yields on the newer routes which account for over 58% of all routes as of now would flow in the next few quarters’

Typically new routes take a year to mature and start giving optimum yields. Air Deccan introduced 56 new routes during the period and carried 4.4 million passengers. Of the total 96 routes operated as of June 06, 56 were new routes which will take anywhere between 10-12 months to mature and yield the desired results.

Added Capt Gopinath ‘We are also working on innovative financial structures which will strengthen our finances and support our growth strategy’. Especially over the next 8-12 months which will see fierce competition with the entry of new players.

In fact a term sheet has already been signed for additional US $ 100 million. The board at the board meting today approved the same and documentation for the same is under process.

For the fifteen month period ending June 2006, the company posted a net loss of Rs. 340 crores on total revenues of Rs. 1352 crore.

Going Forward the company is focusing on 5 key issues to tide over the immense competition that the Aviation Industry in India is going to witness over the next 8-12 months.

1. Product :Keep working relentlessly to world class standard

a. Clean, safe aircraft

b. On Time performance to be better than Indian standards

c. Cancellations to be well within permissible norms

d. Short shipped bags to be the lowest in the country

e. Ensure that mature routes form 70-75% of the sectors in operations ( as against the current norm of approx. 42% mature flights (just 40 out of the current 96 sectors were mature sectors)

2. Infrastructure

a. Hangar: a world class hangar will be ready in the 1st Quarter of 2007( over 3 years after the airline took to the skies)

b. Flight training facility: work is on to ensure that the same is implemented by the 2nd quarter of next year.

3. Revenue Management: A senior team from Aer Lingus (who turned around despite the onslaught of Ryanair) has come on board and revenue management software is being implemented and will be operationalised by December 2006. In addition to this focus would be on ensuring that the composition of routes be worked on to ensure 70-75 % mature routes and the balance relatively new sectors.

4. Perception change: An ongoing campaign amongst customers, corporate and the channel partners will ensure that there be a significant change in perception and therefore get more ‘ high yield customers’ to fly us .In addition to this a corporate product will roll out next month.

5. Funding: A term sheet has been signed to raise US $ 100 million and the documentation is in process.