SKP Research report on Air Deccan:
Company overview:
“Deccan Aviation Limited, a Bangalore based company operates Air Deccan, a low - cost commercial passenger airline and Deccan Aviation, a private helicopter and airplane chartering service in India. Air Deccan which began operations in Aug, 2003 was the first Indian airline to follow a no - frills, low - cost passenger airline business model. The business strategy focuses on offering low fares to attract cost conscious middle class and corporates, selecting new routes and reducing costs. Such a strategy seems to have worked well so far, as the airline has managed to corner a market share of 16% in three years of its operations. Deccan Aviation, India’s largest private heli - charter company provides heli - services for company charters, tourism, medical evacuation, off-shore logistics etc.”
Opportunities:
Strong economic growth:
“India is witnessing strong economic growth which will fuel the demand for air travel. The sector grew at 15.7 % CAGR from FY02 to FY05 on the back of robust growth in economy. Rising income levels and low air fares would attract people who travel by railways or other modes of road transport.”
Emergence of low cost airlines:
“Low cost carriers like Air Deccan, Spice Jet, and Go Air has changed the Indian aviation landscape by offering low air fares and making air travel more affordable. More such service providers are expected to launch their operations in the future which would further increase air traffic in India.”
Under-penetrated market:
“Despite the strong growth in air passenger traffic, the sector continues to be under - penetrated with an average Indian making 0.02 trips per annum against 2.02 trips in the US in FY05. Such a scenario leaves enough headroom for growth in air travel as it becomes more affordable for a larger population.”
Growth in tourism:
“The tourism market has been growing at a significant pace for the last few years helped by government initiatives to promote the sector. Travel and tourism expenditure is expected to grow at a real rate of 8.8% from FY04 to FY14.”
Concerns:
Competition:
“Airline companies are vying to capture a larger market share by offering rock bottom fares. This unhealthy competition would have a negative effect on the margins. Some low cost carriers have come to the market in the last few months and more are expected to launch their operations in the future which will further intensify the competition.”
Loss Making:
“Deccan Aviation incurred a loss of Rs 35.2 crs and Rs 68 crs in FY05 and six months ended Sep 30, 2005 respectively. The management believes that the prospects of the company turning profitable would depend largely on successful implementation of the capex plans for Air Deccan and demand for low - cost flights.”
Fluctuations in the prices of Aviation Turbine Fuel (ATF):
“Fuel costs accounted for 32% of the total costs in first half of FY06. ATF prices have fluctuated in the past due to the higher volatility in crude oil prices.”
Reccomendation: Subscribe to the issue with a long term perspective.
“Deccan Aviation Ltd has been incurring losses since FY04 and has a negative EPS of 13.86 (annualised) based on H1 FY06 earnings. The prospects of the company turning profitable depends largely on successful implementation of the growth plans of Air Deccan and the demand for low - cost travel. Strong economic growth and under- penetrated market will drive the growth of the sector going forward. Air Deccan with its first mover advantage in the low - cost segment would be the major beneficiary of this growth.”
