Air Deccan - Cutting Costs, Not Corners

The Story of Indias First Low Cost Airline

Fin 456-Team 9: Ruchika Chinda, Ruibin Chen, Rishi Gupta, Anuj Sharma

Case Outline
Air Deccans first flight took-off from Bangalore to Mangalore on Aug.
25, 2003
Stunned the market by offering tickets at 10% of the regular rate, at an
average price at 50% less than full service airlines
Achieved a market share of 11%, two years after its debut, making it the
second largest privately owned airline in India
Plans to go IPO in 2006 with a goal to be the leading aircraft company
in India providing a wide gamut of airborne services throughout the
country

Questions to Ask
With the increase in competition in the Indian aviation industry, is this
low cost model sustainable?
Why IPO and why now?
Whats the road-map for expansion after IPO?
What is the optimal price of the offering?

Agenda
Air Deccans business
The aviation industry in India
Major risk factors
Suggested solution for the IPO

Air Deccans Business

Positioning as a low cost carrier
Offers no in-flight service
Single class aircraft configuration
Internet booking and cheap fares

Two aircraft strategy Airbus and ATR

Offering non-trunk short-haul routes and attracting high-end railway
traffic through comparable fares
Target market: Upper middle class in short term and lower middle class
aggressively in long term

Air Deccans Business

Target to expand fleet to 124 aircraft by 2013
The Indian aviation market expected to grow at 20% annually for the
next ten years. Air Deccan is targeting 18% market share by 2013
Passenger load factors anticipated at 70%
Revenues per customer to increase at 5% in the long run
Targets to decease fuel expense as a percentage of total revenues from
30% to 26%, operating expense from 23% to 16% in 8 years

The Aviation Industry in India

High growth potential due to economic boom and highly under penetration
market
0.02 trips per capita per annum
Long-term GPD growth at 8% annually
It is forecast that India would be the second fastest growing travel and tourism
economy in the world
ATF (Aviation Turbine Fuel) prices and airport charges in India are among the
highest in the world
Regulatory and infrastructure bottlenecks have prevented accelerated growth in
the industry
The government is proactively looking to address the bottlenecks

The Aviation Industry in India

Five-force analysis
Rivalry: Increased competitive pressures due to new entrants
Barriers to Entry: Easy entry but execution doubtful
Resource & Supply: Inadequate airport infrastructure, shortage of pilots,
high fuel costs
Customers: Business travelers sector intensified by GDP growth, leisure
customer market too a huge growth opportunity
Substitutes: Railways, high price elasticity of common mans

Major Risks
Increase in Competition
Excess capacity could lead to price wars

Oil Price
Extremely vulnerable to oil price fluctuations due to government
regulations on price hedging

Regulatory risk
A collapse of the current coalition government could trigger significant
changes in Indias economic liberalization and deregulation policies

Questions Recap
With the increase in competition in the Indian aviation Industry, is this
low cost model sustainable?
Why IPO and why now?
Whats the road-map for expansion after IPO?
What is the optimal price of the offering?

Q&A
How sustainable? Why IPO?
What to do after IPO? At what price to IPO?

Suggested Solutions
How sustainable?
High growth potential market
The second fastest growing travel and tourism economy in the world
Airport infrastructure improvement opening up new sectors
The firm achieved break-even in its first year of operations, through a
combination of high load factors and low-cost operating economics.

Suggested Solutions
Why IPO? Air Deccan wanted:
to expand its fleet and enhance engineering and operational capabilities
to establish a relationship with capital markets
to have additional finance flexibility and ensure its long-term growth
to enhance Deccans brand among common man

Suggested Solutions
Risk Analysis &
Cost of Capital
Calculation

Suggested Solutions
Revenue Projection

Suggested Solutions
Expense Projections

Suggested Solutions
DCF Valuation

Suggested Solutions
Comparable Valuation

Thanks
If its on the map, we will get you there---Air Deccan