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Air Deccan - Cutting Costs, Not Corners

Air Deccan - Cutting Costs, Not Corners. The Story of India’s First Low Cost Airline. Fin 456-Team 9: Ruchika Chinda, Ruibin Chen, Rishi Gupta, Anuj Sharma. Case Outline. Air Deccan’s first flight took-off from Bangalore to Mangalore on Aug. 25, 2003

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Air Deccan - Cutting Costs, Not Corners

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  1. Air Deccan - Cutting Costs, Not Corners The Story of India’s First Low Cost Airline Fin 456-Team 9: Ruchika Chinda, Ruibin Chen, Rishi Gupta, Anuj Sharma

  2. Case Outline • Air Deccan’s 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

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

  4. Agenda • Air Deccan’s business • The aviation industry in India • Major risk factors • Suggested solution for the IPO

  5. Air Deccan’s 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

  6. Air Deccan’s 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

  7. 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

  8. 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

  9. 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 India’s economic liberalization and deregulation policies

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

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

  12. 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.

  13. 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 Deccan’s brand among common man

  14. Suggested Solutions • Risk Analysis & Cost of Capital Calculation

  15. Suggested Solutions • Revenue Projection

  16. Suggested Solutions • Expense Projections

  17. Suggested Solutions • DCF Valuation

  18. Suggested Solutions • Comparable Valuation

  19. Thanks “If it’s on the map, we will get you there”---Air Deccan

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