How are you so confident that you'll make money in the next quarter?
We have a load factor of 90 per cent, our yield per ticket is going up from the $45 that we started with. We have five aircraft now and with seven we'll make money since our costs will fall. Imposing a fuel cess to take care of ATF hikes has improved our yields.
But isn't the increased competition hurting?
As long as our prices are about 40 per cent lower than that of the full-service airlines, we're OK.
We really have two low-cost carriers (LCC) "" Air Deccan and you (Kingfisher tariffs are much higher). How much competition is there between the two?
We are both growing the market, and about 25-40 per cent of the travellers are train travellers. We don't compete in many sectors with Air Deccan at all. It is partly by design and partly by accident and market dynamics. We will also try to compete against full-service airlines rather than another LCC operator.
But you have competition from Air Deccan on the Delhi-Kolkata circuit. Will you also enter other metro routes?
On the main trunk routes, there is enough demand for two LCCs. In some of the other routes, it probably makes sense not to compete as the market will not take two LCCs. So, we have flights between Delhi-Ahmedabad and Ahmedabad-Bangalore where Air Deccan doesn't operate. The only route where we are competing is in the Delhi- Kolkata route. There is so much demand in this sector that some more capacity addition will not matter.
How will you do this when new LCCs come in?
There are not too many new planes or capacity coming in. Go Air is looking at five planes in one year "" that is not very significant. They are probably the only ones who are there at the moment. This country needs 400-500 planes, so at 170 planes we are long way off.
So do you mean that there's more space for another three to four LCCs?
In the short run, and on the same routes, it will make a difference. But if you're looking at life beyond the metros, there's scope.
But surely you will not ignore markets like Delhi-Mumbai that constitute for 35 per cent of the aviation revenues?
We will go here, but the gap between full-service and LCC tariffs is just 25 per cent here since the full-service airlines want to protect this market. So, I'd rather be in markets that are not that competitive. When we flew from Delhi to Ahmedabad, everyone said we were wrong. We now have four flights to the city and they are doing extremely well. For instance, we have a direct flight from Pune to Bangalore because we thought they are both IT cities and there should be traffic. It is doing so well now that Kingsfisher has a flight from Pune to Bangalore, too.
Why aren't you in Delhi-Bangalore?
There are too many flights already and it is one of the main Air Deccan markets as well "" there is no point of a head-to-head clash.
What are your expansion plans?
To increase the number of seats from 4,500 to 7,000 a day by a week or so. With seven planes, we will hit 10,000 seats. It gives us a significant market as Air Sahara has 11,500 seats. We will have a 7 per cent market share soon.
How will you fund your expansion?
We invested $35 million to $40 million as start-up cost, including the planes. We are buying 20 planes from Boeing in a phased manner starting early 2006. By December 2006, we will have 14-15 planes. The list price of the planes is $1.2 billion but we are getting a significant discount. We have made a part of the pre-delivery payments which is included in our start-up costs. Then, part of the pre-delivery payment which is coming up now will be made through a bond offering from which we have raised $80 million. We have raised some preferential equity of $12.5 million for an equity stake of around 3 per cent. We'll also make attempts to raise more money when the planes get delivered and look at the cheapest source of finance.
Isn't leasing a better option?
We would then have a large lease burden and at the moment, the interest burden is less than the lease burden. Plus, you get to own the plane that has an asset value. Lease rentals of 737-800 are as high as $400,000. And in case the debt burden looks high, we have the option to sell and lease back the planes, which is the Kingfisher model. Currently our debt is zero.
How serious is the aviation infrastructure problem?
It is serious but there is still sufficient space for growth if you fly non-peak hours and to uncrowded destinations.
Is the aviation party over? You are already seeing airlines in trouble and looking for consolidation?
When you see 30 per cent year-on-year growth, the party is certainly not over. Yes some full service carriers will suffer as LCC grows, which is what is happening in India.
