Air Deccan to mop up $100 mn

Deccan Aviation Ltd, which runs low-fare airline Air Deccan, on Friday said it has secured $100 million funding from European funds Investec Ltd and HSH Nordbank AG by pledging the right to buy 60 planes it has ordered with Airbus Industrie.

Deccan Aviation has given the right to purchase 60 Airbus A-320 planes, worth over $2 billion at the list price, to South West Aircraft Trading Limited "" a company set up in the Cayman Islands by Investec Ltd and HSH Nordbank AG.

Deccan Aviation will lease or purchase the aircraft from this leasing company. It will acquire the aircraft from the leasing company at the prevailing market price, allowing the leasing company to book a profit. Deccan Aviation had placed the order with Airbus at a price lower than the present market prices.

The $100 million payment Deccan Aviation received is part of the future profit the leasing company may book on leasing the aircraft to Deccan Aviation.

In case, Air Deccan fails to acquire the aircraft, the South West Aircraft will have the right to sell or lease them to other airlines and book profit on it.

In a typical aircraft lease or purchase model, a leasing company pays an airline certain commission at the time of the purchase of aircraft. However, in the case of Deccan Aviation, the airline is getting the entire payment in advance.

Deccan Aviation has already received $30 million in the first instalment and will receive the rest in 15 months in three tranches after the company meets certain financial conditions.

"This deal would go a long way in ensuring Air Deccan's financial stability and insulating us from the turbulence in the domestic aviation industry," said G R Gopinath, managing director, Deccan Aviation.

The pre-delivery payment (PDP) for aircraft has been funded by Indian public sector banks, including State Bank of India, Punjab National Bank and United Bank of India, for which security assignment has been provided.

The deal is a win-win situation for Indian lenders, as the leasing company will sell the aircraft in the international market for them and help them recover the investment. "This innovative transaction will add directly to our bottomline and we will not have to pay interest on this financing,'' Mohan Kumar, director, finance, Deccan Aviation, said.

Air Deccan gains from the deal, as the money coming from the European lenders, routed through the Cayman Islands-based company, need not be repaid and is treated as profit according to Indian tax laws, Kumar explained.

According to the financing plan, Deccan will give up the first right to take delivery of the 60 planes to the new company, which will also have some partners. However, Deccan will not have any stake in the company.

Deccan Aviation needs money to compensate the operational losses and make payments to buy as many as 90 planes. The airline posted a loss of Rs 340 crore for the 15 months ended June 30, 2006. It had reported revenues of Rs 1,352 crore for the same period.

Shares of Deccan Aviation gained 1.1 per cent to Rs 99.9 at close on the Bombay Stock Exchange. Aviation analysts said the deal is a good strategy on part of Deccan Aviation. But, according to them, the only flip side is that Deccan Aviation will not be able to cancel the aircraft purchase deal in the event of a possible slowdown of the Indian aviation market.

This will leave Deccan Aviation with no option but to keep the aircraft idle or sell them to another airline at a lower price and incur a loss.