Safe Landing

Deccan Aviation has been thrown a lifeline and from the looks of it, the Bangalore-headquartered airline will grab it. There's talk that the Reliance Anil Dhirubhai Ambani Group (R-ADAG) is eyeing a minority stake in the carrier. It's also possible that private equity players like Texas Pacific Group (TPG) may want a slice of the low-cost carrier's (LCC) equity. Either way, it's good news for Deccan; today funds are the fuel it needs to propel itself forward.

More important, the confidence reposed in the company by investors should steer it towards a turnaround. The numbers for the December 2006 quarter were encouraging: on a turnover of Rs 475 crore, a 32 per cent rise quarter-on-quarter, the carrier posted an operating loss of Rs 128 crore, lower than the Rs 200 crore it piled up in the September 2006 quarter. In fact, the operating profit before lease rentals actually turned positive by a small margin.

The airline has managed to sustain its operations with the Rs380 crore that it mopped up through its public offering in August last year and also a $100 million line of credit which it raised through the sale and leaseback agreements for its aircraft. The money has funded the company's losses: the carrier's total losses are estimated to be in the region of Rs 500- 550 crore. The management says it's looking for around $50-100 million to keep going.

Industry watchers say investors may bite because there's a good chance the airline could break even at an operating level by the end of the current year. The topline growth has been strong driven by better passenger loads"�the load factor in the March quarter has been a strong 83 per cent and the airline has flown 1.8 million passengers.

Also, what's impressive is that the airline is carrying more businessmen, especially on routes that connect non-metros to metros. The management claims it is seeing an increase in business traffic on routes such as Kolkata- Bhubaneshwar- Kolkata, where there are connections in the mornings and evenings. On metro routes too, the company says more businessmen are flying with it.

That's probably because Deccan's reputation, which at one time had taken a beating, is now improving; there are fewer cancellations and the on time performance (within one hour) in March was 98.65 per cent. As the airline's fleet grows"�it currently operates a fleet of 43 aircraft comprising 19 Airbuses A-320s and 24 ATR Turboprop aircraft"�it plans to add new destinations especially the smaller cities. Non-ticket sales, which account for six per cent of revenues today, are fast growing.

However, with the competition in the industry as keen as ever, the carrier has ceded market share in March dropping down to the number three slot"�its share is down to 17.5 per cent from 21.7 per cent in February.

That may seem like a steep fall but some of it was due to a new ticket reservation system that the airline installed. Also, Indian, which has moved up to the number two slot with a share of 21.9 per cent, has reportedly been discounting its fares heavily.

And that is unlikely to change in a hurry. Losses for the industry are estimated at Rs 2,200 crore for FY07 and while signs of rational behaviour are visible at times, some players are likely to continue to discount heavily.

Says Hemant Patel, who tracks the aviation sector at Enam Securities, "The infusion of funds into Deccan will help the airline but not necessarily the industry. If airlines get money it means the cash burn will continue because no capacity is going out of the system and in their bid to fill seats, yields will remain poor."

While domestic passenger traffic is estimated to have grown at around 46 per cent in 2006, a similar addition in capacity has taken place pushing yields down. The industry's hoping that capacity will be reined in, while the momentum in the demand continues. That then will be a win-win situation for everyone.