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 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

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

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 India s 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 it s on the map, we will get you there ---Air Deccan