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					AGENDA



• Nothing succeeds like Southwest

• The Indian Aviation Business

• Air Deccan – The Southwest of India?

• Is Southwest model relevant in India?

• Recent Strategic and Financial moves of Air Deccan
                                                                         150998LNZXWNHPL-P1

Just in case you missed it: Don’t invest in
Airlines         Europe           Asia
                              U.K.                           Japan
Indexed                       600                            140
                              500                  U.K.      120
                              400                  market    100
                                                              80
                              300                  British                        Japanese
                                                   Airways    60
                              200                                                 market
                                                              40
                              100                             20                  JAL
                                0                              0

North America                  1988          1998              1988          1998
U.S.                          Germany                        Singapore
                   S&P        600             German         700
500
                   500                        market         600
                              500
400                Major
                              400                            500
300                Airlines                   Lufthansa
                                                             400                  Singapore
                              300
200                                                          300                  market
                              200                            200
100                           100                            100                  Singapore
                                0                                                 Air
 0                                                             0

 1988           1998           1988         1998              1988            1998

                              Netherlands                    Hong Kong
                              700                            700
                                               Nether-
                              600                            600
                                               lands
                              500              market        500                  Hong Kong
                              400                            400                  market
                              300                            300
                              200                            200
                              100             KLM            100                  Cathay
                                0                              0                  Pacific

                               1988         1998              1988            1998
                                                                                              2
Winning With Focused Strategic
Concept – The Southwest Airlines Case
SOUTHWEST SUCCESSFUL BY ALL MEASURES



 Financial
                  • Made money every year since 1980
 Success
                  • ROE between 4% and 15% p.a.



                  • Successful in all markets it chose to enter
                       •Dominates every single market
 Market Place          •Grew market volumes by 60%
 Success          • From start up to number 5 in US
                  • Operates in head on competition with majors
                       •82 of top 100 markets involve another airlines’ hub
                       •16 of top 100 markets are between hubs of American Airlines



 Quality          • Consistently highest ranked airline ratings
 Success               •Punctuality
                       •Lost Baggage
                       •Perceived service
SOUTHWEST SUCCESS FORMULAE



                     Consistent focus
                      On end user
                         Value
                       proposition




                                        Relentless Top
         Tight
                                        Management
        Operative
                                          Focus on
        Concept
                                         Performance
CONSISTENT FOCUS ON END USER VALUE PROPOSITION




                              …Quotes From Top Management

     Reliable low prices
        on all flights       • “All we do is directed at
                               creating end- user value”

                             • “our pricing is cost based;
                               superior value should flow to
                               the customer”

      Meaningful and         • “We must be a better choice;
       good service            if the customer is indifferent,
                               we will loose him”
Reliable low prices
   on all flights
                                                     Meaningful and
                                                      good service




Traditional full-service carrier   Southwest approach
approach to service                to service

 Choice of Product Features        Easy to use

 Focus on Details                  Uncomplicated product

 Significant service               Quick
 differentiation
                                   Informal and friendly
 Formalities matter
                                   Attitude counts
TIGHT OPERATIVE CONCEPT



                          Low Cost
                          Operations;
                          Simplicity



                                        Focus on
                          High
                                           Short
                          Frequency
                                            Haul
                          Service
                                          Routes




                          High Asset
                          Utilization
RELENTLESS TOP MANAGEMENT FOCUS ON PERFORMANCE
IMPROVEMENTS – A SYSTEM’S APPROACH


                      Systematic
                       codification
                      of processes




       “Driven”        Focused
    improvement       motivation of
   oriented culture     all staff




                         Top
                      management
                       example
                        setting
FROM SUCCESS FORMULAE TO SUCCESS




            Consistent focus                    Average Operating Margins
              On end user                       US Airlines – Domestic
                Value                           Percent, 2000 – 2006
              proposition




                                                 11




                               Relentless Top               -1
 Tight                                                                -2
                                Management                                      -3
Operative                                                                               -3
                                 Focus on                                                      -5
Concept
                                Performance


                                                SW         AA         US Air   Delta   NW    United




   …DOMINATING AIR TRAVEL THROUGH RELAIBLE LOW PRICES AND
   MANINGFUL GOOD SERVICE
FURTHER ISSUES TO BE DISCUSSED




      Dynamics of Indian Aviation sector ?

      Can Air Deccan be India’s Southwest ? Is Southwest model applicable
      in India

      A look at Air Deccan and its recent strategic moves
Air Deccan - Cutting Costs, Not Corners
    The Story of India’s First Low Cost Airline
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
 Indian aviation market has been booming – domestic at 46%, and international
 at 17%, over the past 2 – 3 years

  •   6 new airlines, almost all operating on the LCC model
  •   Strong capacity growth in the domestic market, mainly in the LCC segment
  •   Strong economic growth
  •   Liberalization of access to foreign airlines under bilaterals
  •   Policy to encourage multiple Indian carriers to operate international services

 Phenomenal growth of the kind being witnessed in India, while throwing up
 exciting opportunities, also poses its own challenges for constituents
 The Aviation Industry in India – Porter’s 5 Forces
 Analysis


• Rivalry: Increased competitive pressures due to new entrants                  HIGH

• Barriers to Entry: Easy entry but execution doubtful                         Moderate

• Resource & Supply: High Supplier Power in both Aircraft and MRO
  industries. Further Inadequate airport infrastructure, shortage of pilots,    HIGH
  high fuel costs also pressurize airlines

• Customers: Buyer power has significantly increased in the wake of current     HIGH
  price wars. Demand for most economy buyers is very elastic and hence
  limits pricing power of airlines

• Substitutes: Railways, Automobiles - high price elasticity                   Moderate
Challenges Facing Indian Airlines


•   Declining yields
•   Building on cost efficiencies
•   High input costs
•   Gaps in infrastructure
Challenges


Declining yields
• LCCs and other new entrants together now command a market
  share of around 46%
• Legacy carriers forced to match low LCC fares, during a time
  of escalating costs
• Increasing growth prospects have attracted & likely to attract
  more players
• More players – more competition – lower fares – a continuous
  cycle
• The bottom-line – lower yields for all operators
Challenges

Building on cost efficiencies
• Low yield regime to continue
• Airlines have to build on their cost efficiencies & drive down
  costs below the yield that their product will fetch, to return to
  profits
• For an industry that is estimating losses of US$ 500-550 million
  by end of current fiscal, this is a daunting challenge
• Yet, airlines have no control on external input costs
Challenges

High input costs
• ATF prices in India continue to be far higher than global rates, making ATF
  account for 35-40% of operating cost, as against global average of 20-25%
• High basic rates aggravated by high taxes imposed by State Govt.’s
• ATF cost / kilolitre :
    •   US$   755 in Delhi
    •   US$   780 in Mumbai
    •   US$   455 in Singapore
    •   US$   497 in Dubai
Challenges


High input costs
• Witholding tax on interest repayments on foreign
  currency loans for aircraft acquisition
• Witholding tax proposed on aircraft lease rentals for
  leases concluded after 1st April’07.
• Increasing manpower costs due to shortage of
  technical personnel
Challenges


  Gaps in Infrastructure
  • Airport and ATC infrastructure inadequate to support growth
  • Airlines paying for these strategic gaps in many ways
     • Higher fuel consumption - long holding times, on ground and in the
       air
     • Lower utilisation of aircraft - slot constraints and air traffic congestion
     • Sub-optimal route network strategies, due to lack of night parking
       stands at major airports and navigational aids at many of the smaller
       airports
     • Increased passenger facilitation costs
  • While a start has been made to upgrade infrastructure, the
    results will be visible only after 2 – 3 years
COMPETITIVE LANSCAPE
AIR DECCAN – A NEW CHAPTER IN INDIAN
AVIATION


• 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


• IPO in 2006 with a goal to be the leading aircraft company in India
  providing a wide gamut of airborne services throughout the country
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
Air Deccan – SWOT Analysis


• 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
    Air Deccan – SWOT Analysis

•    Strengths                                                                     •   Weaknesse
                                                                                       s


+         •      India’s first airline to follow a no-frills, low-cost scheduled   -        •    Attrition rates are high
                 passenger airline business model. Advantages accrue from                   •    Low Yields
                 that primarily.                                                            •    Call centres are logged and do not offer the desired
          •      The number of routes offered are more extensive than any                        service levels
                 competitor in the low cost category.                                       •    No customer loyalty or CRM programme exists.
          •      Charter services as Heli-tourism, Adventure sports flying, VIP
                                                                                            •    Supply chain and production variance will need to be
                 and corporate executive travel, Medical evacuation, Aerial
                                                                                                 efficiently managed if routes are being increased.
                 surveys, Services for oil-extraction companies, Religious
                 pilgrimage, and Customized services are offered. The breadth               •    Delays could damage the reputation as well as reduce
                 of services on offer is huge.                                                   daily aircraft utilization

•    Opportunities                                                                 •   Threats


+         •      Selecting advantageous routes and flight frequencies and          -        •    Increasing competition
                 developing routes before competitors win strong positions on               •    Changes in Regulation
                 routes.                                                                    •    Price Wars
          •      Backup aircrafts needed to service holiday travelers who want              •    Inadequate aviation infrastructure
                 low airfares to holiday destinations. A market segment could
                                                                                            •    ATF prices
                 be accessed if routes are covered.
          •      Very high growth rates in the domestic aviation sector
Can Air Deccan Do A Southwest

THINGS THAT IT DID RIGHT

   • Superb operational performance – Highest OTP rate in India
   • Completely knocked off all frills
   • Pioneered the online ticketing concept and avoided middlemen
   • Limited number of aircrafts to two
   • Striked a balance between low cost per seat mile and parking charges
   • Modified the traditional Hub and Spoke model and is moving towards SW like point
     to point model

THINGS THAT IT DIDN’T GET RIGHT

   • The all essential pricing is not reliable – bookings close to departure dates cost
     almost as much as full service airlines and much more then other low cost players
   • Bad reputation due to allegations of over booking and the earlier practice of free
     seating
   • Not been able to fully adopt the Point-To-Point model
   • Not able to attract or retain top talent – something that was at the heart if SW
     success
Why Cant Southwest Model Succeed In India

MOST OF THE COST STRUCTURE OF A LCC IS SAME AS THAT OF A FULL
SERVICE PLAYER DUE TO UNCONTROLLABLE EXTERNAL FACTORS

  • Lack of the concept of second city airports which have substantially lower aircraft parking
    charges

  • Mass market cannot be accessed without the agents and other middlemen as a sizeable
    population still not internet savvy

  • Larger planes like B737 and A320 not viable on short haul routes thus single aircraft
    operations not possible

  • Crippled airport infrastructure does not allow for quick turnaround and thus delays are all
    too often

  • High ATF prices are the single largest cost contributor

  • Compulsory flights on non profitable routes connecting backward regions
…There is a limit to cost savings done just by avoiding food, water and
multiple seat configurations
STRATEGIC MOVES TO SURVIVE THE CASH
CRUNCH


• After making a profit in 2004 it went on a loss spree
  and had thus taken the following strategic steps to tide
  over the cash crunch
   • IPO in 2006 at a price much lower then the intrinsic value
     of the company
   • Sale of stake to Kingfisher Airlines in 2007 again at a very
     low valuation


 Both the steps highlight the fact that Air Deccan has not been able to deliver on
 its initial promises
THE IPO AND ITS VALUATION – (1/4)


• Revenue Projection
THE IPO AND ITS VALUATION – (2/4)


• Expense Projections
  Air Deccan Expense Projections (1)
                                                             Actual                                                            Projected
                                                                                                Year ended March 31,
                                            2003             2004          2005          2006       2007       2008                2009          2010        2011     2012     2013
  Aircraft fuel expenses                      5.34%           13.72%        29.03%        30.00%     31.00%     30.00%              29.00%        28.00%   28.00%   27.00%   26.00%
  Aircraft/engine repairs                     1.32%           13.13%        15.39%        14.00%     14.00%     14.00%              14.00%        14.00%   14.00%   14.00%   14.00%
  and maintenance
  Aircraft/engine lease                      24.36%           15.80%        14.09%        14.00%        12.00%        10.00%         9.00%         8.00%   8.00%    8.00%    8.00%
  rentals
  Other direct operating                     24.74%           24.89%        23.00%        22.00%        20.00%        19.00%        17.00%        16.00%   16.00%   16.00%   16.00%
  expenses
  Employee remuneration                      11.24%           10.61%         9.92%        10.00%        10.00%         9.00%         9.00%         8.00%   8.00%    8.00%    8.00%
  and benefits
  Administrative and                         14.71%           11.22%         6.34%         7.00%         8.00%         9.00%         9.00%         9.00%   9.00%    9.00%    9.00%
  general expenses
  Employee stock                        -                -             -             -             -             -             -             -
  compensation cost
  Advertisement and                              2.30%         0.47%         1.97%         2.00%         3.00%         4.00%         4.00%         4.00%   4.00%    4.00%    4.00%
  business promotion
  expenses
  Finance and banking                            6.46%         5.74%         3.19%         6.00%         8.00%         9.00%         9.00%         9.00%   9.00%    9.00%    9.00%
  charges
  Amortisation                               3.35%             1.47%         1.79%         2.00%         1.00%         1.00%         0.00%         0.00%   0.00%   0.00%   0.00%
  Depreciation                               1.39%             1.66%         0.96%         3.00%         7.00%        10.00%         8.00%         7.00%   7.00%   7.00%   7.00%
  Total Expenditure                         95.21%            98.71%       105.68%       110.00%       114.00%       115.00%       108.00%       103.00% 103.00% 102.00% 101.00%

  Note:
  (1) All numbers are a percentage of revenue.
THE IPO AND ITS VALUATION – (3/4)


• DCF Valuation
  Air Deccan Discounted Cash Flow- (Rs in million)
                                                                            Actual                                                                         Projected
                                                                                                                                Year Ended March 31,
                                                                2001             2004              2005          2006          2007         2008           2009          2010          2011          2012          2013
  INCOME
  Total Income                                                   147                 314          2,669          6,557        11,356        16,921        22,276        28,728        34,388        40,801        47,982
  EXPENDITURE
  Preliminary expenses written off                       -              -                  -               -             -             -             -             -             -             -             -
  Total Expenditure                                              139                 665          3,384          6,669        11,806        17,314        21,595        26,234        31,453        36,528        42,566

  Profit/(Loss) before taxation and prior period items             8             (351)             (715)         (112)         (450)         (392)           681         2,494         2,935         4,273         5,416
  EBITDA                                                          15             (291)             (525)           610         1,367         2,992         4,468         7,091         8,437        10,801        13,093
  EBITDA Margin                                               9.85%          (92.62%)          (19.65%)         9.30%        12.04%        17.68%        20.06%        24.68%        24.53%        26.47%        27.29%

  EBITDAR                                                         62             (185)              (73)         1,528         2,730         4,684         6,473         9,389        11,188        14,066        16,932
  EBITDAR Margin                                             42.42%          (58.74%)           (2.75%)        23.30%        24.04%        27.68%        29.06%        32.68%        32.53%        34.47%        35.29%

  EBIT                                                            11             (312)             (612)           282           459         1,130         2,686         5,080         6,030         7,945         9,735
  Tax                                                                                                           33.6%         33.6%         33.6%         33.6%         33.6%         33.6%         33.6%         33.6%
  EBIT (1-t)                                                                                                       187           304           751         1,784         3,373         4,004         5,276         6,464
  Depreciation                                                                                                     197           795         1,692         1,782         2,011         2,407         2,856         3,359
  Amortization                                                                                                     131           114           169             0             0             0             0             0
  Capital Expenditures as a % of Sales                                                                          20.0%         30.0%         40.0%         37.0%         27.0%         17.0%          7.0%          7.0%
  Capital Expenditures                                                                                         (1,311)       (3,407)       (6,769)       (8,242)       (7,757)       (5,846)       (2,856)       (3,359)
  Changes in Working Capital                                                                                         0             0             0             0             0             0             0             0
  FCF                                                                                                            (797)       (2,194)       (4,157)       (4,677)       (2,373)          565          5,276         6,464
  WACC                                                                                                          15.0%         14.4%         13.9%         13.3%         12.8%         12.4%         11.9%         11.1%
  PV of FCF's                                                                                                    (693)       (1,676)       (2,811)       (2,838)       (1,298)          281          2,400         2,780
  Sum of FCF's                                                (3,856)
  Terminal Value                                             148,840
  PV of Terminal Value                                        64,007
  Enterprise Value                                            60,151
  Less Net Debt                                                 4,179
  Equity Value                                                55,972
  No of shares outstanding                                     98.18
  Implied price per share                                     570.08
THE IPO AND ITS VALUATION – (4/4)


• Comparable Valuation
  Comparable Company Analysis
  Comaparable EV/EBITDAR multiple               7.40       12.4
  Air Deccan 2008E EBITDAR                     4,684      4,684
  EV                                          34,662     58,282
  Less Net Debt                                4,179      4,179
  Equity Value                                30,483     54,103
  No of shares outstanding                        98         98
  Implied price per share                     310.47     551.05




  … The final issue price was fixed at Rs.145. The price was way lower then the
  intrinsic value of the shares calculated using the assumptions mentioned in its
  prospectus. However, the company had very little options available to tide over
  the losses and pay for new aircrafts so it had to accept the low valuations
STAKE SALE AND ALLIANCE WITH KINGFISHER

… 26% stake in Air Deccan was acquired by Kingfisher in mid 2007 @ Rs.155/-
per share thus valuing Air Deccan at just 3X its EBITDA while LCCs in developed
world trade at a median 7 times EBITDA and leaders like Southwest and Ryanair
trade at 12 – 14 times there EBITDA

However, the deal does make sense and bring tangible synergies and cuts the time
Kingfisher required to wait for going international by 2 years – also the synergies are
much more then that in case of Jet-Sahara deal


                      “same Airbus fleet, same engines,
          same brakes, same ATRs, same avionics, same rotables,
                same maintenance with Lufthansa Technik.
                   It couldn’t be better. It fits like a glove”


In contrast Jet and Sahara have different series of Aircrafts and Sahara’s aircrafts
are very old vis-à-vis brand new carriers of Deccan
                                     Thanks
“If it’s on the map, we will get you there”---Air Deccan

				
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