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Air Deccan - Cutting Costs, Not Corners. The Story of India’s First Low Cost Airline. Fin 456-Team 9: Ruchika Chinda, Ruibin Chen, Rishi Gupta, Anuj Sharma. Case Outline. Air Deccan’s first flight took-off from Bangalore to Mangalore on Aug. 25, 2003

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air deccan cutting costs not corners

Air Deccan - Cutting Costs, Not Corners

The Story of India’s First Low Cost Airline

Fin 456-Team 9: Ruchika Chinda, Ruibin Chen, Rishi Gupta, Anuj Sharma

case outline
Case Outline
  • 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
  • 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
Questions to Ask
  • With the increase in competition in the Indian aviation industry, is this low cost model sustainable?
  • Why IPO and why now?
  • What’s the road-map for expansion after IPO?
  • What is the optimal price of the offering?
agenda
Agenda
  • Air Deccan’s business
  • The aviation industry in India
  • Major risk factors
  • Suggested solution for the IPO
air deccan s business
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 business1
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
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 india1
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
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
Questions Recap
  • With the increase in competition in the Indian aviation Industry, is this low cost model sustainable?
  • Why IPO and why now?
  • What’s the road-map for expansion after IPO?
  • What is the optimal price of the offering?
slide11

Q&A

How sustainable? Why IPO?

What to do after IPO? At what price to IPO?

suggested solutions
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 solutions1
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 Deccan’s brand among common man
suggested solutions2
Suggested Solutions
  • Risk Analysis & Cost of Capital Calculation
suggested solutions3
Suggested Solutions
  • Revenue Projection
suggested solutions4
Suggested Solutions
  • Expense Projections
suggested solutions5
Suggested Solutions
  • DCF Valuation
suggested solutions6
Suggested Solutions
  • Comparable Valuation
thanks

Thanks

“If it’s on the map, we will get you there”---Air Deccan