How to start your own low cost airline - with ECA support

Low-cost lowdown

Rukhmini Punoose

Mumbai, December 10, 2005

http://www.hindustantimes.com/news/181_1570495,0035.htm (expired) 

How about starting your own airline? All you need is Rs 10 crore (€1,833,840, US$2,168,257) in paid-up capital to start a regional airline with an aircraft of less than 80 seats. A good example is Air Deccan, which started as a regional airline with a single turboprop ATR aircraft before spreading its wings across the country.

Today, an LCC with a pan-India presence would cost you $40-45 million (Rs 180-202 crore). If you can increase it to $65-70 million (Rs 270-315 crore), you could also build in some cushion that can help you to tide over a crisis like an oil price spiral. Jet Blue, Richard Branson’s LCC in Australia, had burnt $45 million before it could fly a single aircraft.

Airlines is a high cash-burn business. You spend Rs 2.5 lakh an hour to fly an Airbus A320. To fly it for 10 hours a day, you need Rs 8 crore. If you have six aircraft — airlines need to bring in six aircraft within year of starting operations — you will burn Rs 90 lakh a day or Rs 27 crore in a month. To recover this, the airline will have to fly at say, 70 per cent load factor (occupancy).

If it manages to just do 50 per cent load factor instead of the targeted 70 per cent — Sahara Airlines could just do 25 per cent initially when it was launched — it will have to incur losses. Typically, an airline has to incur a cash burn of Rs 2-3 crore in the first few months every time it introduces an aircraft in a new sector.

Besides, all expenses are payable upfront or almost immediately. For instance, the oil companies provide credit for only seven days; if you don’t pay them, they will stop supplies. The airport charges have to be paid every month.

Before you seek a licence, you need to get a no objection certificate (NoC) from the civil aviation ministry. The ministry studies the promoters background before issuing an NOC, based on which operators can lease an aircraft or place an order with aircraft manufacturers like Airbus or Boeing.

The start-up costs could be huge (see graphic). Lease rentals, which is 1 per cent of the cost of the aircraft, for a new Airbus A320, is $350,000/month. Airlines have to provide a month’s rental plus three months lease rentals as deposits to the lessors or a lease rental for a month plus letters of credit for three months. The lease and deposits for six A320s will cost you $8.4 million /Rs 37.80 crore. Insuring an A320 costs Rs 2 crore a year, which have to paid in four instalments. Insuring six planes will cost Rs 12 crore. Airlines also need to make initial provisioning for each aircraft, which consist of consumables like blinkers on the wings. A set of tyres, for instance, lasts one-and-half months. For each aircraft, airlines have to carry initial provisioning and consumables worth $1 million and LRUs of $3.5 million for every three aircraft. For six Airbus A320s, the bill could be $13 million or Rs 58.50 crore a year.

It costs Rs 35-40 lakh to train a pilot for A320; training an ATR pilot would cost half. The pilots have to be trained on simulators, given route checks where the aircraft is flown empty for 9 hours and on-the-job training, where they fly in as a co-pilot. The international norm is 11 pilots per aircraft. Training 66 pilots for six planes would cost you Rs 23 crore.

Air Deccan was lucky — it roped in 42-odd retired airforce pilots and trained them at a cost of Rs 4.5 crore. No such luck for later entrants who had to poach pilots and other core staff from other airlines. A pilot for an Airbus A320 costs Rs 3 lakh a month, for an ATR Rs 2.25 lakh a month; co-pilots cost half. Expatriates come at a premium and charge Rs 1 lakh more.

You need 11 pilots (pair of five-and-half) per aircraft. Assuming annual salaries of Rs 36-40 lakh per pilot, the salary bill for six aircraft will be Rs 18-20 crore a year. The salaries for engineers, who are certified by the Director General of Civil Aviation (DGCA) after tests, will be another Rs 5-10 crore a year, salaries for cabin crew and ground staff will cost Rs 3 crore a year; more for security.

Each aircraft needs ground handling equipment worth Rs 75 lakh like push back unit, ground power unit, step ladders, conveyors and chocks. Unlike an automobile, the aircraft doesn’t have a reverse gear and needs a push back tractor to move it back. This unit costs Rs 45-50 lakh. Ground handling equipment for 6 Airbus A320 or Boeing 737-800 will cost Rs 4.50 crore.

When you start flying, you will also have to fork out deposits of Rs 50 lakh per airport. So, if you plan to have operations across 20 airports, please be ready to shell out deposits of Rs 10 crore. Besides, you need to pay a deposit of Rs 1 lakh per airport for check-in counters, Rs 2-3 lakh per aircraft as parking fees. Every airport requires half a dozen computers; 100 -120 computers across airports and offices could cost you another Rs 1 crore.

Implementation of a reservation system could set you back by Rs 3 crore. SpiceJet, for instance, uses Navistar while Kingfisher uses Bird Group’s/Lufthansa’s reservation system. Both charge a recurring fee of 40 cents a ticket, which is Rs 18-20 on every ticket. You can develop the reservation system indigenously to save costs — Deccan’s system was developed by Interglobe Technologies, an arm of Interglobe that is launching IndiGo.

Finally, you have pre-operative expenses which could be Rs 10-12 crore. During the project implementation, you incur a lot of expenses on travel consumables. If you end up hiring a consultant for everything, that could jack up costs by an extra $100,000. Promotions could eat up Rs 5-8 crore while a 10,000 square feet office space with security deposit and furniture could cost you Rs 3 crore. Thus, setting up an LCC with a pan-India presence could cost you Rs 200 crore, for starters.

A promoter need not bring in all the money at one go, but he’s expected to bring in at least half the initial project costs, if not entirely. Banks do provide working capital, but they are yet to really warm up to the new wave in Indian aviation. But they chip in when you buy an aircraft. Export credit agencies and banks finance up to 95 per cent cost of an aircraft.