The Hindu Business Line : "Facilitate aircraft funding within the country competitively"

Classifying the airline industry as `infrastructure' and making it qualify for priority lending by nationalised banks will contribute to the bottom-line. — MR MOHAN KUMAR, CHIEF FINANCE OFFICER, AIR DECCAN

A chartered accountant by profession, Mr M. G. Mohan Kumar, Chief Finance Officer, Air Deccan, gave up the conventional career option to take on the challenge of getting a fledgling low-cost airline to take off. Today he is credited with being instrumental in making Air Deccan a success.

Mr Kumar met Captain Gopinath, founder and Managing Director of Air Deccan, in 1996. Post 2000, when Captain Gopinath envisioned starting an airline company, Mr Kumar studied the global aviation industry, especially the low-cost airlines and worked out a revenue model suited for the industry in India. Mr Kumar responded to a few questions from Business Line.

Excerpts from the interview:

First, a quick division of the Air Deccan's pie, both on the revenue and the expenses side: Where the rupee comes from, and where it goes...

Cost break-up for July to September 2006 shows that fuel costs account for more than 40 per cent of the total. Aircraft lease and finance, is the next major expenditure, at 15 per cent. Airport charges, employee expenses and maintenance are the other important heads of expense. On the revenue side, ticket sales and charter services make up for nearly two-thirds.

What have been the cost-pruning measures that yielded dividends in Air Deccan?

We have undertaken several cost cutting measures. They can be divided into short-term projects and long-term projects.

Short-term projects:

We have arranged the route network in such a way that the crew is brought back to the base on a daily basis. This has brought down the hotel and other accommodation expenses significantly.

The aircraft turn around has been modified to cut down the turn-around time and to increase the flying hours or the gap between flights in order to achieve better on time performance.

Some of the operating procedures on the aircraft operations have been modified to reduce the wear and tear on brake pads and tyres.

The seat design has been modified to reduce inventory costs and usage of spare seats and also lower repair costs of the seats.

Long-term projects:

Reduction of fuel consumption by optimising the utilisation of GPUs (Ground Power Units) in place of APUs (Aircraft Power Units).

To build our own hangar. This will reduce maintenance expenses.

We would like to set up simulators for both ATR and Air Bus. This will reduce the travelling and per diem cost for pilots' recurrent training and also minimise the expenditure on pilots' conversion courses. In this respect, the ATR fixed base simulator has already been installed and we are able to see the cost savings on pilot training.

Controlling manpower recruitment and increasing the productivity of the human resource pool already available to the company.

Did you find any specific areas where cost cutting proved tough, or expensive?

There are certain areas in which cost cutting is very difficult. One is the skilled manpower area because of the competitive situation prevalent in the country and also because Air Deccan doesn't compromise on safety.

We recruit the best pilots from all over the world. The other area is fuel. The continuously rising fuel prices are beyond the airline's control price and even fuel hedging is not permitted as of now in the country.

How much tax does Air Deccan suffer every month?

At present we have the following tax incidence on our operations:

Service tax on various services such as airport charges, passenger services fees, insurance premium, outsourcing of ground handling services and various technical services availed of by the company.

Absorption of withholding tax on many of the services utilised from overseas.

Fringe benefit taxes (FBT) under Income-tax for issue of concessional tickets, staff travel, hotel and accommodation expenses.

Service tax on the Passenger Service Fee (PSF): Rs 75,00,000

WT and TDS on salaries etc: Rs 3,00,00,000

FBT: Rs 40,00,000

Other taxes: Rs 35,00,000

Rs 200 per passenger to Airports Authority of India (AAI): Rs 10,00,00,000

The total adds up to approximately Rs 14.50 crore per month in terms of taxes.

Potential new areas where you are looking for revenues and savings.

A part of our revenue comes from in-flight sales of food and beverages and other items. We are looking at innovative ways to earn revenue, like our onboard courier service.

Five top metrics that you keep track of, continually.

Periodically we look at CASK (Cost per Available Seat Kilometre), RASK (Revenue per Available Seat Kilometre), daily collections, passenger load factor and yield per passenger.

What are the constraints in laws which when removed can contribute to the bottom line of airlines?

The following changes in the current laws and regulations will help improve the bottom line by reducing costs:

Changes in Aircraft Rules and Guidelines of Directorate General of Civil Aviation (DGCA) in line with International Civil Aviation Organisation (ICAO) norms to save some of the cost on engineers.

Changes in tax laws to facilitate the employment of skilled expert personnel on tax free compensation basis.

Classifying the airline industry as an infrastructure industry and accordingly qualify for priority lending by the nationalised banks.

Implement tax laws in line with Irish tax laws to facilitate aircraft funding within the country competitively.

Best practice takeaways from Air Deccan for other players in the industry.

It is these best practices that sets us apart from the rest and, unfortunately, we cannot reveal our winning formula!

Airlines and accounting standards (Indian and international). Are there areas where the standards are not sensitive to the nuances of the industry?

In the airline industry there are many expenditures that are one-time expenses of a substantial amount and cannot be treated as capital expenditure in view of the newly introduced Accounting Standards (from April 1, 2003). For example, the expenditure of flying to a new place, which would include the purchase of new aircrafts. Such expenditure distorts several financial ratios, which brings down the leverage to borrow money from the banking system. Introduction of new flights for opening up new sectors involves substantial marketing and development expenditure and also the funds required form the initial cash burn. As per the present accounting standards, these are treated as normal revenue expenditure, which distort the working results of the company and accordingly the company's ability to raise funds is curtailed.