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Speculation in the air as Deccan Aviation scrambles for new cash

Speculation in the air as Deccan Aviation scrambles for new cash

New Delhi: In Bangalore, where the top brass of Air Deccan, India’s biggest low-cost airline, are facing lawyers and financiers from India and overseas, one of two scenarios is likely playing out.

Scenario A: Private-equity (PE) players, being hit up by the airline for a cash infusion of $100 million (Rs410 crore), are driving a hard bargain as they point to years of non-stop losses that have eroded the airline’s equity to almost zero. They—and everyone else—are acutely aware that a financial lifeline, a Rs200 crore line of credit from the State Bank of India (SBI), is not just completely drawn down, but set to expire within two weeks.

Scenario B: The same PE players are being told that one particularly harsh quarter, where the airline lost over Rs213 crore, doesn’t change the fact that the carrier, which has tightened its belt, is generating at least Rs6 crore a day in revenue. With a solid 22% share of all airline passengers in India, would a potential investor want to really pass up on the second-biggest airline in the fastest-growing aviation market in the world?

Next week, in all likelihood, Air Deccan, owned by the Bangalore-based Deccan Aviation Ltd, will announce the results of these hard-nosed negotiations. Until then, analysts who watch the airline industry but aren’t privy to the ongoing discussions say Scenario A is more likely to pan out, though at least two people familiar with the matter, including one close to the company, insist Air Deccan is firmly in the cockpit on this ride.

When the deal does close, there will be two key indictors of how it all played out: how much equity did the struggling airline give up in exchange for the cash infusion; and whether G.R. Gopinath, who launched the airline almost four years ago, is still at the helm.

According to a person familiar with the matter who did not want to be quoted, Gopinath’s position as CEO of the airline has been a point of contention with at least one of the two private equity players involved in the funding discussions. Depending on how much equity the airline has to liquidate, Gopinath’s personal stake in Air Deccan will drop below 10% and could go as low as 6%, while at the same time, he is set to lose his chief operating officer, Warwick Brady, who is expected to join an Indonesian carrier in the next two months.

“If a private-equity investor is serious about how the airline will be run, he has to ask himself one question: How did the airline get to the shape it is in now?" said an analyst, who has tracked the airline’s stock since it went public but isn’t willing to be named. “And then the investor has to ask himself, should the same people continue?"

Exactly what shape the airlines’ current finances are in is unclear. A Mint analysis showed that on 31 March, it had a little over Rs42 crore left in equity and was losing serious money—upward of Rs1 crore a day. The Rs200 crore credit line from SBI was obtained by securitizing the company’s cash receivables, or its future ticket sales.

“You only do that as a last resort," said the finance director of a competing airline. “It means you have nothing left."

Meanwhile, a combative Gopinath insists there is no reason to panic, saying in an interview with this newspaper earlier in the week that existing, large investors—Capital International and ICICI Venture—“will pump in the money" if it comes to that.

Meanwhile, Air Deccan shareholders have had quite a ride. On Thursday, the airline’s shares rose almost 23%, its highest one-day increase ever, amid speculation that the Anil Dhirubai Ambani Group might be eyeing a stake. On Friday, the company’s shares fell about 3.4% as the management maintained a studied silence.

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