On a roller Costa!

The mortality rate of regional airlines in India is so high that every time a new one is launched, it is almost time to say goodbye.

But Vijayawada-based Air Costa, a part of construction conglomerate LEPL Group, has hung on gamely and is set to complete two years of operations in a couple of months.

Yes it has faced its own set of teething problems, gone wrong with the choice of aircraft, is stuck with expansion issues — it has only four planes — and is also burning money.

Air Costa has been bleeding between ₹3 crore and ₹4 crore every month. It may all sound dismal but according to the airline’s Chief Financial Officer Vivek Choudhary, Air Costa is confident of navigating through this turbulence.

“Any other airline would have inducted ATRs which are easy to maintain, burn less fuel and have easily available parts. But we went ahead and leased Embraers because we knew this was the right aircraft for the region even if it means a longer time for us to make money out of it,” Choudhary said.

Air Costa is betting big on regional connectivity as it strongly believes that the metro markets will soon get saturated, leading to never-ending price wars. “We are still a bus and train nation with only the elite and time-sensitive businessmen preferring air travel. I am sure this is going to change in the next 10 years,” said Captain K N Babu, the airline’s CEO.

But like any start up, Air Costa has made some costly mistakes. The first was the induction of two E170s when the airline should have got all E190s in its fleet. Choudhary admits as much.

It has perhaps been the single biggest reason for the mounting losses. The E170 has a total capacity of 78 but the airline chose to have a configuration of 60 economy and seven business class seats, thereby losing 11 seats per flight in the process. As the aircraft flies 10 sectors a day, the total loss of seats was 110 for each aircraft. With an average load factor of 75 per cent, the loss was ₹4 lakh per day or ₹2.5 crore per month for both the aircraft.

The prudent thing to do would have been to replace the E170s with E190s much earlier. Or not take them on lease at all. But Air Costa found itself in a rather piquant situation when it went shopping for the aircraft.

“The failure of Kingfisher Airlines had cast a shadow on the airline industry in India. The perception about the industry was at an all-time low. We had to convince the manufacturers, investors as well as the lessors that our business model would work and we are long term players,” said Choudhary. So, the airline took on lease whatever it could get.

The good news though is that the E170s are being replaced with the profitable E190s to regain lost ground. 

The lessors, GECAS has now agreed to take back E170s and replace them with the all-economy 112-seater E190. This should happen in another two or three months. But after that, Air Costa will go slow again in terms of induction of aircraft. It will add a mere two more E190s each year till 2018 when it will start receiving the first of the new 50 E2-190s for which it has placed an order worth $2.94 billion.

By 2018, Air Costa expects to have a total fleet size of 12 and fly to 18 stations including new ones like Pune, Guwahati, Indore and Bhopal. But the airline, said Choudhary, has bigger plans. It wants to feed the metros picking passengers from regional towns and tie up with an international airline to take them to their destinations abroad.

But Choudhary said once the new aircraft come in, Air Costa could step on the toes of IndiGo as well as SpiceJet and that is when it may take a relook on how to expand further. “We will either look at a model similar to that of GoAir which with a limited number of aircraft is able to manoeuvre well or rapidly expand like IndiGo,” said Choudhary.

The airline is also working on replacing its reservation software with one that can handle larger traffic and fleet. Choudhary conceded that the airline has been a tad conservative. “It is our shareholders who are still sustaining the business.”  The airline promoters haven't hesitated to pump in more funds even though profits seem to be far away. They have already invested ₹420 crore and in the next fiscal will invest another ₹70 crore-₹80 crore.

Except last December when it posted a profit of $160,000, the airline has been incurring losses every month. Its cost per available seat km or CASK, is at ₹6.5 while revenue per available seat km is ₹5.5 In other words, cost of running the airline works out to about ₹40 crore per month on revenues of ₹36 crore-₹37 crore. If you consider a passenger load factor of 75 per cent and a market share of 1 per cent, there isn't much to talk about after two years of operations. 

However, Air Costa’s bosses are keen to turn things around. They have over time brought down costs by renegotiating lease rentals as well as the maintenance outgo.

The Andhra Pradesh Government’s move to reduce sales tax on aviation turbine fuel from 16 per cent to 1 per cent has also helped. The airline has also been able to increase the utilisation of the aircraft between 20 per cent and 30 per cent. It is also encouraging passengers to buy tickets on its website rather than from travel agents who now contribute nearly 80 per cent of total ticket sales.

The airline pays between ₹1 crore and ₹3 crore to travel agents by way of commission.

The salary cost isn’t high now but as more aircraft are added it is bound to go up. As of now, the average salary for the cabin crew is around ₹50,000 per month while expat pilots get ₹15 lakh per month and local pilots get between ₹4.5 lakh and ₹6 lakh per month, First officers take home between ₹1 lakh and ₹4 lakh. Air Costa currently has about 800 employees. 

The airline is also planning to raise funds by offering equity to investors. However, it has not been able to do so because of a technical glitch. The licence for operating the airline is with LEPL which also runs power and real estate projects. The promoters wanted to spin off the airline venture into a separate entity to make it more attractive for investors. However, it has not been able to do so as the licence is non transferable according to regulator DGCA’s norms.

Therefore, the promoters have divested all non-airline businesses from LEPL. While the promoters are busy untangling the business, talks with certain foreign investors are at an advanced stage, Choudhary said. The airline expects to raise about $50 million (₹330 crore) and offer up to 26 per cent equity.

Air Costa is slowly getting its act together. What has helped it so far is the promoters’ sustained commitment to keep itflying, something that might eventually reap dividends in the long run.