Case 083Asset-backed, project and real-asset lendingHard

An airline flies 180-seat aircraft at an 82% load factor and a cost per flight of Rs 9.6 lakh before aircraft financing. What fare breaks even, and can it service a Rs 800 crore aircraft loan if fares run 10% above that?

Bain CapitalBoston · 2024

The situation

Nimbara Airlines, a domestic carrier, flies 180-seat narrow-body aircraft. On average 82% of seats are sold. Each flight costs Rs 9.6 lakh to operate, covering fuel, crew, maintenance, airport charges and overheads, but not the cost of owning the aircraft.

Nimbara wants a Rs 800 crore loan at 9% over ten years, repaid in equal annual instalments, to buy the aircraft that fly 8,000 of its flights a year. Management expects average fares to run 10% above the break-even fare on those flights.

Your task

What average fare breaks even on a flight? At fares 10% above that, can those flights service the loan, and if not, what would you lend?

Quick check

Fares run 10% above break-even. Does that cover the loan's annual payment?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The break-even fare is about Rs 6,504, and at 10% above it the flights cannot service the loan: cover is 0.62x. The margin is Rs 76.8 crore a year against a payment of Rs 124.7 crore. Covering it needs fares 16% above break-even, or a load factor near 87%. On the stated fares I would lend about Rs 394 crore at 1.25x cover, not Rs 800 crore.

Step 1How do you get from a cost per flight to a fare?

Spread the flight's cost over the people who actually pay. Rs 9.6 lakh over 180 seats is Rs 5,333 a seat, but only 82% of seats are sold, 147.6 passengers on average. The paying passengers carry the empty seats too, so the break-even fare is Rs 9.6 lakh over 147.6, about Rs 6,504. A shared taxi works the same way: if four seats cost Rs 400 and only three riders turn up, each pays Rs 133, not Rs 100. In the interview, ask for the load factor before you divide; it is the number that decides the fare.

From cost per flight to the fare that breaks evenCost per flightRs 9.6 lakhbefore aircraft financingPer seat flownRs 5,3339.6 lakh / 180 seatsPer passengerRs 6,504/ 147.6, the 82% who flyFare 10% aboveRs 7,154Rs 0.96 lakh a flight spareAcross 8,000 flights a year: Rs 0.96 lakh x 8,000 = Rs 76.8 crore of cash marginto pay for the aircraft. The empty 18% of seats is why the per passenger cost is higher than per seat.
Rs 9.6 lakh a flight over 180 seats is Rs 5,333 a seat, but only 147.6 passengers pay, so the break-even fare is Rs 6,504, and a fare 10% higher leaves Rs 0.96 lakh a flight, Rs 76.8 crore a year across 8,000 flights.
Step 2Can the flights service the aircraft loan?

Compare the margin with the annual payment. Rs 800 crore at 9% over ten years costs Rs 124.7 crore a year in equal instalments. At 10% above break-even the flights earn Rs 76.8 crore, covering the payment only 0.62 times, so over a third of the instalment has to come from elsewhere in the airline. The cost line was before aircraft financing, so this margin is all there is to pay for the aircraft.

The relationship
DSCR=147.6×(7,154−6,504)×8,000800×0.091−1.09−10=76.8124.7=0.62\text{DSCR} = \frac{147.6 \times (7,154 - 6,504) \times 8{,}000}{800 \times \frac{0.09}{1 - 1.09^{-10}}} = \frac{76.8}{124.7} = 0.62
147.6paying passengers per flight, 82% of 180
7,154 and 6,504fare charged and break-even fare, Rs
8,000flights a year on the financed aircraft
124.7annual payment on Rs 800 crore at 9% over ten years, Rs crore
What it says in wordsThe flights earn about 62 paise for every rupee of loan payment due.
What the fares earn against what the aircraft loan costs, Rs crore a year76.8Cash marginfares +10%124.7Debt serviceRs 800 crore, 9%, 10 yrs124.7Margin at 1.0xfares +16.2%155.8Margin at 1.25xfares +20.3%cover 0.62xWhat it would take
At fares 10% above break-even Nimbara's flights earn Rs 76.8 crore a year against a Rs 124.7 crore loan payment, cover of 0.62x; fares would need to be 16.2% above break-even to cover it once and 20.3% above to cover it 1.25 times.
Step 3What would make the loan work, and what would you lend?

Work backwards. Covering the payment once needs Rs 1.56 lakh a flight, which is a fare of Rs 7,560, 16.2% above break-even, or at the planned fare a load factor of 86.6%. In airlines, load factor and fare together decide debt capacity, and both move against you in the same downturn. That is part of why airlines have so often earned poor returns: high fixed costs, a product customers compare on price alone, and fuel and currency costs the airline does not control. On the planned fares, cover of 1.25x supports a loan of about Rs 394 crore.

Close with the lender's view. I would not lend Rs 800 crore against these flights; I would lend about half, or lend more only against the aircraft themselves, with a loan-to-value limit and the right to repossess. An aircraft is a mobile asset with a second-hand market, which is why aircraft lenders lean on collateral as much as on cash flow. The limitation: cost per flight is taken as fixed, but fuel moves it, and a lender would stress fuel as hard as fares.

Where candidates lose it

The first loss is dividing the flight cost by 180 seats and getting Rs 5,333. Empty seats still fly, so their cost falls on the passengers who pay; the break-even fare is over Rs 6,500.

The second is reading 10% above break-even as a healthy margin without converting it to rupees. On a Rs 9.6 lakh flight it is Rs 96,000, and across a year it covers under two thirds of the loan payment.

What the interviewer asks next

  • Fuel is 40% of the cost per flight and rises 20%. What happens to the break-even fare?
  • Why might an aircraft lease be easier to finance than an aircraft loan for Nimbara?
  • What load factor would you use in a downside case, and why?
  • Why have airlines historically earned poor returns on capital?

Asked at Bain Capital, Generalist, Boston, 2024 (Wall Street Oasis): I was asked to calculate the price of a ticket for an airline based on a few figures about the airline

Company names and figures are illustrative.