Introduction of new aircrafts and new routes have helped Air Deccan to emerge as the second biggest domestic airline behind Jet Airways in recent months. But the growth has come at a heavy financial cost to the airline and its net worth has seen significant erosion.

Deccan Aviation Limited, which operates Air Deccan, has reported a net loss of Rs 340.55 crore for 15 months ended 30 June 2006, which is way above analyst estimates. Operating revenues were at Rs 236.39 crore for this period.

Air Deccan's managing director Capt. GR Gopinath toold CNBC-TV 18 that rising fuel costs have put Air Deccan through turbulent times.

"The aim was to deploy aircraft and gain market share so that when the turbulence is over, it will help us for future expansion and growth and profitability. We have deployed 20 aircrafts in the last 18 months," said Gopinath.

The company had extended its accounting period by three months for the last financial year as it has changed its accounting year to June-May from the current financial year.

The losses would have been even higher if the company had not resorted to accounting policies, to which the auditors have objected. The company has reported other income of Rs 115.41 crore for the 15 month period, of which its auditors have qualified an amount of Rs 49.03 crore. The auditors have also objected to deferring some expenses and not making provisions for balances or advances, which have not been confirmed by counter-parties.

Fuel expenses for the 15 month period was Rs 625.45 crore, or 50.59 per cent of operating revenues. Aircraft lease expenses and other direct operating costs were Rs 719.18 crore or 58.17 per cent of operating revenues.

Staff costs were Rs 170.62 crore and selling and general expenses were Rs 109.12 crore, resulting in an operating loss - without considering other income - of Rs 387.98 crore.

The company paid an interest of Rs 31.95 crore and depreciation charges were Rs 32.28 crore for the same period.

The decline in fuel prices may provide some respite to the company in the current quarter, but it remains to be seen whether crude oil prices would remain at these levels or decline further over the medium term. Aircraft lease costs and other direct costs would remain high and the airline needs to expand its revenues at an even faster rate to reach break-even levels.

Weak financials of the airline would affect its ability to finance future aircraft acquisitions. The management remains confident that sufficient finance can be raised from overseas sources to finance the large orders placed with Airbus and ATR over the last one year.

The company had come out with an IPO during the April - June 2006 quarter at a price of Rs 148 per share. The stock declined substantially after its listing, but has seen a recovery in recent weeks as oil prices receded. The stock is currently trading at around Rs 100 per share - a discount of more than 32 per cent over the issue price.

However Warwick Brady, COO, Air Deccan, said that the low cost carrier is positive about making up for losses through lower operating costs.

"I think one of the key advantages of being low cost is that our costs are almost 50 per cent lower than the full service carrier, which gives one a strategic advantage that one can enjoy where you can simply charge lower fares and make money," Brady told CNBC-TV18.