Akasa and the coming war for the sky

“The airline industry is full of challenges and yet you have gone ahead and launched an ultra-low-cost airline?”

“I have a business plan,” Jhunjhunwala replied, without elaborating on what the strategy is. “The way people are surprised, I tell them. I tell them that when I came to the stock market, my mother asked, ‘Who will marry you?’ Everyone thought I would fail and I proved them wrong.”

Jhunjhunwala is backing Akasa Air, founded by aviation industry veteran Vinay Dubey. Jhunjhunwala has invested around $50 million. The airline awaits regulatory approval for launch later this summer. Meanwhile, it has placed an order for 72 Boeing 737 MAX family of aircraft for $9 billion (at list prices). The first delivery is expected in April.

Surprise and doubt is because India’s aviation landscape is littered with tales of spectacular failures- Kingfisher Airlines and Jet Airways being two big names that went into air pockets before they landed. The aviation industry has also faced unrest in the context of the pandemic. Air passenger traffic has declined and all carriers have suffered heavy losses. According to a report by rating agency CRISIL Ltd, domestic air traffic is now only expected to fully recover by the fourth quarter of 2022-23. Indian airlines may suffer record losses. 20,000 crore in the current financial year. This will be 44% higher than the combined loss reported in 2021-22. And although the third wave has subsided, uncertainty about future pandemic outbreaks still looms large.

If one manages to overcome the current turmoil, money will have to be made. Jhunjhunwala is well aware of this.

Aviation consultancy Capa India expects around 80 million passengers to travel within the country and 16 million abroad this fiscal from 53 million domestic passengers and 10 million international passengers in 2020-21. While these numbers are down from 2019-20 (when 138 million passengers flew domestic routes and 67 million passengers took international flights), air passenger traffic has registered a steady hockey-stick growth after each wave of the pandemic.

Industry experts argue that the long-term potential of the industry remains unaffected by the pandemic. In 2021, aircraft maker Boeing Company had forecast strong aviation growth in India over the next two decades due to its growing economy and expanding middle class. The company said it expects India’s commercial aircraft fleet to grow four-fold by 2039.

Separately, the International Air Transport Association (IATA), an airline industry lobby group that represents 85% of the world’s airlines, expects 47.8 million Indians to fly annually by 2036.

While those are impressive estimates, the market, today, is tilted towards highly capitalized airlines such as IndiGo and airlines operated by the Tata Group, which include Air India, Air India Express, Vistara and AirAsia India. Therefore, many question whether Akasa can punch above its weight with its proposed low-cost model.

“I wouldn’t call it low cost. I would call it frugality. Frugality is a culture,” Jhunjhunwala said at the real estate conference, hinting at how the airline would be run.

frugal disruption

Low-cost carriers typically have a single aircraft fleet and offer a single-class range, while full-service ones typically have multiple cabin options and a diverse fleet. In the domestic market, while airlines such as Indigo, SpiceJet, GoFirst (formerly GoAir), Air India Express, and AirAsia India are classified as low-cost, Air India and Vistara are full-service carriers.

What disruption could Akasa bring to the table?

“Akasa is expected to disrupt the low-cost carrier market led by IndiGo, but only after reaching a substantial scale. In the short term, this could lead to churn in top talent in the industry and reduce airfares on certain sectors. could affect,” said a senior official of the Gurugram-based airline, who did not wish to be identified.

“Akasa, however, is well prepared to take on office bearers battling debt and high-cost structures. As Akasa will start from a fresh slate, and is debt-free, it may grow at the expense of airlines like SpiceJet and GoFirst,” the executive said.

It’s almost certain that Akasa’s launch will mean a drop in fares on some routes—with passengers benefiting as competition mounts. All of Akasa’s rivals may try to maintain their market share by offering discounts. Experts said if Akasa can sustain the low prices, it expects to get a good share of the traffic.

“Akasa has raised significant amounts of money and will be supplemented by a sell-and-putback (SLB) flow. Therefore, they are not the kind of person they can bleed to kill with Indigo or other loss-led tactics,” Satyendra Pandey, managing partner of aviation advisory firm AT-TV, said.

An SLB is a transaction in which the owner sells an asset, in this case, an aircraft, and then leases it back from the buyer. This type of deal typically removes the aircraft and associated debt from the buyer’s balance sheet.

“On the cost front, all indications are that Akasa will be competitive. In terms of credibility, Akasa is pulling in good talent. Combined, Akasa has managed to build a foundation with competitive costs, reliability and cash, which is making other airlines stand out and take notice,” Pandey said.

Apart from Jhunjhunwala, Akasa has reportedly attracted investments from investment fund New Horizons founder Madhav Bhatkuli, other travel sector stalwarts and US-based hedge funds.

hunting talent

As expected, Akasa has attracted talent from other airlines. The company’s website features a photo of the nine founding members, a photo of influential characters that includes Aditya Ghosh, former chairman and board member of IndiGo.

However, Ghosh will not be involved in day-to-day operations at Akasa—he will represent Rakesh Jhunjhunwala on the board.

“What works for Akasa is that a lot of their talent comes from Indigo. So, they will get to know how IndiGo thinks and reacts as they have to develop a strategy to compete with the bigger airline.”

For example, Akasa has Ankur Goel, former vice president and head of treasury and investor relations at IndiGo, as its chief financial officer.

Apart from IndiGo, Akasa has also hired senior executives who had earlier worked with Jet Airways or GoAir. The list includes Pravin Iyer (Chief Commercial Officer), Bhavin Joshi (Senior Vice President of Aircraft Leasing and Purchase), Belson Coutinho (Head of Marketing), Adam Voss (Head of Engineering) and Ajit Bhagchandani (Vice President of Inflight Services).

Several mid-level executives and pilots from other airlines have also been offered jobs at AKSA – the airline is reportedly offering employee stock options (ESOPs) to woo talent.

According to a report in The Economic Times, Akasa is offering almost 80% more salary to the pilots as compared to SpiceJet. It makes sense to hunt down SpiceJet’s pilots as the current Boeing operates the 737, the same family of aircraft ordered by Akasa. The same report said the airline expects to hire around 300-350 cabin crew members and pilots by March 2023.

oncoming winds

So, what will be Akasa’s major challenges?

The airline may constrain pricing on some routes but its rivalry with market leader IndiGo is likely to be fierce. The big airlines have used their might on past occasions to eliminate competition. For example, IndiGo has been known to eliminate competition by deploying capacity and slashing fares on certain routes.

“In the past, IndiGo increased frequency and reduced fares on routes like Kolkata-Agartala, forcing SpiceJet to vacate the route. IndiGo later increased the fares on this route,” said Ameya Joshi, independent aviation analyst and founder of aviation website NetworkThoughts.

“Similarly, SpiceJet was kicked out of Tuticorin (Thoothukudi) as IndiGo pushed with their ATRs using the same strategy.”

For IndiGo, allowing one or two flights affects a small percentage of its schedule. “Even when the fares are low, IndiGo makes money and does not lose due to its low-cost infrastructure,” Joshi said.

The scale of operations of IndiGo is indicated here. At the end of December 31, IndiGo’s fleet consisted of 56 Airbus 320ceos, 140 A320neos, 52 A321neos and 35 ATRs. The airline operated a maximum of 1,574 daily flights including non-scheduled flights during this period. The airline will add more capacity going forward. It has ordered 332 A320neo aircraft and 398 A321neo aircraft. So far it has taken delivery of 120 A320 aircraft and 33 Airbus A321neo aircraft.

In comparison, SpiceJet and GoFirst have a relatively smaller fleet of 95 and 57 aircraft respectively. There are over 200 airlines in service between the airlines – Air India, Vistara, Air India Express and AirAsia India – operated by the Tata group.

A former IndiGo executive said, “IndiGo plans to work in any Indian city with a population of over one million.” This means that it will fly on almost any route that Akasa chooses.

“On the international front, IndiGo plans to connect to international destinations with its A321XLR fleet, the latest and longest range variant of the A320neo family of aircraft. Competing with IndiGo on both the fronts will be a daunting task for anyone.”

While Akasa has remained silent on the routes it will fly, media statements from founder Dube indicate that the airline will serve metros, both tier II and tier III cities. However, slots are hard to find in India’s busiest airports- New Delhi and Mumbai. Akasa, therefore, may have limited connectivity between these two important places. Instead, the airline may choose to prioritize presence in cities such as Bengaluru, Kolkata and Hyderabad, among others.

Akasa Air did not respond to Mint’s questions.

Meanwhile, everyone seems to be waiting for the launch date. Still, some experts aren’t convinced it’s the right time.

“Akasa’s entry into service at this time (summer of 2022) is unfortunate. They should delay the launch until the third quarter or so – until the industry has gone through consolidation,” said aviation giant Shakti Lumba, a former Indian Airlines executive and former vice president of operations at IndiGo.

At least two airlines are in a precarious financial position and many experts see an imminent consolidation.

“Airline space suffers from overcapacity and already has low fares as a result. “All airlines end up as low-fare carriers, regardless of whether they are low-cost or full-service carriers,” Lumumba said.

Still, the timing of the launch—after the pandemic when passenger volumes are still low—will allow Akasa to bargain for the best contracts from vendors, airports, aircraft manufacturers and lessors. This may further help Jhunjhunwala’s philosophy of ‘frugality’.

Meanwhile, billionaire investors don’t seem too bothered by all the doubts they have. He swears by another vision.

“Many people question why I started an airline,” he said at the same real estate conference I mentioned earlier. “I tell them that I am prepared for failure. It is better not to try than to try and fail”.