Let’s say you plan to fly from New Delhi to Mumbai for a holiday before December. Currently, you can choose among all six pan-India carriers that fly that route, with all of their cheapest tickets at around Rs 2,500. The closeness of the price range isn’t a surprise considering the cut-throat competition in the aviation industry, especially after airlines were grounded for months due to the Covid-19 pandemic.
By this time next year, there will hopefully be two more options — Akasa Air and Jet Airways 2.0. And if things go as per plan, Air India could go to a private entity, which would be raring to go. After the lull of the past 18-odd months, suddenly there’s action happening in the sector. The most astute investor of current times, Rakesh Jhunjhunwala, too, has taken the plunge, betting on one fact — the world’s second-most populous country is hugely under-penetrated in air travel. Munch this — just about 8 per cent of India’s population fly.
But why has Jhunjhunwala, who is often referred to as India’s Warren Buffett, ventured into a sector that has more case studies of failure than success? The catastrophic collapses of Kingfisher Airlines and Jet Airways, and their impact on the industry in the past decade, have taken significant sheen off the aviation business. It is truly a survival of the fittest balance sheet in India’s notoriously price-sensitive market, where the race to the top is via rock-bottom prices. A route Akasa plans to take by being an ultra-low-cost carrier (ULCC).
“Jhunjhunwala goes deep into the business before putting in his money. That he’s a successful investor cannot be disputed. The question is whether he has done a similar study in aviation before investing. The fact is that the Indian aviation industry has proved to be a graveyard for many carriers,” says Jitender Bhargava, former executive director of the government-owned carrier, Air India.
The billionaire investor’s predilection for aviation dates back to 2015 when he invested in InterGlobe Aviation, which runs IndiGo. Over the years, irrespective of good or bad results, he grilled the management in investor calls, a sign that he was keenly interested in the sector. Now, he has directly entered it. And he’s bringing company. His team includes, among others, former IndiGo President Aditya Ghosh and former Jet Airways CEO Vinay Dube, who will be CEO of Akasa Air and director of the holding company, SNV Aviation Private Limited. Jhunjhunwala will reportedly invest $35 million (nearly Rs 260 crore) for a 40 per cent stake in Akasa.
You could argue about the ace investor’s timing. Indian airlines and airports incurred losses worth Rs 22,400 crore in FY21 amid the pandemic, according to official data. Even IndiGo — the market leader with a 57 per cent share, according to the Directorate General of Civil Aviation (DGCA), India’s civil aviation regulator — reported its biggest-ever loss, of Rs 3,180.2 crore, for the April-June quarter. However, the fact is that Akasa’s launch is several months away, and the environment might change for the better by then. Plus, India’s air traffic is growing steadily each year and, as per trade body International Air Transport Association, the country is set to overtake the UK to become the world’s third-largest aviation market by 2025.
In fact, most analysts agree that Jhunjhunwala’s timing is actually quite good. Aircraft prices have fallen due to the pandemic and Akasa could negotiate a favourable deal, whether it is buying or leasing planes. Moreover, the job market also favours employers as the pandemic-driven layoffs and furloughs have left pilots, cabin crew, and ground staff available at competitive salaries. Lastly, while Akasa is yet to receive regulatory clearance, the word is it will start operations only in the summer of 2022. “By summer 2022, everybody will be vaccinated and, hopefully, the demand in the domestic segment, on which Akasa will predominantly focus, will bounce back. They will be well-placed to take advantage of that. The key issue is to ramp up quickly and take on the competition,” says Vinamra Longani, head of operations at Sarin & Co., a law firm specialising in aviation.
That’s much easier said than done, though. Even for Jhunjhunwala.
One big advantage for Akasa is its choice of aircraft — the Boeing 737 Max. Indian carriers predominantly use Airbus planes, with only SpiceJet and Air India Express flying the Boeing narrow-bodies. Boeing is thirsting to corner a bigger market share and, given Akasa’s plans to induct 70 planes in the next four years, the airline could broker a lucrative deal. “There are ample Max [aircraft] available in the market. Even though narrow-bodies are in demand, the lessor would be happy to work with a new airline and offer them good deals,” says an aviation analyst. But the Max has been besieged with problems. They were grounded globally for nearly two years starting in 2019 after two fatal crashes. The DGCA lifted its ban on the Max only in late August.
“The challenge I see for Akasa is to manage the operations with the Max. A lot needs to be done to win back travellers’ confidence in the Max,” says Mark Martin, CEO of Martin Consulting, an aviation consultancy. “The Indian consumer is discerning and has had exposure to LCCs [low-cost carriers] for about 20 years. Competition should be another challenge as they enter into a crowded market with old horses of the trade like IndiGo, Vistara [a joint venture between Tata Sons and Singapore Airlines], Air India, and Go First.”
Experts say Akasa might focus on the metro cities, which means it goes up against the old guard head-on. In fact, the airline will likely have its headquarters in Mumbai and operate out of Bengaluru. “There are certain indications that Akasa would focus on metros. Their aircraft of choice is not a regional plane, which means they will fly between bigger airports,” says Satyendra Pandey, Managing Partner at aviation services firm AT-TV. “The profile of the management team shows a similar pattern. Akasa will likely fly from the same metro cities where it will be competing with existing carriers because the demand pattern is the same.”
Akasa will, therefore, need a sizeable count of parking and landing slots for a decent number of flights between metros. However, these airports have nearly run out of slots. No surprise, considering India’s six carriers have 83 Delhi-Mumbai flights between them. Bengaluru recently built a second runway and could have some slots available, as could Delhi after some optimisation. But Mumbai is fairly saturated. And bagging slots will become even more difficult with the expected ramp-up in traffic and the restart of Jet Airways, which plans to begin with a Delhi-Mumbai flight. Attempts to reach Jhunjhunwala and Ghosh did not elicit any response.
Bhargava says Akasa doesn’t have to focus only on the metros. “Connectivity between metros gives greater visibility, but not profits. There’s growth in airport infrastructure in religious places, Tier II and Tier III cities where the demand has also been robust,” he says. That also dovetails with the ULCC model to attract flyers, including first-timers, who are more price-sensitive than brand-conscious.
Does Akasa need 70 planes, though? Yes, says Sarin & Co.’s Longani, because the stronger incumbents will eventually price out a low-frequency newcomer. “To become relevant, Akasa needs to ramp up and offer a decent number of flights on some routes. More flight options attract business travellers, though it doesn’t matter to leisure travellers,” he says. But scaling up has its own challenges. “Akasa will be taking deliveries of 13-14 aircraft a year. That’s not an easy feat. They need to set up operations at multiple airports, hire pilots and ground staff. IndiGo, Vistara and AirAsia took their own time before adding more planes,” he adds.
But forget ramping up, Akasa’s choice to start as a ULCC has raised a few eyebrows.
A model carrier
A ULCC unbundles the fare, separating the price of the seat from other services such as food and luggage, among others. This makes tickets extremely cheap. Ireland’s Ryanair has used this no-frills model to become the market leader in Europe. However, ULCCs are still a new concept in India.
That’s due to operating costs. Most expenses — such as for aviation turbine fuel (ATF), airport parking and landing, engineering and maintenance — are the same for ULCCs, LCCs and FSCs (full-service carriers). IndiGo, an LCC, seems to have the lowest cost base in the industry. So, Akasa has to do better to be able to offer the lowest-priced tickets. That it’s not relying on borrowed money is a huge advantage, but only at the start. “As the market picks up, their cost base has to be competitive, where, if they are offering low fares, they are not offering [them] at a loss. That’s hard to manage. How they will lower the costs is yet to be seen,” says AT-TV’s Pandey.
This is why Go First, though technically the only ULCC in India, operates as an LCC for all practical purposes, and its ticket prices are nearly identical to LCCs IndiGo, SpiceJet and AirAsia. What this means is that Go First cannot charge extra for cabin baggage or other services as ULCCs in other countries do. The only way to lower costs — and therefore ticket prices — is by sheer scale of operations. Like IndiGo.
“IndiGo is a professionally managed company that has grown in a calibrated manner. There were multiple factors for its growth. When Kingfisher Airlines collapsed in 2012, IndiGo was the biggest beneficiary. Akasa has to grow in double digits to survive against large carriers,” says Bhargava. When it started, IndiGo also profited by using the sale-and-leaseback model for its fleet as it was not operationally as robust.
Ajit Deshmukh, Managing Director and Co-head of investment banking at Equirus, in which Jhunjhunwala owns a 13 per cent stake, warns of the highly regulated environment. “Airline companies depend on how the government makes rules. The problem with airlines is not lack of supply or lack of airports. The problem has always been government regulation and competition. The competition is so much that it’s great for consumers but not good for companies,” he says.
Now, Jhunjhunwala’s early announcement has given the competition notice, which has its pros and cons. “The plus part is that it helps in building credibility and the brand, which is important in consumer-facing businesses. Yet, the competition also gets a lot more time to respond,” says an aviation consultant.
“I think they will be able to survive for the longer term,” says Rajat Sharma, Founder of financial advisory firm Sana Securities. “By whatever metric you look at — the number of new airports and the way people are taking to the skies — air travel is increasing. I believe there’s pent-up demand in the system for carriers to capture.”
Perhaps there is no one better than Jhunjhunwala to do that given how he values money. But there’s a twist to the tale. Running an airline is different from what the Big Bull is famous for: value investing. In stock market investing, a few top performers can compensate for a bunch of rotten apples. In business, there’s only one bet, and he will have to win it at all costs.
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