I would have put money in Akasa Air had Rakesh asked, says Ramesh Damani

In an interview to Moneycontrol's N Mahalakshmi on August 15, Damani said, “Rakesh sees five to 10 years into the future. He wasn’t looking at it from one or two quarters. So, by using his own mental model of risk-reward, it makes a lot of sense to me.”

Also watch: Ramesh Damani looks back on the journey of Rakesh Jhunjhunwala
According to Damani, Jhunjhunwala analysed the investment like he did every other, by considering the loss he may have to bear and then ringfencing that amount, and by looking at the returns the airlines could give. “He said he liked the risk-reward ratio in it,” Damani said.

Damani and Jhunjhunwala had their first meeting as brokers at BSE and it was the beginning of a long friendship. They discussed trades and socialised outside of work, even vacationed together with families.

A day after the launch of Akasa Air, Jhunjhunwala had spoken to CNBC-TV18 and said as discretionary spending per capita goes up, there would be a lot more flying. He also cited Civil Aviation Minister Jyotiraditya Scindia’s estimate of 40 crore air travellers in India, roughly 30 percent of the country’s population, by 2027.

India would need 1,200 aircraft–or double the present number–by that year, Juhunjhunwala said.

Also read: Rakesh Jhunjhunwala says Akasa Air is a frugal airline

Damani said the cost of running an airline had come down over the last ten years or so because of the sale-and-leaseback (SLB) arrangement.

He cited the example of IndiGo that capitalised on this model of buying planes and selling them to a lessor and then leasing it back. The airline could buy aircraft at more competitive prices because of the large orders and then money in the difference by selling it to the lessor at a higher cost.

The airline also saves on maintenance cost and can replace its fleet faster to keep pace with newer technologies.

According to Satyendra Pandey, a civil aviation veteran, the success of the strategy depends on two things—the price at which the airline is buying the plane and the model that is being acquired.

The first determines the profits that can be made when the airline is selling it forward and the second determines the interest a lessor would have in entering into such an arrangement with the airline.

Damani said that he wasn’t privy to any conversation but his understanding was that a similar model was being used for Akasa.

In the CNBC-TV18 interview cited above, Jhunjhunwala said Akasa would be competing with IndiGo and SpiceJet for India’s domestic air-travel market.

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To Damani, the market for leasing is looking good. Running an airline, which is generally a capital-intensive business, won’t be as cash-guzzling with the SLB model, he said.

He is also optimistic about how the civil aviation market is expanding, with better pricing options. “Like in Sudan there will be low-cost airports and there will be more ala carte pricing,” he said.

Damani pointed to Southwest Airlines which has outperformed Berkshire Hathaway over the past 30 years.

“Who’s to say that this (Akasa Air) won’t be the Ryanair out of here? If you ask me, Rakesh had foresight. He got together an extraordinary team of managers who helped him build that (the airlines) and he gave a lot of equity to them, so that their interests are aligned with its (the company’s),” he said.

Ryanair is a highly successful low-cost Irish airline that disrupted the European aviation industry.