Akasa, an ultra-low-cost carrier (ULCC) backed by billionaire Rakesh Jhunjhunwala, is the latest entrant in Indian skies, counting on more people travelling by air once the pandemic recedes. However, experts are divided over the venture.
Jhunjhunwala is considering investing $35 million for a 40 percent stake in the carrier and plans to operate 70 aircraft within four years, Bloomberg reported on July 28. He told Bloomberg Television that he expected to get a no-objection certificate from India’s aviation ministry in the next 15 days.
Akasa’s team includes a former senior executive of Delta Air Lines Inc. Former IndiGo president Aditya Ghosh and former Jet Airways chief executive officer Vinay Dube are also said to be on board.
The airline will look for planes that can carry 180 passengers, Bloomberg quoted Jhunjhunwala as saying. With this seat capacity, Akasa could consider the Airbus A-320 family, the Airbus A-220, the Boeing 737 family or Embraer aircraft.
$8 billion sector loss
Akasa enters India’s aviation sector when airline losses are expected to touch over $4 billion for the second year in a row, as estimated by consultancy firm CAPA.
India’s domestic air traffic has shrunk due to restrictions imposed on account of the COVID-19 pandemic. The number of air passengers fell to 10.9 million during April-June, in the midst of the second wave, from 23.3 million in the quarter ended March. Airlines can currently operate offering a maximum of 65 percent of their pre-pandemic seat capacity.
There are a couple of firsts that Akasa brings with it. To start with, it will probably be India’s first ultra-low-cost carrier, although Go First, the new brand of GoAir, claims to be a ULCC. Domestic airlines currently are either full service (Air India and Vistara) or low-cost carriers (IndiGo with an over 50 percent share and SpiceJet).
Another first associated with Akasa is the entry of a billionaire stock market investor in India’s aviation space. Jhunjhunwala owns a stock trading firm called RARE Enterprises. According to Forbes magazine, Jhunjhunwala has an estimated net worth of $4.6 billion. In June 2020, Jubilant Life Sciences informed the stock exchanges that Jhunjhunwala had increased his stake in the company to 5.2 percent. Besides, he also has a marginal stake in Titan.
Aviation experts said Jhunjhunwala’s deep pockets and business acumen will play a pivotal role in the airline’s launch and success.
Making the right bets
According to a person involved with the aviation industry in India for over two decades, the new airline will succeed because Jhunjhunwala knows when to bet on an industry.Others agreed the time is right for a ULCC in India. With the second wave of the COVID-19 pandemic abating, interest in flying is likely to pick up.
This may work in Akasa’s favour, given that it could take 18 to 24 months after getting a no-objection certificate to start operating an airline. The domestic and international aviation markets are expected to recover by 2024, by which time Akasa should have gained enough traction.
Akasa is said to be modelled on Irish low-cost carrier RyanAir, which operates mostly on inter-European, short-haul flights.
“Those airlines that had to fail have already failed. The domestic aviation market is changing with new segments of people now willing to fly rather than take a train or bus, which will help the startup,” said the person with over two decades of aviation experience.
Satyendra Pandey, managing partner of Airavat Transport & Technology Ventures, agreed and pointed out that after COVID-19, there’s been a shift in consumer behaviour when it comes to air travel and pricing, but cautioned that the permanence of this shift remains to be seen.
Matter of structural costs
However, others questioned the ULCC model and its viability in India. Pandey maintained that for an airline to succeed, “you have to be exceptionally good or exceptionally cheap. The ULCC model focuses on the latter and the jury is out on whether this ULCC model can work in India.”
“The ULCC model not only depends on lower ticket prices but lower structural costs. Other than secondary airports, what is often overlooked is the cost of funds, distribution costs and demand dynamics. For the ULCC model to succeed, any new airline will have to get this right,” Pandey said.
There are no low-cost airports in the country, which is something that Akasa’s promoters will have to keep in mind.
Another aviation industry veteran with over three decades experience argued that if someone is serious, then the product should do the talking and one should not tom-tom about it without anything getting off the ground.
“That is the way Jet Airways earlier and now IndiGo have managed,” he said.
Good for competition
Jagannarayan Padmanabhan, director & practice leader – transport & logistics at CRISIL Infrastructure Advisory, said as a ULCC, Akasa needs to choose its routes wisely and ensure that it has a regional play with a national presence.
“Driving volumes with good capacity occupation would be the key for the ULCC,” Padmanabhan said.
However, experts are more optimistic about what Akasa’s entry will do to the aviation space in India. Pandey said a new airline will certainly help with competition.
“But it could also mean that in a race to discount and match fares, existing players may start competing their profits (real or otherwise) away,” he said.Padmanabhan said that although India is an underserved market, competition is quite high and with COVID-19 still around, it will be at least another six to eight quarters before airlines can emerge from the woods.