At a time when the Indian aviation industry is struggling with low passenger traffic, high fuel prices and taxation, Rakesh Jhunjhunwala’s vision of setting up a new ultra low-cost carrier (ULCC) in India has intrigued the interests of market experts and analysts.
Analysts told Moneycontrol that the proposed airline, Akasa, should target regional routes and avoid going head-to-head with larger players.
“Regional routes under UDAN are expected to be the growth drivers in the Indian aviation space, going forward, and a new airline should look at these routes to create a stronghold for itself to thrive," Jagannarayan Padmanabhan, Director, Transport and Logistics, CRISIL, said.
Regional routes growing faster
An aviation analyst from KPMG said that the Indian aviation industry is still quite small when compared to China, the US, and Canada, and it has the potential to keep growing in the coming years, especially on the back of growing demand for regional connectivity.
A look at the air passenger traffic data from 2018-19 and 2019-20 (pre-COVID-19 outbreak) shows that regional routes from Ranchi, Surat, Vijayawada, Bhubaneswar and Varanasi have grown much faster than established routes from Delhi, Mumbai, Chennai, and Bengaluru.
The Airports Authority of India (AAI) had, in 2018, said that a 26 percent growth in the domestic aviation sector seen then was primarily because of the demand that is being generated from these Tier-II cities and the addition of new routes and services.
On July 28, Jhunjhunwala said he is looking to set up a new airline in India with a fleet of around 70 aircraft in four years. The billionaire, in an interview on Bloomberg Television, said he is considering investing $35 million and would own 40 percent of the airline.
He added that he will rope in Aditya Ghosh, former president of IndiGo, as a co-founder, The Economic Times reported.
Optimisation of expenses
While IndiGo and GoFirst already operate as low-cost carriers in India, the country, at the moment, does not have a ULCC. Market experts say that in order to offer tickets at even lower prices, a new airline must look at optimising expenses.
By targeting regional routes, the proposed airline will keep its fixed costs low, as airport operators on large routes are unlikely to cut the costs of operating flights from these airports as they are all looking to expand capacity and have taken a hit due to the outbreak of COVID-19, they said.
Another important aspect that Jhunjhunwala should consider while setting up a new airline is the aircraft-leasing model in order to keep expenses tight rather than owning a fleet of planes.
Furthermore, the airline could also consider not offering check-in baggage with its tickets and could utilise the storage space of its planes for cargo services as well after getting permission from the Directorate General of Civil Aviation (DGCA), they said.
“A ULCC will look to eliminate amenities like food onboard, check-in baggage etc in order to optimise the operating costs of their aircraft," Lokesh Sharma, a senior aviation and defence consultant, said.
Sharma added that a ULCC will look to operate smaller planes like Boeing 737 MAX and Airbus A320neo to keep its operating costs under check.
A market expert from an international airline trade association also said that, globally, ULCCs compete with the likes of high-speed railways and road transport by offering competitive prices and better efficiencies.
Punctuality, prices key factors
“The backbone of ULCCs in Europe and the US is their punctuality, comparable prices, and frequency of operation. The same model must be replicated in India for a successful airline,” he said.
In India, a ULCC will have to compete with the prices offered by the Indian Railways, especially the prices of an AC Tier-III ticket, multiple analysts and market experts said.
While Jhunjhunwala's plans of setting up a new airline is still a while away, most experts do not expect the stock market investor to acquire an existing airline and convert it into an ultra-low-cost player.
“Acquiring an ageing fleet is very inefficient in terms of operating expense as new planes have much lower operating costs and better fuel efficiencies. Older planes will also require a lot of maintenance, which will further increase costs. So while people can look to acquire an already existing airline and rebrand them, in terms of keeping expenses tight, a new fleet will be more efficient,” Padmanabhan said.Analysts said that a new ULCC should come up in India only after a couple of years as air passenger traffic is expected to be subdued at least for the next year.