After more than a year of distressing performance caused by the Covid-19 pandemic, the Indian airlines space is gearing up for entry of two airlines — Jet Airways 2.0, and Rakesh Jhunjhunwala-backed Akasa. While the detailed plans for both the airlines are being finalised, it has underscored investor appetite in the airlines segment at a time when the existing players are in the red because of muted travel demand during the pandemic.
Akasa is an upcoming “ultra low-cost carrier”, or ULCC, being launched by stock market investor Rakesh Jhunjhunwala, who will hold a 40% stake in the airline company. Jhunjhunwala has reportedly planned to launch the airline by April 2022, and has onboarded aviation industry veterans such as former Jet Airways CEO Vinay Dube and ex-IndiGo President Aditya Ghosh to run the airline. While Dube is expected to be the CEO of the company, Ghosh is expected to be on the board as Jhunjhunwala’s nominee. The Mumbai-based investor will pump in $35 million, according to a Bloomberg report, and is planning to have a fleet of 70 planes over the next four years. The airline expects to be granted a no-objection certificate from the Ministry of Civil Aviation over the next few days.
Currently, InterGlobe Aviation Ltd-run budget airline IndiGo is India’s largest airline with over 54% market share in the domestic passenger market followed by state-owned Air India, SpiceJet, GoAir, Vistara and AirAsia India. GoAir, which has filed papers for its initial public offering, recently rebranded itself to GoFirst and plans to revamp its business model to become a ULCC. The upheaval of the Indian airline industry has largely been on the back of deep losses reported in 2020-21 (April-March) because of Covid19 — a situation that has persisted with the second wave in the new fiscal.
“Massive, perennial losses have created a debt trap which has resulted in most airlines having very limited means of recapitalisation. The Government of India is providing almost no direct support; lenders have by and large closed their doors to airlines, even for restructuring purposes; and lessors will soon have no option but to start applying pressure on defaulting airlines. Simultaneously we are heading into a higher cost environment, while staff morale is declining,” aviation consultancy firm CAPA noted in its India airline outlook for 2021-22.
With the 2019 closure of Jet Airways, a potential disinvestment of Air India, and the weakened position of other existing players, the airlines industry is facing a threat of consolidation of market share with the major players. Additionally, with vaccination rollout gaining momentum, market participants expect the sector to bounce back. In his interview with Bloomberg TV, Jhunjhunwala said: “I’m very bullish on the Indian aviation sector in terms of demand and I think some of the increment players will not recover”.
In the ULCC airline business model, the company focusses on keeping operating costs even lower than typical budget airlines like IndiGo and SpiceJet. In the low-cost model, airlines unbundle certain amenities that are usually associated with the full-service airline experience — like seat selection, food and beverages, etc. In the ultra low-cost model, there is an even further unbundling of services like checked-in baggage, cabin baggage, etc. Traditionally, while LCCs operate with significantly lower fares and only somewhat lower costs than full-service carriers, ULCCs operate with minimal costs to ensure profitability.
Being a ULCC, Akasa will potentially attempt to take market leader IndiGo head on, which has bled through the pandemic. However, despite its massive losses, IndiGo remains in a comparatively stronger position. Speaking at the post-earnings conference call on July 27, IndiGo’s CFO Jiten Chopra said: “The strength of our balance sheet is our biggest defense in the fight against Covid19 and we will continue to enhance this strength by focusing on cost reduction, liquidity enhancement and capacity addition”.
CAPA said that it expects Indian airlines to lose a consolidated $4.1 billion in FY2022, similar to that in FY2021. In addition to Akasa, the relaunch of Jet Airways will also be key, primarily on the expectation that the two entrants will look to aggressively pursue market share in the initial days. However, their ability to go aggressive on the fares will depend on the government doing away with fare restrictions that were imposed during the reopening of Covid19 lockdowns.