Monday, September 06, 2021

Indian aviation: A study in paradox

Investments in the Indian airline industry are subject to market risks, read all scheme-related documents carefully. If there is an opportunity to cut losses, do so asap. But nobody wants to read the fine print, more so entrepreneurs, though the airlines in India are stumbling from one quarter of losses to another.

Take, for instance, the announcement by investor Rakesh Jhunjhunwala who is willing to raise over ₹260 crore to fund his airline start-up, Akasa. It remains to be seen if the airline will adopt the low cost or ultra-low-cost business model, but it is safely assumed that majority of aircraft will be based in Bengaluru, one of the few airports that can offer slots. Most likely, it will be headquartered in Mumbai.

Investors bet on India’s macro-economic fundamentals — a young population, low air-travel penetration, and a shift to domestic travel. Concurrently, there is the challenge of stagnant wages, job losses, dipping consumer sentiment and a banking section averse to lending. Initial investors may recover their investment and then some depending on how the investment is structured. Retail investors are best advised to be wary, and not to underestimate the complexity of airline investments.

Onlookers are in shock and awe. An airline start-up during a pandemic is not that common. But this speaks to the paradox of the Indian airline market that perplexes even experienced minds. Airlines in India have witnessed huge losses, yet it is also home to one of the most profitable airlines; macro-economic woes continue yet folks travelling unabated, pandemic notwithstanding, are a reality; several of the incumbents continue to fly in spite of defaults. To enter this arena is challenging, to say the least.

Airlines face a market reality where traffic levels have collapsed and price floors and capacity caps continue to be mandated by the government. Occupancy factors are in the 50 - 60 per cent range, that too after flights have been combined. Finally, the elephant in the room — the sale of Air India.

What will be critical is an accurate reading of the market. Getting this wrong has meant that even well-funded airlines have failed to turn a profit and witnessed continuous margin deterioration. Levers that worked pre-pandemic may not quite work the same.

05/09/21 Satyendra Pandey/Business Line

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