Wednesday, October 13, 2021

Rakesh Jhunjhunwala's bold bet on Akasa Air: Is Indian market ready for another low-cost airline?

New Delhi: Akasa Air, the new kid in the Indian aviation market, backed by ace investor Rakesh Jhunjhunwala on Monday received the no objection certificate (NOC) from the aviation ministry and is planning to start ultra low-cost airline service across the country from the summer of 2022. But before that it needs Air Operating Permit (AOP) from the aviation regulator DGCA, which will issue the licence once it gets satisfied with all the aspects of operations and safety.

SNV Aviation Pvt Ltd, the company that will launch Akasa Air is also backed by former Jet Airways CEO Vinay Dube and Aditya Ghosh, who has spent over 10-years as president and whole-time director at InterGlobe Aviation, the company that runs India's largest carrier IndiGo.

While it is true that Aditya Ghosh has a formidable experience in running a low cost airline, Vinay Dube, who was at the helm of Air Jet Airways and will be the CEO of Akasa Air, has not yet got any success in running a low-cost airline. But still the company has taken a bold bet to compete with established players like IndiGo and SpiceJet in the low-cost carrier (LCC) space. Analysts believe Akasa Air is going to have a tough time to keep control on costs given the fact that crude oil, which accounts for nearly 40% of an airline's operating cost, is at an over four-year high. Also the company has to shell out more to hire pilots as the situation in the aviation industry is changing fast with airlines world-wide resuming international flights and have started offering jobs to pilots who were laid off. If it hires expats, it has to pay more, increasing cost.

In the past as well we have seen low-cost airlines such as AirAsia India, which started operations in June 2014, has not seen a break-even year yet and AirAsia Bhd is no longer infusing funds into the airline after the Covid pandemic made the situation worse for the aviation sector, that has huge fixed costs and need a fixed regular cash inflow to sustain operations. The Tata group now owns 84% in AirAsia India and may soon acquire 100% stake in the company. Except for IndiGo, which was profitable till the outbreak of the Covid pandemic, no other low-cost airline in India has yet succeeded as an LCC.

Even Vistara, which started operation as a full-service carrier, has racked up losses even after making multiple changes to its aircraft configuration. Vistara now has all-economy-class aircraft in its fleet and the airline has started a special fare class with Buy on Board (BoB) as an option. In commercial aviation, BoB is a system where food or beverages are not included in the ticket price, and fliers have to purchase them either on board or as an optional durig or after booking tickets.

Jet Airways, which was home to Akasa's CEO Vinay Dube and other team members of Akasa, was grounded in April 2019, as the airline was unable to service its debt because of huge operating cost and low pricing power with the presence of no-frill carriers like IndiGo, which controls half of the aviation market in India.

And now, with Tata group consolidating its position further with Air India win, competition in the Indian aviation space will get tougher in the coming days. Until last month, half of the aviation market in India was fragmented. But once Tatas complete Air India takeover, the market will be controlled by two major players--IndiGo, which controls around 50% market share, and Tata group, which will command a quarter of the market. Even it won't be easy to push weaker players like Go First, which would by then have raised funds through its proposed IPO and would have a plan in place. SpiceJet, too, is expected to tide over its funding crisis by then.

12/10/21 Priyabrata Prusty/

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