By Rajdeep Sil and Shelly Singh
Overview of the Aviation Industry
During the past few years, the Indian aviation market has surfaced as one of the fastest growing markets in the world. It stands at third position in the world in terms of the size of the domestic aviation market. By 2024, it is expected that India will surpass the United Kingdom to become the third largest market in terms of the passenger load carried.
However, one must remember that it is the same place which saw three full-service carriers – Jet Airways, Kingfisher Airlines, Air Sahara and one budget carrier – Air Deccan shut down or acquired by their rival. If we analyse some of the primary reasons for this, the following can be noted: First, fuel prices which are heavily taxed, form nearly 30% of an airline’s operational costs which significantly increase the operating costs for the airline. Second, due to the high competition prevalent in the aviation market, the carriers cannot increase the price beyond a certain point, which affects their profitability. Third, strict regulation and directives of the Directorate General of Civil Aviation (DGCA) require airlines to spend heavily on upgrading their security and safety measures which further increases the costs for the carrier.
To make matters worse, the pandemic has shaken the entire aviation industry with travel restrictions, grounded fleets and benched staff have pushed the entire industry into a corner. As a result, India’s airline industry is expected to incur a loss of USD 4.1 billion (INR 31000 crore approximately) in 2021-22, on top of the already reported loss of USD 3.9 billion (INR 29000 crore approximately) in June 2021, corresponding to the last fiscal year.
Even though the aviation industry has its own unique set of challenges in terms of strict regulations, intense competition and high costs, this has not deterred the existence of a significant number of players in this market.
Among the six major players in the market, IndiGo has ruled this market for over a decade now with nearly 50% market share and 8 continuous years of profits, courtesy its efficient operations and revenue management.
However, the tale of the aviation industry is about to get even more interesting with the entry of a new player.
New Entrant – Akasa Air
Having understood the dismal situation the aviation Industry is in, does it make much sense to start up an airline afresh in the current scenario? Looks like it did make a lot of sense to the Warren Buffet of India, Mr. Rakesh Jhunjhunwala. He has taken a bold step by entering the Indian aviation market by taking up a significant stake of nearly 40% in the soon to-be-launched airline – Akasa Air with an initial investment of nearly 250 crore (USD 33 million). This is in accordance with his statement that he is bullish on the growth of the Indian aviation market and that people will soon prefer air travel more than the other modes of transport.
Akasa Air has recently been in the news for all the good reasons as it plans to finally take to the skies in the summers of 2022.
- Forming a formidable team with Vinay Dube as the CEO & MD of Akasa Air & Aditya Ghosh as the representative of Rakesh Jhunjhunwala in the Board of Directors. Vinay Dube served as the CEO of Jet Airways & GoAir in the past. While, Mr. Aditya Ghosh played a major role in turning around IndiGo as the president of IndiGo.
- Getting NOC from the Ministry of Civil Aviation to start operations.
- Placing an order for 72 fuel efficient B737 Max Aircraft.
Business Model
While there are many players in the aviation market, how does Akasa Air differentiate itself?
Apparently, Akasa Air claims to be an ULCC (Ultra Low Cost Carrier). So if we try to draw an analogy, Akasa Air will try to be the D-Mart of Indian aviation, offering services cheaper than the cheapest. This would require the entire operations to be structured such that it reduces the cost at every single stage.
If we take a look at the breakup of an airline’s operational costs, it can be observed that the fuel costs alone constitute nearly 30% of an airline’s operating costs. With fuel being pretty much out of the airline’s controls, that leaves Akasa to reconfigure the rest 70% of the costs.
Some of the mechanisms it can use to manage the rest 70% of the costs can be :
Sales & Leaseback Model
To put it simply, the airline company (A) will buy aircraft from the aircraft manufacturer (say Boeing) and then sell the aircraft to another company (B) with the assurance that the airline A will take back the lease of the same aircraft and pay a periodic rent for its usage.
Unbundling of Services
Under this, every service provided by the airline will be charged, for example, charging for the cabin & checked in baggage, thus keeping the “travel” prices low.
Focussing on Employee Morale and their Upliftment
Although the benefits of this exercise can’t be directly measured in monetary terms, a force of motivated & agile employees can definitely optimize the entire operations as can be seen in the case of SouthWest Airlines as well. After all, “it is the employees who put soul in the flying piece of Aluminium”.
Is it the Right Time to Enter?
It might seem that with the existing players already struggling, this might not be the right time to enter. However, two arguments can support the timing of Akasa Air :
Bargaining power with a struggling Boeing
In 2018, Boeing faced a major blow when two B737 Max aircrafts crashed in an interval of just 5 months, this led to a worldwide grounding and cancellation of orders from the airlines. Coupled with the pandemic, things have only worsened for Boeing. Thus, currently Boeing can make do with some orders even if it is at a discount to gain back the credibility. This can save Akasa a lot of funds and possibly earn profit by implementing the sales & leaseback model.
Now let’s understand how Akasa can use this to extract a profit even before its first takeoff.
Generally, an aircraft (say Boeing’s B737 Max) costs nearly USD 100 million. Now if Akasa places a large order (say 70 aircraft) with Boeing, which is already struggling to get orders, then Akasa can easily get a hefty discount whose magnitude can go as high as 40%, thus a single aircraft would now cost USD 60 million.
Now with the sales & leaseback model, Akasa can sell this aircraft to the lessor at USD 65 million per Aircraft, along with a promise to lease it back. Now the lessor will also be very happy with this deal since it gets the aircraft at a cheap rate as well as a customer giving a recurring income. Thus, Akasa makes a profit of 5*70 = USD 350 million even before it takes off ! In the past, IndiGo has made use of this model efficiently to gain profits.
Dark red balance sheet of other airlines
With other airlines bleeding funds profusely at the moment, thus offering tickets at a cheaper rate will be the last thing on these airlines’ minds otherwise it will be difficult to recover their losses. Here, Akasa with a fresh balance sheet can afford the initial cash burn to attract customers and gain market share.
Impact on the Aviation Industry
Factors that can cause Turbulence for Akasa
Akasa’s flight into the Indian Aviation Industry won’t be smooth. It is bound to face certain issues on the way. First is the Aviation Turbine Fuel (ATF) prices. The ATF prices have risen over 96% within a span of one year, and for a component that makes up nearly 30% of the cost structure, Akasa needs to get its cost accounting spot on.
Next is the Fluctuating Exchange Rate. A weaker Rupee can hurt Akasa more, as it can increase the prices of ATF. Also it can increase the prices of maintenance since many spare parts & components need to be imported.
Last corresponds to the Aircraft B737 Max. With B737 Max coming out of a recently lifted ban over multiple crashes, Akasa can only hope that no further crashes takes place with the B737 Max, since this can ground the entire airline in a snap.
Conclusion
While there is no doubt that it is a great time for the entry of a new player in the aviation market but with the stiff competition and the strict regulations, Akasa Air needs to play its cards really well.
With the management of Akasa Air consisting of veterans of aviation industry including many from the now defunct Jet Airways, it can be safely said that even if the management does not know what to do, they definitely know what not to do.
At the same time, with Aviation being a capital-intensive industry, Akasa Air should have enough capital to bear losses for at least the first two or three years.
With that said, will Rakesh Jhunjhunwala soar to new heights with this new venture, or will this be just another grim story in the aviation space? Only time will tell.
References
- https://www.akasaair.com/media-center
- https://www.business-standard.com/podcast/companies/what-could-work-and-what-needn-t-for-rakesh-jhunjhunwala-s-airline-venture-121101300253_1.html
- https://www.hindustantimes.com/business/akasa-air-rakesh-jhunjhunwala-to-invest-33-million-for-low-cost-airline-in-india-101627490375078.html
- https://transportgeography.org/contents/chapter5/air-transport/airline-operating-costs/
- https://www.statista.com/statistics/575207/air-carrier-india-domestic-market-share/
- https://www.outlookindia.com/website/story/opinion-indian-aviation-industry-present-tense-future-uncertain/384873
- https://www.ibef.org/industry/indian-aviation/infographic
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