Will India’s Akasa Air be able to weather the turbulence facing other airlines? – The National

India has had a history of airlines which have ended in failure. Among them were Vijay Mallya's Kingfisher Airlines, businessman Naresh Goyal's Jet Airways and the country's first low-cost carrier, Air Deccan, founded by former army captain GR Gopinath.

Despite these collapses and a turbulent operating environment, which has only worsened during the coronavirus pandemic, Indian billionaire Rakesh Jhunjhunwala is seemingly undeterred.

He is trying his hand at bringing the new Akasa Air to the skies along with former Jet Airways chief executive Vinay Dube. The new airline is billed as an ultra low-cost carrier and it plans to start operating in the coming months. But Akasa Air will be flying into stormy weather.

Considering the past and present situation, it will not be a cakewalk for the company and it will have to overcome many hurdles to make its way up, says Nitin Shah, the executive director of Findoc, an Indian financial services group.

As the aviation industry worldwide grapples with the impact of the pandemic, Indian airlines are projected to report collective losses of between $3.2 billion and $3.7bn in the current financial year ending March 31, 2022, according to aviation consultancy Capa India.

But analysts also point to room for growth in India's aviation sector, as Asia's third-largest economy is expected to expand in the coming years.

The country's economy is forecast to grow 9.5 per cent this year and 8.5 per cent in 2022, according to the International Monetary Fund, after shrinking 7.3 per cent in 2020 because of the Covid-19 pandemic.

By 2030, Indias international air traffic is projected to increase by between 50 million and 60 million passengers a year compared with pre-Covid levels, to reach 115 million to 125 million, according to Capa. It is then expected to double again by 2040, to 240 million.

Increasingly, Indians are expected to take up air travel. Currently, only a single-digit percentage of its population of almost 1.4 billion travels by air. And that is the market potential Akasa Air is targeting.

India is one of the fastest-developing aviation markets and has extraordinary potential, says Mr Shah. There is a huge potential for the sector to grow in future. The Indian aviation sector has witnessed a strong recovery in the post-lockdown era.

But the near-term challenges are great, analysts say. Even before the Covid-19 crisis hit, India's aviation industry was going through turbulence. Factors including price wars between India's carriers and soaring taxes on fuel pushed several airlines into steep losses, leaving them in a precarious position.

High fuel and running costs, and a capital intensive business, along with cut-throat competition, has made the business of even the best-placed players quite vulnerable to any adverse developments, says Richa Agarwal, a senior research analyst at Equitymaster.

High fuel and running costs, and a capital intensive business, along with cut-throat competition, has made the business of even the best-placed players quite vulnerable to any adverse developments

Richa Agarwal, senior research analyst, Equitymaster

In recent history, the full extent of the woes of the sector came into sharp focus with the demise of Kingfisher Airlines in 2012. The airline, set up by liquor tycoon Vijay Mallya, started operations in 2005. It launched amid great fanfare and gained a lot of popularity among consumers, becoming known for its high levels of customer service.

But the competitive environment and the airline's high costs meant that it became unviable, and it became a struggle for the company to pay its staff and bank loans. It was the airline's failure and insolvency that led to Mr Mallya becoming a wilful defaulter, as he fled to the UK, where he is currently based. The Indian government is fighting to have him extradited.

Air Deccan went down with Kingfisher after the budget airline, which had run into losses, merged with Kingfisher in 2007.

Following Kingfisher's demise, low-cost carrier SpiceJet was on the verge of collapse. But Ajay Singh, its co-founder, stepped in with a rescue package. This involved restructuring the airline's ownership. SpiceJet survived, seemingly against the odds.

Indian billionaire Rakesh Jhunjhunwala. Prashanth Vishwanathan / The National

Players in this segment have shut shop in the last few years due to mounting debts, poor acquisitions and cheaper prices offered by competitors, says Gaurav Garg, the head of research at CapitalVia Global Research. Also, the rising fuel prices and a depreciating rupee seem to be a major reason in the increasing operating costs of the airlines.

Jet Airways also became a victim of the tough operating environment and it stopped flying in April 2019, when it ran out of cash.

Even Air India, the country's flag carrier, has long struggled with losses and mounting debt. This led to its long-awaited privatisation this year, with Tata Sons acquiring the ailing airline.

In the past decade, seven airlines have ceased operations, including regional carriers like Air Costa and Air Pegasus, alongside bigger players.

There is fierce competition among Indian carriers, as the market continues to recover from the impact of Covid-19. Akasa Air's plan to hit the skies coincides with Jet Airways' aim to resume operations in 2022 under new ownership.

We believe the entry of another low-cost operator, Akasa, will only make the going tough, Ms Agarwal says. The industry dynamics will remain challenging with the fight for slots and traffic, and high costs.

For these reasons, she does not think it is a good investment.

We believe that in the past, quite often, tycoons obsession for airline business has been more driven by megalomania than a sound investment decision based on economics, she says. Its not bad luck.

The impact of Akasa Air on low-cost carriers is likely to be similar to that of Kingfisher's on full-cost carriers seen in 2005, according to Kapil Kaul, chief executive and director at Capa India.

Kingfisher's impact on full-cost carriers was very strategic, which led to some bad decisions by Jet Airways, including the acquisition of Air Sahara, he says.

However, Akasa Air is regarded as a major emerging player based on the financial strength and the hiring strategy so far, Mr Kaul says.

Working in its favour is the Bengaluru-based airlines strong team, which offers a chance at success, some experts say.

Mr Jhunjhunwala, the co-founder of Akasa Air, holds a 40 per cent stake in the new airline. A stock trader and investor, he is often referred to as the Warren Buffett of India because of his savvy stock investments.

Mr Dube is the chief executive of the new airline, and Aditya Ghosh, the former president of India's largest domestic carrier, IndiGo, is also on the board.

Certain carriers have committed the mistake of over expansion and taking on huge debt, which led to stretching too wide and ultimately, the collapse of the business, Mr Garg says.

On the contrary, Akasa being a well-capitalised new entrant, holds the potential to be successful over the long term if it focuses on certain crucial elements like managing its fleet composition, distribution model and destination selection, which would differentiate it from the existing players and provide a competitive edge.

Akasa Air is already well-positioned for its take-off in 2022, having placed an order this month for 72 Boeing 737 Max planes, valued at close to $9bn.

We are already witnessing a strong recovery in air travel and we see decades of growth ahead of us, Mr Dube said at the time of the deal, announced during the Dubai Airshow.

Akasa Air's core purpose is to help power India's growth engine and democratise air travel by creating an inclusive environment for all Indians, regardless of their socio-economic or cultural backgrounds.

As an ultra low-cost carrier, Akasa Air will have an opportunity to win over passengers with low fares, says Mr Shah. But the key to profitability will be focusing on keeping operating costs even lower than other airlines like IndiGo and SpiceJet, and making profits by selling a big volume of tickets.

Akasa Air will have to navigate its way through strong headwinds, but soaring profits could be on the horizon.

Updated: November 28th 2021, 4:40 AM

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Will India's Akasa Air be able to weather the turbulence facing other airlines? - The National