Crippled. Fractured. Disrupted. These are a few of the words that perfectly fit the current scenario of the Airline Sector in India. The aviation sector has seen far more lows in its journey than highs, and the economic downturn in the said sector can no longer be glossed over. With the onset of the pandemic in 2020, the aviation sector experienced unprecedented turbulence when it was brought to a grinding halt with forced suspension of operations for a period of approximately 60 days. Suspension of activities compelled airlines to ground their aircraft, pare their utilization and defer deliveries, all of which resulted in reduced manpower requirements resulting in 39,000 job losses as per the Civil Aviation Ministry. The aftermath of these disruptions was very evident as two of India's largest airlines reported heavy losses. IndiGo incurred a net loss of over Rs 4,000 Cr while SpiceJet recorded over Rs 710 Cr in the first two quarters of the fiscal year 2020.
However, what took everyone by surprise was when Mr. Rakesh Jhunjhunwala, a highly reputed Indian investor and trader, recently announced his plan to launch an ultra-low-cost carrier, Akasa Air. In this article, we analyze major aspects of this development, to try and predict the prospects of Akasa Air: its chances of experiencing clear skies or turbulent weather.
Mr. Rakesh Jhunjhunwala is all set to invest $35 Million and own a stake of 40% in the company. He is also aiming to expand the business to 70 aircraft in just a span of 4 years. To put things in perspective, the same milestone took GoAir 15 years to reach. He is presumably applying the Dhandho strategy, that is, Heads I Win, Tails I don’t lose much. He has an estimated net worth of $4.9 billion, of which the investment in Akasa is merely 1%. Moreover, it is not the first time that Mr. Jhunjhunwala has shown interest in the aviation sector. He had previously bought stakes worth 1.05% and 1% in Jet Airways and SpiceJet respectively. It is indeed quite interesting to see his optimism; to quote him, “I am very, very bullish on India’s aviation sector in terms of demand.”
To understand one of the strategic advantages, we need to know a bit about Boeing Aircraft's history. In 2018, two Boeing aircrafts had crashed within a span of just 5 months. Following this, the Boeing 737 Max was banned for 2 years. This explains the fall in demand for the Boeing 737 from 837 units in 2018 to a scant 69 units in 2019. Naturally, the profits dropped drastically from $10.4 Billion in 2018 to a loss of $636 Million within a year. With the onset of Covid and delays in deliveries, the company is in serious peril. In such a situation, a bulk order would be a win-win for both parties. While the company would benefit by garnering a greater market share and the buyer potentially getting enormous discounts, the ultra-low-cost plan can be enabled.
As aforementioned, the losses faced by majority of the airlines will compel them to increase the ticket prices. But with Akasa, this is not the case! Akasa, having a fresh start, will be able to give discounts and lure customers while the dire situation of the current airlines would make it impossible for the competitors to match the prices of Akasa. This will be an advantageous opportunity for Akasa as it would easily capture the market share of these established players.
The cherry on the cake is the Government's Udaan project, under which around 100 airports are proposed to be built in Tier 2 and 3 cities. India will also be witnessing the debut of secondary airports in the next 5 years. The 39,000 jobs lost due to Covid could soon be recovered if projections are to be trusted.
Having the best of players in the market on board will surely be a silver lining for Akasa. One of the key players will be Mr. Aditya Ghosh, the Ex-President of IndiGo Airlines, who will be getting 10% of the new venture. Having done brilliant work during his time with IndiGo, he has got people highly anticipating further reforms to be brought about through Akasa. He had successfully made IndiGo one of the low-cost carriers in India, doubling its market shares from 20% to approximately 40%, thus capturing a significant proportion of the market.
Another key player coming aboard is Mr. Vinay Dube, the former CEO of Jet Airways, who will be getting 15% of the new venture along with many other experienced individuals. Among these veterans, marquee investors like Airbnb and PAR Capital Management are also investing in the venture.
Thus, Mr. Jhunjhunwala was correct in saying that he has “got some of the best airline people in the world” as his partners.
Indigo Airlines, which is by far the most successful airline in the Indian aviation sector with more than 55% of the market share, may strike one as the most potential rival of Akasa. However, the current situation of Indigo has not been too good ever since Mr. Aditya Ghosh stepped down from the company’s President position in 2018. He was the intelligent mind behind the innovative sale and leaseback model of Indigo Airlines. Even before the pandemic, Indigo began to report losses, with a cumulative loss of over Rs 10,000 Cr in the last 6 Quarters, making Indigo’s total debt balloon by a staggering 34.6% from Rs 23,551 Cr to Rs 31,690 Cr in just a year.
The airline has just over 14% of the market share in the airline industry. Though it recently received a staggering $150 Million in compensation from Boeing for the grounding of its 737 Max aircraft, SpiceJet still reported a loss of about Rs 729 Cr in its previous quarter. With a total debt of about 13,000 Cr, SpiceJet seems to be in a better position than Indigo to face the future challenges posed by a new entrant in the Industry.
Seeing the current situation of Air India where the government has never made a profit since its merger with Indian Airlines in 2007, it lost about Rs 10,000 Cr in FY 2020-2021 up from Rs 8,000 Cr loss in the previous year. It has been more than 4 years since the government tried to first privatize the airline but received no bids for the same. Let's wait and see what unfolds for the Airline in the future.
With a market share of about 6% and the company's cash balance being precariously low at just Rs 11.6 Cr, Go Air is in extremely dire conditions. The company’s cash crunch is so acute that it continues to default on aircraft lease payments. It now has a negative net worth of Rs 1,961.5 Cr with current liabilities exceeding current assets by Rs 4,362.58 crore. This is after the company received funding from another company of the promoters, the Wadia group, and credit from ICICI Bank. The company is looking to raise Rs 3,600 crore via IPO. The funds will be used for debt repayment, paying lessors, repaying dues to Indian Oil Corporation.
Cut Throat Competition
Even though the airlines are not profitable, they are certainly fighting for market share in the hopes of making profits. The easiest way to gain market share is by providing the best deals for customers, even if it means it is hurting the airline in terms of financials.
High Operational Cost
Running an airline company comes with a huge price tag, the company needs to pay for the plane and the fuel which goes into the plane, as well as its pilots, other employees, and the airport for using their parking space and runway. These are just the macroscopic aspects of an airline’s costs, there are plenty less conspicuous ones too, such as security, hospitality, food, etc.
Oil has always been a hot commodity with high demand all over the world, and the airline business is literally fueled by it. While oil prices fluctuate throughout the year, airline companies have no choice but to buy oil for their operations at whatever price tagged, which leaves them with no bargaining power. To rub salt on wounds, oil-producing countries are limited and hence a lot of countries and companies need to import oil from these nations into where the airline’s operation is based and these imports have taxes levied upon them, which again the airlines are made to pay.
It is not the first time that the Indian Aviation Sector is anticipating a brand new arrival. With many prospects as well as potential consequences on board concerning a new airline company starting, it will be interesting to witness how Mr. Jhunjhunwala brings about a revolution in the sector. Either the company flies high or crashes!
(Muskan Kalani is a 2nd year student pursuing Bachelor of Management Studies at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)
(Sashank Suraiya is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Junior Associate of the Xavier’s Finance Community.)