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India’s new ultra-low-cost carrier, Akasa, chasing opportunity post the COVID-19 crisis

Setting up an airline in India is easier said than done. Here’s why, reports Anjuli Bhargava.

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October 22nd 2021

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Realms of academic literature dictate crises are the best times for business start-ups. Read More » The new kid on the block has a clean slate. No baggage so to speak. It can strike long-term deals at rock bottom prices with vendors and suppliers and young talent is available at cheaper rates, among a host of factors.

All this holds true for Akasa, the newest airline to enter India’s aviation ken, funded by market mover, Rakesh Jhunjhunwala, and led by Vinay Dube, a former Delta Air top executive brought in by Naresh Goyal to fix Jet Airways when it was feeling the economic and political heat in more ways than one.

But industry experts and analysts predict Akasa’s going may not be as smooth as it or others think. Several factors are likely to make its road ahead rocky and potholed. Former finance and aviation secretary, Ashok Chawla, struck a less than optimistic note when he said: “Akasa has chosen the right segment and it has some marquee names behind it. But it has entered a crowded space with established players. Already they have covered substantial ground [in the market].”

To begin with, airlines in India need a head honcho figure to navigate India’s complicated rules, circuitous regulations and quite often corrupt bureaucracy. “Who will be Akasa’s Naresh Goyal, Jeh Wadia, Vijay Mallya, Ajay Singh or Rahul Bhatia ?” asks an industry veteran.

“Jhunjhunwala is primarily a financial investor and while former IndiGo president and CEO, Aditya Ghosh, holds a small stake in the carrier and is on the board, he is unlikely to play the role a Naresh Goyal or Ajay Singh (SpiceJet) would in helping the start-up LCC “navigate the complex web of India’s establishment”, a factor crucial for its success.

Secondly, Dube, although respected for his knowledge of commercial aviation, has very little experience about how Indian aviation operates. “Aviation is a mug’s game in India where players spend much time ensuring things don’t happen for their rivals,” said a former Jet Airways old-timer.

“In today’s scenario, an already highly stressed environment, many of its rivals, especially SpiceJet, could see a huge pilot exodus to Akasa if it buys MAX aircraft. It would have a lot to lose if Akasa takes to the skies,” he said.

“I expect them to use their heft to delay the newcomer’s plans”, a former ministry of civil aviation secretary said recently. He said he has witnessed over the years many airline chiefs spend a fair bit of time “worrying about and scuppering the plans of rivals”. Competition is better killed before it begins is the thinking.

Another reason why the industry is not fully convinced of the airline’s success is that almost all its senior management is from legacy airlines. Barring Aditya Ghosh, Dube and the main team are either ex-Jet Airways or have had limited experience in low-fare airline management.

“This is another drawback I see for Akasa. The two are very different animals: a legacy carrier and a full-service one. Not everyone appreciates how different the two can be,” said a former Jet Airways COO, speaking on the condition of anonymity.

Aviation history, not just in India but globally, is littered with examples of experts in one type of airline operating model attempting to run the other and failing. In Kingfisher Airlines’ early days, Vijay Mallaya had brought in Alex Wilcox, who set up and worked for JetBlue, an LCC in the U.S. Wilcox quit very soon after he realised Mallya was talking low-cost but thinking and wanting a full-service airline. He felt his expertise was not required for Mallya’s plans.

A senior IndiGo management member said this is more a mindset issue than anything else as all executives carry some legacy from all assignments. “Practices, service quality standards, in fact almost everything is determined by the culture you are groomed in and these experiences are never easy to change or shake off,” he said.

Another crucial problem many see is the newbie’s strategy of aiming for an ultra-low-cost carrier (ULCC) space, a market category most argue does not exist in India.

“In India, we have low-fare airlines with high costs with some having a slightly lower high cost”, said former commander, Shakti Lumba, A combination of high cost airports, high aviation turbine fuel (ATF) prices and a gamut of other factors mean airlines in India operate in a very, very high cost environment,” he said.

“Charges for landing, navigation and other services at India’s main metropolitan airports are higher than Singapore and Dubai by almost 30%-35%. Carriers in India also pay far higher rates for fuel, encouraging the ridiculous practice of [our] airlines refueling in other countries rather than at home.

“Moreover, unlike the U.S. and European countries, where airlines that offer no frills can function out of secondary airports with lower charges, there is not this option in India.”

Chawla said at best the ULCC is a “branding gimmick and all players will be as low or high cost as an IndiGo or a SpiceJet, whatever you choose to call them”. “Two of the biggest factors that allow a Spirit in the U.S. or any other ULCC to be so is they charge for both checked in and hand baggage.

“In India, passengers receive 15 kgs of free check-in luggage and 7 kgs of hand baggage. If average fares are around Rs 3,000 (US$40) net to Indian airlines, allowing airlines to charge for 22 kgs of baggage, it could mean an incremental average fare rise of Rs 500 per passenger.”

In the U.S. and Canada, where ULCCs exist, the behaviour of full-service carriers and ULCCs is very different. It’s not as if everyone adheres to the practices followed by each other. “The market is differentiated enough. Those who fly full service (FSC) would not fly with an ULCC. They are willing to pay for the conveniences and services a full-service airline offers,” explained a former Jet CEO. In India, there is little difference between fares offered by FSC and LCCs although the former provides more services to customers. IndiGo and SpiceJet routinely lose fliers to Air India on this count” alone.

“Air India allows 25 kgs check baggage plus 8 kgs of hand baggage versus an LCC average of 15 kgs of checked-in luggage. The minute the government allows one airline to charge for baggage, everyone will quickly follow.

“Conversely, if any airline does not charge for baggage, it will have full loads as India’s flying public is highly price sensitive. So industry sources say unless rules allow only one or two airlines to charge for baggage and they actually do it, this ULCC model cannot work in India.”

For all the negatives, there is one huge positive for a newcomer. Akasa’s biggest positive is it has not had to survive through the two years of the pandemic, a situation that afflicts every other airline in India.

All its potential rivals have reported massive losses and have balance sheets saturated in red ink. Akasa is starting with a clean financial slate. With seed capital funding of around US$100 million, it can easily launch a tidy but small operation and raise money through sale and lease back. If it orders 70 aircraft, industry insiders said Akasa could receive US$5 million to US$7 million per aircraft in the deal.

Also cash could start coming into the ULLC’s coffers as flights are announced six months ahead and people start booking. Talent too will not be difficult to attract, especially at the mid and lower levels.

“The ultimate test will be delivery. If Akasa executes its operations to perfection, be it route strategy, financial management or bringing in productivity, efficiency and a sharp focus on costs, it can succeed because of the poor shape of all its rivals in the skies,” said a former MOCA secretary. Although that, as India has amply demonstrated, remains a big if.

In the end, the Indian flying public stand to gain the most from Akasa’s arrival in the market. More airlines translate into lower fares and more senseless undercutting, all of which is good news for air passengers. Taxpayers and travellers can only wish the brave hearts good luck and hope they make a success of their gamble. As the saying goes, you don’t manifest dreams without taking chances.

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