Akasa (Sky) is the limit: Why launching airlines during Covid is smart business
The proposed airline Akasa (meaning 'the sky') could be backed by ace investor Rakesh Jhunjhunwala and aviation veterans, including Vinay Dube
As the Indian aviation sector recoups some of the massive losses incurred as a result of the Covid-19 pandemic, new players may enter the market. One among them could well be a low-fare airline backed by ace investor Rakesh Jhunjhunwala and seasoned aviation professionals, including former Jet Airways and Go First Chief Executive Officer (CEO) Vinay Dube. Interestingly, if it comes through, the airline could be the second after FlyBig to launch in the Covid era in India.
Dube is leading the talks with the 'Warren Buffet of India' Jhunjhunwala, who could invest up to Rs 260.7 crore ($35 million) and own up to 40% in the airline, which has been tentatively named as Akasa, meaning 'The Sky', according to a report in The Economic Times. A foreign investor could also be roped in. Praveen Iyer, former vice president at Jet Airways and former chief commercial officer at Go First; and Anand Srinivasan, former head of revenue management at Go First could also be part of Dube's team, according to a Times Now report. Another ex-Jet honcho Nikhil Ved may also be involved, Livefromalounge said.
The airline is awaiting a green signal from the Ministry of Civil Aviation (MoCA). However, a MoCA no-objection certificate (NOC) is just the first step, an industry source told ET, adding that for further applications, the Akasa team needs to finalise a business plan, for which it needs funds. The team's success would depend upon when and how much money it can raise and the airline could start by the middle of 2022.
How ULCCs are different
According to a Livefromalounge article, the new airline is looking to raise $100 million and work on an Ultra Low-Cost Carrier (ULCC) model. ULCCs take the LCC model further. Apart from offering some of the lowest fares, every single inch of space in the aircraft is used for advertising. Therefore, luggage bins, foldable seat back trays, paper cups, food packaging, and even the uniform of the flight crew carry advertisements. Every unbundled service comes with a charge. As an LCC, a ULCC also offers a bare-bones in-flight service. But there is more to ULCCs. ULCCs chase markets and consumers that the traditional carriers tend to ignore. They also encourage consumers to make impulse purchases drawn by super-low fares and high value-to-cost equations for the consumers.
The first Flybig flight that used a plane wet-leased from SpiceJet. Image courtesy: Twitter/@flybigairlines
Dube has been planning to launch a new airline for some time now. According to a CNBC-TV18 report earlier this year, Dube was looking to launch the airline with five aircraft by the end of the year. Apart from Jet Airways and Go First, Dube had worked with American Airlines and Delta Airlines and knows the low-cost carrier (LCC) model well.
Launching when others are shutting down
However, isn't it odd that when the Covid-19 pandemic has devastated the aviation sector across the world, causing most airlines to wallow in losses, and some of them to even fold their wings, there have been some others that have chosen to start operations?
The International Air Transport Association (IATA) -- a leading global aviation trade body -- had predicted that airlines would lose $48 billion through 2021, according to a Simpleflying report. According to the frontline aviation consultancy firm CAPA, Indian carriers are expected to register a consolidated loss of $4.1 billion in the current fiscal, PTI reported. The loss would be similar to that incurred in 2020-21. Domestic passenger traffic has been projected to be around 80-95 million in 2021-22, much less than the 140 million passenger volume recorded in 2019-20. International traffic has been projected to be in the range of 16-21 million passengers. Both the domestic and international numbers are, in fact, expected to be at the lower end of the range.
Recession in the Indian aviation sector could be seen in widespread salary cuts, leave without pay, job losses, and major airlines like SpiceJet defaulting on lease payments. The second Covid wave stymied the sector's steady recovery, scaring passengers away again, as airport footfall and aircraft passenger load factors fell again. Flight capacity, which seemed not far from being restored to 100%, had to be kept moderate. There is no clarity on when there would be a full-scale recovery in the Indian aviation sector, and a third Covid wave could spell absolute doom for the industry.
Yet, Akasa is keen to take to the skies even in such an inclement environment. There must be a method to this madness.
Sanjay Mandavia, CEO of FlyBig, which was launched in December 2020, said in an interview with The Hindu Business Line that by starting during the Covid time, the airline would benefit from tailwinds and lower leases. In fact, leasing of planes was about 20-25% lower than usual, which gave FlyBig better negotiation power and bulged its margins.
Bullish on the future
Moreover, Jhunjhunwala, who is known for his bullish outlook on the Indian markets, sees the Covid situation in India continuing to improve strongly. He believes that there would not be a third Covid wave, considering that the vaccination drive is picking up pace and immunity growing. He also points out that people are now better prepared to face the pandemic. He had bet energetically on local entrepreneurs and made small investments in the aviation industry earlier. He had owned a little over 1% of SpiceJet at a time it was being turned around by its current Chairman and Managing Director (CMD) Ajay Singh. He had also owned about 1% of Jet Airways, which closed down in April 2019. Despite the dark clouds of slowdown, the big bull thinks that India's bull market would continue and that inflation is transitory.
The soon-to-be-launched flypop promises to connect London and secondary Indian cities at low fares. Image courtesy: @_flyPOP
However, irrespective of whether the aviation sector and the economy, on the whole, recover significantly or not, opening an airline at this time has some very valid reasons behind it. Let us elaborate on the points made by Flybig's Mandavia.
Why starting during Covid makes perfect sense
Firstly, as airlines across the world fell on bad times, there was a flurry of deferred or cancelled leases, and suddenly, there was a huge oversupply of aircraft. Consequently, lessors started looking to somehow offload their planes and even offered favourable leasing contracts, like power-by-the-hour deals. "We have a ‘power-by-the-hour' deal on the aircraft. We’re not paying until we fly. That would never have been possible for a startup pre-Covid," Nino Judge, CEO of upcoming startup airline flypop, said during a webinar organised by Simpleflying.
The pandemic has resulted in a huge number of aircraft ending up with no takers. There is an abundance of surplus planes, while there are very few airlines to buy or lease them. This has given an opportunity to startups to snap up high-quality aircraft at a much cheaper rate than would have been possible before the pandemic. Birgir Jonsson, CEO of Icelandic startup airline PLAY, said that there were a lot of top-notch planes available at "absolutely unbelievable terms".
Moreover, the pandemic has driven a number of pilots and cabin crew members out of work. A startup airline can absorb these aviation professionals on favourable terms. The airline also benefits from the services of seasoned aircrew. These 'bottom-of-the-market' deals are critical for a startup airline during the pandemic, Judge said. "You have cheap capital, cheap planes, cheap crew. It’s the perfect time to start an airline," he said.
Also, a new entrant in the aviation market may not be burdened by years of debt like an established player, and, therefore, has a distinct credit advantage.
CAPA had predicted that there would either be a strategic consolidation in the domestic aviation market in India once Covid restrictions are done away with, which would result in there remaining only three-four carriers, or there could be no consolidation, and a few startups may emerge, resulting in eight-nine carriers occupying the Indian airline space. If the Akasa project works out, we may indeed be heading towards the latter possibility.
(Cover image courtesy Unsplash/Vista Wei)