Downturns can be the perfect time to launch a new start-up. The new kid on the block starts with a clean slate (with no baggage), it can seek bargains and strike long-term deals on all inputs and with all vendors and suppliers at rock bottom prices; talent is available at a cheaper price, among a whole host of other factors.
All this holds for Akasa—the new kid on the block in India’s aviation arena—funded by market mover Rakesh Jhunjhunwala and led by Vinay Dube, a former Delta employee who was brought in by Naresh Goyal to head Jet Airways—when the airline was beginning to feel the heat in more ways than one.
Even as Akasa obtained a no-objection certificate from the aviation ministry, industry experts and analysts argue that Akasa’s going may not be as easy and smooth as it or others think. Many factors are likely to make its road ahead rocky and full of potholes. Former finance and aviation secretary Ashok Chawla sounds on a less than optimistic note when he says, “Akasa has chosen the right segment and it has some marquee names behind it but it enters an already crowded space with established players who have already covered substantial ground”. He adds that there is a saying “better late than never” but in India, the way aviation sector works is “better never than late” to his mind.
Airlines in India need a head honcho type of figure to navigate India’s complex 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 Aditya Ghosh holds a small stake and is on the board, he’s unlikely to play the role that a Naresh Goyal or Ajay Singh play in steering the airlines and helping it “navigate the complex web of India’s establishment”, a crucial factor for success.
He argues that any airline that hopes to get anywhere in India needs a “savvy, street smart father figure” and promoter to help it deal with and navigate the corridors of power at Rajiv Gandhi Bhawan and various other government departments it necessarily comes into contact with. Akasa has already discovered this as its primary funder (Jhunjhunwala) is yet to get his security clearance and without it, the airline will not be able to get its airline operator permit (AOP). Many argue that this will take a few months and some say that the airline’s plans to launch by next summer will be delayed on this count alone.
Dube—although known and acknowledged for his understanding of the general aviation industry—is not familiar with the way things work or don’t work in India and has very little experience in how India operates. “Aviation is a mug’s game in India where players spend as much time ensuring things don’t happen for their rivals”, says a former Jet old-timer, who cites the example of his former boss Naresh Goyal.
Whenever Goyal wanted something to happen or not happen, he usually put his former aide, the late S.K. Datta, on the job for him. He was single-handedly successful in scuppering Tata's plans of starting a new airline with Singapore Airlines back in 1996-97. “In today’s scenario and already highly stressed environment, many of the rivals—especially SpiceJet who could see a huge pilot exodus if Akasa buys the Boeing 737 Max aircraft—would have a lot to lose if Akasa takes to the skies. I expect them all to use their heft to delay the newcomer’s plans”, says a former MOCA secretary. He says he has seen over the years many airline chiefs spend a fair bit of time “worrying about and scuppering rival’s plans”. Competition is better killed before it begins to bite is the thinking.
Another reason why people are not fully convinced of the team’s ability to pull this off is that almost all the talent in the airline is people who have been with legacy airlines. Barring Aditya Ghosh—former president and CEO of IndiGo who is on its board and who is an investor as well—Dube and the main team are all either ex-Jet or have little 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, and not everyone appreciates how different the two can be”, says a former Jet COO, speaking on the condition of anonymity. He says that aviation history—not just in India but globally—is littered with examples of experts of one type of model attempting to run the other and failing.
In Kingfisher Airlines' early days, Vijay Mallya had brought in Alex Wilcox, who set up and worked for JetBlue, a low-cost airline in the U.S. Wilcox quit very soon after he realised that Mallya was talking low-cost but thinking and wanting a full-service airline. He felt his expertise was not what was required for Mallya’s plans. A senior IndiGo management member says that this is more a mindset issue than anything else as one carries some legacy from where one comes in all assignments. “Practices, service quality standards—almost everything is determined by the culture you are groomed in and these things are never easy to change or shake off.”
Another crucial problem that many see is the newbie’s claim of aiming for an ultra-low-cost carrier (ULCC) space—a space that most argue doesn’t exist in India. “In India, we have low fare airlines with high costs with some having a slightly lower high cost”, says veteran industry expert and former commander Shakti Lumba. A combination of high-cost airports, high aviation turbine fuel (ATF) prices and a gamut of other factors ensure that airlines in India operate in a very high-cost environment.
Charges for landing, navigation, and other services at the main metro airports in India are higher than Singapore and Dubai by almost 30-35%. Carriers in India also pay far higher rates for fuel—encouraging a ridiculous practice of carriers trying to refuel in other countries in the region rather than at home. MRO operations in India—despite it having a wealth of skilled engineers and personnel—has never taken off due to a quagmire of absurd government rules, regulations, and taxes. This forces Indian carriers to look outside and pay in foreign currency for their MRO requirements.
Moreover, unlike the U.S. and other European countries, where airlines that offer no-frills can function out of secondary airports—where charges are lower—is not an option here. Chawla adds that ULCC is at best 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 or any other ULCC to be so is that they charge for both checked in and hand baggage. In India, passengers get 15 kgs of free checked-in and 7 kgs of hand baggage. If average fares are around ₹3,000 net to Indian airlines, allowing airlines to charge for 22 kgs of baggage could mean an incremental average fare rise of ₹500 per passenger.
But in the U.S. and Canada, where ULCC exists, the behaviour of full-service and ULCC is very different. It is not as if everyone follows the practices followed by each other. “The market is differentiated enough and those who fly the full-service would not fly the ULCC and are willing to pay for the conveniences and services the full-service airline offers”, explains a former Jet CEO. In India, there is little difference between fares offered by FSC and LCCs—although the former does offer more services. IndiGo and SpiceJet routinely lose fliers to Air India on this count alone —Air India allows 25 (plus 8 in hand baggage) kilograms of checked-in baggage versus their 15 kg. The moment the government allows one airline to charge for baggage, everyone will quickly follow.
Conversely, if an airline does not charge for baggage, it will have full loads as India’s flying public is highly price sensitive. So, industry sources say that unless rules allow only one or two players to charge for baggage and they do it, this ULCC model can’t work here.
Rivals are also not unduly perturbed by the entrant as of now as it is planning to start small. “The announcement they have made is of 70 aircraft over the next five years. That’s one aircraft a month so it’s not a big threat as such”, says one rival CEO. He says that the airline will very soon realise how much it will bleed at the start and that’s when it becomes important to see how much value the investors place. “Initially, you end up just watching your capital vanish. Many find this unnerving”, says a former Tata insider, who saw this with Air Asia India. Whether the airline board and key investors have the appetite for this will only be known in time.
But for all the negatives, there is one huge positive for the newbie. No baggage. The biggest positive for Akasa is that they don’t have the Covid-19 baggage of the last two years which every other airline in India is afflicted with. Unlike all the others who have massive losses and a balance sheet splattered with red, it starts with a clean slate. Also, with the airline’s funding of around $100 million as seed capital, it can easily launch a tidy, small operation, raise money through sale and leaseback (if they order 70 aircraft, industry insiders say they can get $5 million-$7 million per aircraft through this) and from flights operations—cash starts coming in quickly as flights are announced for six months and people start booking—and find other ways to raise money to fund their initial losses. Talent too will not be difficult to find especially at the mid and lower levels.
“The final key will be in execution. If they have to execute their operations to perfection—be it their route strategy, financial management or bringing in productivity, efficiency and a sharp focus on costs, it can be pulled off given the poor shape of all the rivals in the skies”, says a former MOCA secretary. Although that as India has amply demonstrated in the past remains a big if.
In the end, however, it is the passengers and the Indian flying public who stand to gain the most from the newcomer. More airlines translate into lower fares and more senseless undercutting, all of which is good news for the flier. So, as those who are watching the developments from the outside, taxpayers and the Indian passenger can only wish the brave hearts good luck and hope they make a success of their gambit. As the saying goes, you don’t manifest dreams without taking chances.
‘Akasa Has Its Task Cut Out’
Former IndiGo founding member and a veteran Indian Airlines commander, Shakti Lumba is not known for mincing his words. Even as he begins his aviation memoir—The Old Bold Pilot—he spoke to Anjuli Bhargava on his views on Akasa. Excerpts from a short, hard-hitting chat:
Q: How optimistic are you on the new entrant in the sector Akasa and why/why not?
A: The former CEO of Continental Airlines, Robert Six, once said “I have never seen an industry that gets into people’s blood the way aviation does”. As I see it at least two of the key people—Aditya Ghosh and Vinay Dube—have been bitten by this bug and that perhaps explains why they are choosing to foray into this at the wrong time. Besides the collapse of traffic, there is the imminent threat that by the time they launch, they will have two large players here in India (IndiGo and the new Tata entity) ready to gobble it up. Akasa has its task cut out.
Q: But they don’t intend to be in the same segment as an IndiGo or a combined Tata-Air India entity. They are targeting to be a ULCC like Go First.
A: Pure fantasy. I know ULCC is their chosen mantra but it is just that in India—nothing more than a catchphrase. Fuel costs are among the highest in the world and applicable to all. High airport user charges, maintenance and ground handling, manpower, speed money apply to all. All things being equal, this results in many high-cost airlines with lower costs (CASK) for the more disciplined ones. Everyone sells below CASK so RASK is invariably higher than CASK. It is no reflection of how remunerative the operations are. As I see, there is very little low-hanging fruit to harvest and whatever little there was has already been harvested.
Then they will have to contend with predatory pricing and network rivalry. So, for every flight Akasa introduces to Jhumri Telaiya, IndiGo, or the new Tata airlines—once it's in the fray—will introduce six. As I see it, Mr. Jhunjhunwala is best advised to stick to stocks and not foray into unknown dangerous territory, unless he has some kind of death wish or desire to lose his millions. He should not be snared into aviation by “skimmed milk masquerading as cream”.