Can Rakesh Jhunjhunwala's Akasa Air beat Indigo?
Airline is a tricky business. You cannot control most of the costs. The fuel cost depends on crude oil prices, fees paid to the government to use the airports are mostly fixed, employee costs, etc. An airline has little or no control over its costs and the business becomes more tricky when it's done in India.
Indians are price sensitive. As rightly said by Crisil’s Jagannarayan Padmanabhan - Indian flyers want the ride of a Ferrari at the price of a Maruti.
With the price-sensitive, customers and intense competition, Airlines also have little control over their revenue and hence have to operate on paper-thin margins. The airline business is tough to crack! One company that did it was Indigo.
IndiGo got the formula mostly right, at least in the years leading up to the pandemic; it was mostly profitable, increased its market share, kept costs under control, and saw sale-and-leaseback gains. All the while, debt remained relatively low. IndiGo's massive and rapid capacity expansion over the years has solidified its market leadership position.
Post pandemic, when the sky seemed gloomy for the airlines, Rakesh Jhunjhunwala, the billionaire investor announced that he would be foraying into the sector and bringing in new planes to the Indian skies.
On August 7, the day finally came when Akasa Air, began its commercial operations with its first flight from Mumbai-Ahmedabad. The brand new, sparkling white Boeing MAX 737 planes would fly on the Indian skies.
The question here is will Akasa thrive when other Airlines are dying? Also, its strategy to be a low-cost carrier puts it in direct competition with Indigo, the only airline that has cracked the airline business.
Akasa’s strategy to fly high
Jhunjhunwala’s Akasa entered the industry when most airlines are dying. Now entering just after the pandemic has earned Akasa three strategic advantages over its peers.
Pandemic has left the airline industry bleeding. It has wiped off the profits and squeezed up the cashflows of most airlines. According to a Crisil report, the top three large listed airlines ― IndiGo, SpiceJet, and Air India ― which have a 75% share in domestic traffic are expected to report their highest ever losses of INR 20000 crore in FY22.
If you look at Akasa’s competitors, Spicejet is sitting on a pile of debt, its grim liquidity position has been highlighted by its auditors multiple times. At the end of Q3FY22, the company had negative retained earnings of Rs 5,453.4 crore and a negative net worth of Rs 3,830.7 crore.
Its current liabilities had exceeded current assets by Rs 6,344.1 crore.
It isn’t just SpiceJet, its rival Go Air is also sitting on a loss of INR 2000 crores, and have filed for an IPO to pay off its debt.
It is the best time for Akasa to enter the industry and gain the share as other players are struggling.
Airlines typically place bulk orders with aircraft manufacturers who deliver them in batches over a few years. Airlnes placed bulk orders with manufacturers before the pandemic, but cancelled them later, so manufacturers had a backlog of orders they manufactured for other players and because of that Akasa must have got the aircrafts at bargain prices, due to which it can it provide ticket at lower fares than its competitors.
Akasa is founded by Vinay Dube, who comes with extensive experience in a airline industry, he was previously the CEO of Jet Airways and Go First. His experience with lost cost carrier helped him bring in Rakesh Jhunjhunwala on board, who brought in the president of Indigo, Aditya Ghosh.
Jhunjhunwala knew to thrive in the industry, he need to have the Indigo DNA in Akasa. Most employees in the management of the company have been brought in from Indigo, which can keep the operations as cost effective as Indigo.
Because lauching a low cost airline is one thing and thriving as a low cost airline is another! The only player that successfully pulled off the LCC model is Indigo. The company has reportedly 60% market share in the industry and is consistently growing it.
Akasa is trying to replicate the business model of Indigo, for ex: Just like IndiGo, Akasa has gone with a single type of aircraft (the Boeing 737 Max), having a single type of aircraft makes operations and maintenance cost-effective.
Will Akasa take on Indigo by walking on its footsteps?
May be, May be not! Managing the costs well is the secret ingredient behind Indigo’s success and it is difficult for other airlines to keep their costs lower than Indigo because it has the advantage of economies of scale. Due to its massive operations, it can negotiate with all its suppliers, and vendors and can get better prices than any airline.
So, its time before we can tell if the company can take on the giant with its effective leadership and fabulous timing.
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