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The TLDR: The Tatas have bought Air India, Jet Airways has announced an unexpected comeback—and there is a brand new airline named Akasa getting ready for takeoff. We take a look at what you can expect when you plane-hop next year.
Where we are now
This flurry of big ticket activity is a bit astonishing given the state of the Indian aviation industry—which is expected to report a net loss of Rs 250 to Rs 260 billion (Rs 25,000 crore to Rs 26,000 crore) in FY22. Thanks to the pandemic, there has been a 66% decline in passenger traffic, and airlines are neck-deep in debt. For all the optimism shown by Jet, Air India, and Akasa, the industry forecast for 2022 remains gloomy:
“Lurching from crisis to crisis has become a familiar story since 2004 because the industry has chosen to pursue profitless growth, resulting in chronic losses for many years… Two major airlines have failed in the last 10 years, leaving a trail of $7 billion of liabilities. Yet nothing has changed. The twin waves and sudden impact of Covid-19 have resulted in a high level of solvency risk for most airlines, which could impact the entire industry, including airports.”
The main players: The biggest fish is Indigo with 57.6% of the market, followed by Air India (13.3%), SpiceJet (8.9%) and Vistara (8.2%). The smallest fish: AirAsia with only 4.4%.
Point to note: Indian airlines share the same basic problem. The industry requires huge upfront investments and is vulnerable to spikes in fuel prices. But it has to turn a profit in a country where the consumer is highly price conscious—and the only way to compete is to slash fares. As one financial expert puts it:
“Airline companies depend on how the government makes rules. The problem with airlines is not lack of supply or lack of airports. The problem has always been government regulation and competition. The competition is so much that it’s great for consumers but not good for companies.”
Welcome aboard Akasa
Origin story: When Jet Airways collapsed, its CEO Vinay Dube left for GoAir—which didn’t work out either. He then came up with the idea of a new airline, and found a big-name investor Rakesh Jhunjhunwala—a stock market genius known variously as either India’s Warren Buffet or Big Bull. He is putting in $35 million for a 40% stake. Industry watchers are a little surprised that Jhujhunwala is gambling on an industry known to be a terrible bet, but he insists: “I’m very, very bullish on India’s aviation sector in terms of demand.”
A super duper cheap flight: Akasa will be an Ultra Low Cost Carrier (ULCC), which means it will keep its costs to a minimum—and charge you for everything, including cabin baggage—and offer very cheap fares. Think even more low-budget than GoAir or SpiceJet. The model is similar to European airlines such as RyanAir.
Big challenge #1: A ULCC may seem ideal for an Indian market where most passengers are looking for the cheapest flight. But it isn’t clear how Akasa will reduce its operational costs. Aviation turbine fuel (ATF) prices have risen by over 30% since the beginning of 2021, and account for nearly 40% of the cost of running an airline in India. And unlike Europe and the US, India doesn’t have low-budget, no-frills airports to support the ULCC business model.
Big challenge #2: The competition. Given its focus on low fares, you might expect Akasa to focus on Tier 2 and 3 cities. But there is every indication that it intends to take on the big boys in the big metros. The airline’s headquarters will likely be in Mumbai and it will operate out of Bangalore. And its biggest rival will be Go First (formerly GoAir) which has big plans to corner the ULCC market—under the leadership of a new CEO Ben Baldanza. Unlike Akasa CEO Dube who only has a premium airline like Jet on his resume, Baldanza built his reputation by transforming Spirit Airlines into North America’s first ULCC.
One Tata brand to rule them all…
There’s been plenty of ink spilled over whether the Tatas can turn a white elephant like Air India into a success. The challenges are fairly straightforward:
- Its fleet of planes are either old or in a state of disrepair: “If you don't have newer airplanes or airplanes that are reliable, no matter what you do, you are going to have a problem.”
- A makeover will be expensive. It will cost at least $1 billion to rehaul Air India's 141 planes and up to $300 million to retrain staff and improve operations and service.
- Despite the sweet deal cut with the government, the Tatas will still inherit 25% of Air India’s Rs 615.6 billion (61,562 crore) debt.
- Also this: The airline currently loses Rs 200 million (20 crore) a day.
The really big play: From a customer point of view, what’s most interesting is the plan to consolidate all Tata-owned airlines under one brand. The group currently owns 100% of Air India and Air India Express, 51% of Vistara and 81% of AirAsia India. Taken together, the three airlines account for 26% of the domestic market—making them a formidable rival to IndiGo.
Now add in Air India’s advantage in international operations. The carrier has 7000 slots at key international airports—and code share agreements with a number of foreign airlines. And it flies non-stop to Europe and the US. Sprinkle in the Tatas’ experience in offering a premium customer experience (See: Taj hotels), and you have the makings of a very different kind of business model.
The big question mark: Jet Airways
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