Rakesh Jhunjhunwala has made billions investing in India’s stock markets. Whenever he is asked about India's economic outlook, he has generally been bullish on the long-term prospects. No doubt, there is so much under-penetration in so many sectors, that there remains a huge scope for growth across industries. That has perhaps got him interested in one such sector – aviation.
India has a rapidly growing middle-class population. As more and more people will travel in the coming years, be it for leisure or business, demand for air travel is expected to soar.
According to Invest India, the National Investment Promotion and Facilitation Agency, 79 million people 79 million people travelled to, from, or within India in 2010. By 2017, that number doubled to 158 million and this number is expected to treble to 520 million by 2037.
To cater to this growing demand, Jhunjhunwala is plotting an entry with an airline of his own—Akasa. He has roped in experienced hands in the business to give this airline a lift. Aditya Ghosh, former president of Indigo will reportedly be joining him as the co-founder. The former CEO of Jet Airways, Vinay Dube, is also on board.
“I am very, very bullish on India’s aviation sector in terms of demand,” Jhunjhunwala said on Bloomberg TV.
He has the money: He will be investing $35 million to hold a 40 per cent stake in the airline. But he also has leaders with experience with Ghosh, as well as access to pilots through Dube. Ghosh led Indigo from a small newcomer to the market leader in India’s airline industry in the 10 years that he was its President.
The aim is to set up an ultra-low-cost airline with plans to have 70 planes in four years.
But, all this alone need not necessarily be a recipe for success in India’s aviation industry, which has seen many companies aim for the skies only to be grounded for good in a few years. Just two years ago, full service carrier Jet Airways went bankrupt and had to halt operations. Only recently, a consortium of Kalrock Capital and businessman Murari Lal Jalan won the bid to revive the airline.
The list of airline failures in India is fairly long and includes liquor baron Vijay Mallya’s Kingfisher Airlines, which was grounded in 2012. Other prominent names include Paramount Airways that went bust in 2010; MDLR, which last flew in 2009; Damania and NEPC that shut in 1997, and East West and Modiluft—which ran out of fuel in 1996. Air Costa, Air Pegasus and Air Carnival are among the smaller regional airlines that also ceased operations in the last few years.
As these examples show, running an airline in India is not easy. Acquiring planes is expensive, the industry is highly regulated, taxes are high and fuel, which is a major expense, has only got costly over the years. If that was not enough, the COVID-19 pandemic struck a huge blow and the sector is yet to recover from it, not just here but globally.
In the quarter ended June 30, Indigo, the largest carrier in the country, reported a huge net loss of Rs 3,174 crore, compared with a year ago loss of Rs 2,844 crore. The losses widened even as the total income jumped 177 per cent to Rs 3,170 crore, aided by the low base of last year.
Aviation consultancy CAPA recently said that demand uncertainty had been exacerbated by the second wave of the pandemic. It expects India’s airlines to likely post consolidated loss of $4.1 billion in the year-ending March 2022, driving the losses for the two pandemic hit years to around $8 billion, with a further downside risk if there is a third wave of COVID19.
Passenger traffic is expected to increase from 52.5 million last year to anywhere between 80 million to 95 million this financial year, which is still way lower than the 140 million passengers who flew in 2019-20.
“Many operators will struggle to recover from two consecutive years of such massive losses,” said CAPA.
Credit ratings agency ICRA estimates the airline industry in India will require an additional funding support of Rs 35,000 crore to Rs 37,000 crore over FY2021-FY2023.
Clearly, there is a lot of turbulence in the air in the near-term, which certainly is not a good time for a new airline to take to the skies.
“It is the team that is giving the hope that this could possibly be a successful venture. Rakesh’s presence is itself a positive. Aditya (Ghosh) has the capability and understanding to execute a very high level of business planning, Vinay (Dube) had a hard experience in Jet Airways and Go Air,” Kapil Kaul, CEO, CAPA India said on a TV channel.
There are opportunities available to reduce costs, compared with the current crop of low-cost carriers, pointed Kaul. But, Akasa is also going to be a ultra-low cost carrier, and that will mean lower fares and thus lower revenues. The key will be to focus on revenues from ancillary services.
The existing carriers like Indigo, Go Air and SpiceJet are also trying to lower costs and augment ancillary revenues. Another challenge will come in terms of competition as Jet Airways, under the new owners, is also expected to start flying in the coming year. Vistara, the full service venture between Tatas and Singapore Airlines is also expected to spread its wings further. If Akasa has to fly high, Jhunjhunwala and his team clearly have their work cut out.