What the Future Holds for Akasa Air

When India’s newest scheduled airline Akasa Air takes to the skies on August 7, it will be launching in the world’s fastest expanding aviation market that also faces a clutch of challenges. The low-cost carrier, backed by billionaire investor Rakesh Jhunjhunwala, will thus have to offer a product that is both disruptive and different.

The expectations are high from the carrier. This was evident after tickets for its maiden flight were sold out within hours after bookings opened on July 22. “As professionals, we have spent one and a half years on developing a competitive cost structure from day one,” says Founder & CEO Vinay Dube. A quick check reveals that Akasa’s ticket prices are lower than its competitors by over 22 per cent on average in the Mumbai-Ahmedabad sector. Similarly, in the Bengaluru-Mumbai sector, its fares are lower by nearly 5 per cent.

So, to what extent will it be able to shake up the market? “Akasa is flying into an intensely competitive market with razor-thin margins. It is also a market where the top two players, namely IndiGo and the Tata group airlines, command more than 80 per cent market share,” says Satyendra Pandey, Managing Partner at aviation advisory AT-TV.

Given Akasa’s financing prowess and management team, it is expected to put up a strong fight in sectors where it launches operations. The airline plans to scale up to a fleet of 20 aircraft within 18-20 months of launching commercial operations. AT-TV estimates that Akasa should be able to capture around 4 per cent market share in the next few years. “This will also help them leverage benefits of scale, amortise costs and set up operations to fly internationally. However, success also depends on demand patterns and geopolitical dynamics,” says Pandey.

Referring to the airline’s pricing strategy, Karan Khanna, an Analyst with Ambit Capital, says, “It is lower than other airlines in the time slot they are operating as of now, which should help them achieve better load factor at the start itself.”

Rohit Tomar, Partner at advisory Caladrius Aero, doesn’t foresee a major upheaval because of Akasa’s entry in the near term. “In the medium term, however, there are a lot of expectations from the market to get better quality of service while having the preference of low fares. It is very typical of a growing market, where the number of trips per person increases more than the increase in base—of new entrants—in air travel,” he says. The Indian market now has a substantial number of frequent travellers.

A Price-sensitive Market

Domestic airlines carried 57.2 million passengers in the January-June 2022 period vis-à-vis 34.3 million passengers in the corresponding period of the previous year, registering an annual growth of more than 66 per cent and monthly growth of over 237 per cent, says data from aviation regulator the Directorate General of Civil Aviation (DGCA). And the post-Covid-19 recovery is expected to sustain.

Also, as the Indian flyer is very cost-sensitive, ticket pricing is one of the key determinants of market demand. “Without competitive fares, airlines risk losing passengers to other modes of transport, or risk a scenario where passengers choose not to travel at all,” says AT-TV’s Pandey. Therefore, he sees Akasa pricing tickets competitively as it expands its network.

Amid a sharp increase in jet fuel prices, apart from the partial rollback of salary cuts, profitability for the industry has been materially impacted, despite an uptick in demand, says Ambit’s Khanna. “Consequently, there has been an increase in air fares across the existing carriers, with yields reaching historical highs,” he adds. With the entry of new carriers like Akasa, the revival of Jet Airways and the consolidation of the Tata group-owned carriers Air India, Air India Express, Vistara and AirAsia India, passengers may get some relief in airfares amid increased competition.

However, elevated crude prices, and a depreciating rupee can further amplify the impact of fuel on costs. Today, fuel accounts for approximately 50 per cent of the operational expenditure of an airline in India. “Would I like to see crude back at $40 a barrel? Absolutely! Would I like to see the rupee at 60 to the US dollar? Absolutely! Having been in aviation for 32 years, I can tell you that you don’t get into this business if you are scared of forex or crude spike; you plan for ups and downs,” discloses CEO Dube.

Turbulence Ahead

So, what are some of the challenges Akasa will have to contend with? Unconstrained capacity, fare wars and structural challenges, especially the high cost of jet fuel, are some of the immediate concerns, says Pandey. In the near term, it will also face a challenge with prime slots at metro airports although this will ease over time with new airports and additional airside capacity.

For an airline launching in a market with high passenger volumes, cut-throat competition and restricted infrastructure, consistent delivery of services will be a constant challenge. “Consistency is the key in such a market, ranging from consistency in cost structure, consistency in services and consistency in growth,” says Tomar of Caladrius.

But the benefit of starting with a clean slate may be Akasa’s biggest advantage. “This also means that they fight it out alone, winning one battle at a time. Far too many people have underestimated the complexity and competitiveness in the Indian market, and how this plays out remains to be seen,” says Pandey.

Meanwhile, a bullish Dube says, “In terms of growth in demand, it’s going to be staggering for the next 20 years plus in India. We don’t need to take someone else’s market share, or steal someone else’s traffic!”

@manishpant22