Jhunjhunwala’s Riskiest Bet: Will Akasa Air Take-Off?

For billionaires around the world, buying a jet seems to be an unsaid rite of passage. Even the most seemingly frugal of them all — Warren Buffett — had famously fallen prey to the charms of the airborne chariot (before selling it in a spectacular hurry).

Despite this, every once in a while, a billionaire goes the whole nine yards to take the reins of a fledgling/ailing aviation business.

The latest name in this narrative is ace investor-turned-promoter Rakesh Jhunjhunwala and his anticipated upstart, Akasa Air, which is expected to grace the skies in June 2022. But given the widespread turmoil in the industry since the pandemic, all fanfare must be taken with a pinch of salt.

After all, the last time a billionaire bought an airline in India, he was still called the ‘King of Good Times.’

Flight Of The Bull

Hailed as the ‘Big Bull’ of the Indian stock market, Rakesh Jhunjhunwalla and his homegrown investment company ‘RARE Enterprises’ have been astute stock-pickers for over 3 decades. He has made over 10,000% from his stake in Titan (including dividend and share splits), and multifold profit through investments in Sesa Goa and Lupin — enough to convince anyone about his mettle in the realm of investing. When it comes to the aviation industry, he has made a tidy sum off his investments in both SpiceJet and Indigo, the latter being purchased at IPO less than a decade ago.

However, identifying the potential for growth is an entirely different ballgame from actively promoting a company and running operations for an airline. This especially holds true in a year where the industry has bled billions just to stay afloat (or in this case, airborne).

To make matters far more difficult, the Tata Group bought back Air India in late 2021, and the Tata trifecta (Vistara, Air Asia India, and Air India) aims to capture all segments of air travelers, from the discerning to the more budget-conscious. What’s even more crucial is that with the buyout, the group has secured key planes and preferred slots at airports both in India and abroad. Not to mention, Indigo continues to command a formidable 60% of the Indian market making a price war in the sector inevitable in the years to come.

So what will it take for Akasa Air to win the skies? What does a win even look like? Let’s take a look at both sides of the coin.

Tailwinds

Akasa Air plans to mark its debut in June 2022 [Update: Now July 2022] as a low-cost carrier with a fleet of 18 planes. What this means is that Akasa Air will offer attractive (i.e. cheapest) base fares to travelers while all additional services such as F&B services, preferred seating, and extra baggage charged additionally.

Hence, if it invests in the right planes, which in this case happens to be the thin-bodied Boeing 737 Max, it can minimize the cost per seat on the aircraft and improve margins through the add-ons.

Start Small, Stay Humble

A good strategy of execution could be to compete effectively in regional markets against homegrown players who face little to no competition on less popular routes. In the west, low-cost carriers dominate secondary airports in key destinations or frequent less popular routes to reduce costs and stay competitive. Since that model is yet to take form in India, Akasa could benefit from cutting its teeth by taking on local players first.

Take the example of Star Air– the aviation arm of Sanjay Ghodawat Group, that connects 14 cities in the country and commands a meager 0.2% of the total market share. However, due to its low base effect, the airline charted an impressive recovery, growing 50% YOY in 2021 as compared to its pre-pandemic figures.

By focussing on the growth of non-metro destinations, aka, destinations in Tier 2 & Tier 3 cities, Star Air was able to clock 28–80% growth on routes that included Pathankot, Belravi, Ajmer, Kalaburagi, and Hindon among others.

Find Opportunistic Endeavours

Like Star Air, another erstwhile success story in the regional airline industry was Hyderabad-based carrier TruJet. The beleaguered airline at its peak serviced routes such as Mumbai-Nanded, Mumbai-Kolhapur as well as Mumbai-Jalgaon under the RCS-UDAN scheme of the central government that offers subsidies to carriers to operate these routes. Since TruJet finds itself grounded indefinitely until an investor infuses fresh funds to the tune of $29m, Akasa would do well to quickly capture these airplane slots as well as the more lucrative routes to scale.

Find The Right Timing

Sometimes, starting anew is easier than rectifying old wrongs. Since it’s starting from scratch, Akasa will have the distinct privilege of going into business without the mountain of debt on its books that most national and regional carriers are trying to wash off.

Airlines like AirAsia & Vistara have raked in a few hundred crores of operating losses raising eyebrows and questions alike on the feasibility and viability of future business prospects. To Akasa’s benefit, a sparkly clean start complemented by Rakesh Jhunjhwalla and his consortium of investors who have committed a war chest of $50m will come in handy while its competitors grapple with a severe cash crunch across the board.

Diversify Into Cargo

At a time when passenger traffic in the country and the world is unstable, Akasa can look to gather a steady inflow of income from cargo. With commerce and retail making a promising comeback, the economy looks poised for a rosy recovery & running cargo operations offer the much-needed cushion a new airline may desire to keep the wheels churning. In 2018, SpiceJet, launched a cargo-only service called SpiceXpress, which initially included a fleet of B737s, Q400s, B767s, and A330s. The foray into cargo proved to be life-saving for the airline in the post-pandemic world; of SpiceJet’s INR 42.5 cr profit in Dec quarter of FY22, INR 21.5 cr came from cargo. In the previous quarter, IndiGo’s cargo revenue grew by 9.6% YOY.

Clearly, Akasa could benefit tremendously from striking the right product mix.

Headwinds

As the world pulls out of three successive waves of the pandemic, the nature of travel- both for business and pleasure has changed. Technology has been an enabler for most organizations and a whole lot of meetings that previously took place face to face have comfortably moved to Zoom. While revenge buying in terms of leisure travel has come back with a vengeance, foreign travel- where most airlines make the bulk of their profits, is largely limited. Moreover, unlike other ‘leaner’ new-age ventures, an airline company requires significant investment up-front & significant infusion of working capital to keep functioning.

Escalating Input Costs

See a pattern here? The culprit is a meteoric global rise in Aviation Turbine Fuel (ATF) which accounts for 30–40% of the total input costs of an airline. Despite suffering sharp cuts in March 2020, the cost of crude has nearly doubled in the 2-year period since then. To make matters worse, the Russian-Ukraine war will only exacerbate the supply of oil since the Putin-led aggressor accounts for about 10% of the world’s output. If sanctions on oil & gas do come into play in a meaningful way, the cost of fuel could further skyrocket.

Other costs include long-term engine servicing contracts and dizzying taxation that offers no respite.

Underwhelming Passenger Demand

Even though a marginal rebound has been seen in reported numbers of a few carriers in the country, travel curbs within the country and abroad are not exactly a thing of the past yet. This puts a lot of question marks on the future of operations and the resulting profitability of domestic carriers. During the year April 2018 to March 2019, airlines in India carried 140 million passengers under domestic services (Government of India, 2019b). However, this number dropped 70% during 2020–2021, although Q4 2022 has staged a recovery on certain routes. What will this statistic look like if another wave of COVID-19 returns? What will be the cost of sustained non-occupancy for a new airline like Akasa Air? It still remains to be seen.

Debt Financing

Although Akasa Air starts off with a clean slate, it depends squarely on the nature of demand in air travel in the coming 2–3 years that will determine how long it can escape the debt trap that other leading airlines have fallen prey to. Consider this: the company has placed an order for 72 Boeing planes costing over $ 9 billion that needs to be paid in parts over 5 years, which can surmount into a fairly large sum in case the flight operations do not take off in time. Akasa Air will need to strike the right balance between in-plane occupancy, pricing, and frequency on popular routes in order to avoid snowballing losses quarter on quarter & hence delay break-even and profitability.

Will It Take Flight?

Overall, the odds of the business and the timing of getting into the airline business could not be better given the overall state of affairs of air travel are similar to taking a contrarian trade & Rakesh Jhunjhunwalla is undoubtedly the master of this craft. However, an excursion into the airline business is rarely a feat for the weak-hearted & time will tell how this tale pans out.