2 min read.Updated: 05 Aug 2021, 01:16 AM ISTRhik Kundu
The high cost structure in India could erode its competitive advantage
Billionaire Rakesh Jhunjhunwala is looking to carve out a place for his upcoming airline venture, Akasa, an ultra-low-cost carrier (ULCC), in India’s highly competitive aviation market.
It’s a model that has worked well in Europe and the US. But the inherent high-cost structure for operating airlines in India could erode any competitive advantage Jhunjhunwala may hope to achieve.
As things stand, the promoters are awaiting a no-objection certificate (NOC) from the ministry of civil aviation.
ULCCs like RyanAir and Spirit Airlines represent a distinct business model, which is different from the low-cost carrier (LCC) model followed by IndiGo.
For instance, ULCCs often opt for unbundling of fares, making tickets cheaper than those of LCCs. Any extras such as baggage, selecting one’s seat or food are subject to a charge. These airlines also typically have cheaper operating costs as they operate out of secondary airports and have lower distribution costs.
“The ULCC model not only depends on lower ticket prices but also lower structural costs. On these, an ULCC in India cannot gain advantages. Other than secondary airports, what is often overlooked is the cost of funds, distribution costs and demand dynamics. For the ULCC model to succeed, any new airline will have to get this right," said Satyendra Pandey, managing partner at aviation advisory AT-TV.
“Post covid, there has also been a shift in consumer behaviour when it comes to air travel, pricing and purchase of tickets. Overall, a new airline will certainly help with competition. But it could also mean that in a race to discount and match fares, existing players may be further weakened," Pandey added.
For any airline to succeed in India, one has to be either exceptionally good with services or exceptionally cheap. While the ULCC model focuses on the latter, the jury is still out on whether a ULCC model can work in India.
In India, most airlines follow similar networks, pricing and aircraft types, which makes differentiating between their services difficult. The high costs of operating an airline in a highly competitive market also means that margins for most players are well below their cost of capital.
“With price being a key differentiator for a ULCC, it (Akasa) has to make a judicious choice between plying metro and non-metro routes, as a ULCC will have limited flexibility in pricing in the ultra-competitive major routes," said Jagannarayan Padmanabhan, director and practice leader of transport and logistics, at Crisil Ltd.
“On the flip side, non-major routes may not be able to give the necessary volumes to bring in operational efficiency. Also, the fight for customers’ wallet share is going to be more pronounced in the next 12-18 months among the airlines and hence much of the success will depend on the operational efficiency of the airline," Padmanabhan added.
The airline venture will also see the return of former IndiGo president Aditya Ghosh, who along with Jhunjhunwala and former Jet Airways chief executive officer Vinay Dube, are reported to be the co-founders of Akasa.
Ghosh was once the face of IndiGo, which is currently the largest domestic airline in the country with a market share of close to 55%.
However, Ghosh will face immense challenges to kick start the airline as the economy recovers from the covid-19 pandemic and amid intense competition from IndiGo, SpiceJet, Vistara and others.
According to estimates by aviation consultancy Capa India, Indian airlines are likely to suffer a consolidated loss of about $4.1 billion during financial year 2022, similar to the losses in FY21, due to the covid-19 pandemic.
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