Jhunjhunwala’s  airline plan: Eagle and vulture

Rakesh Jhunjhunwala, Partner, Rare Enterprises (REUTERS)
Rakesh Jhunjhunwala, Partner, Rare Enterprises (REUTERS)


With his new domestic airline, Rakesh Jhunjhunwala is eyeing progressive gains on two fronts. The continuing financial deterioration of airlines beyond IndiGo will give him an easier runway to launch, while offering a picking of good aviation assets

Rakesh Jhunjhunwala wants to enter an industry that has seen just one entrant truly take off. And he wants to enter it when its size has shrunk to 2015 levels. Jhunjhunwala is approaching his planned airline both like an eagle and a vulture. He believes the pandemic will eventually be over and Indians will fly in big numbers like before. “I’m very, very bullish on India’s aviation sector in terms of demand," Jhunjhunwala told Bloomberg TV. He also believes there will be aviation assets to prey on, arguing that some of the smaller players may not recover from the pandemic shock.

Akasa is planned as an ultra low-cost carrier (ULCC). In theory, a ULCC differs from a low cost carrier (LCC) such as IndiGo in that it only sells a seat. Everything else involves micro-costing: choice of seat, check-in baggage (15 kg won’t come free), printing a boarding pass, etc. It gives passengers an opportunity to fly cheap, or be billed on actual usage.

It hasn’t happened in practice. Go First recently rebranded as an ULCC, but its fares mirror LCCs. Even the line between LCCs and full-service airlines has blurred. LCCs account for 80% share, led by IndiGo. Despite offering fewer features, they often command higher fares than full-service airlines.

The blurring of lines is partly influenced by superior coverage and partly by cost compulsions. Nearly two-thirds of the operating cost of domestic airlines is flight related, leaving little room to manoeuvre. Fuel is the main cost (37% in 2018-19), and Akasa is entering when prices are high. Thus, how it fares will depend on its own choices, but also on what happens to struggling airlines.

Play for 50%

Be it organically or inorganically, Jhunjhunwala is eyeing a piece of the market beyond the current control of leader IndiGo. This is currently roughly half the domestic passenger market. At least three of the five major airlines that make up this half are facing questions of survival, especially if the pandemic stretches. These are SpiceJet, Go First, and Air India. Each has lost share during the pandemic.

Meanwhile, IndiGo has increased its share in this smaller market from 47% in 2019 to 54% in 2021. The hope for Jhunjhunwala is that by the time his airline is ready to launch, the continuing effects of the pandemic would have inflicted more financial damage to all airlines. This will cramp their ability to rebound. For Akasa, bereft of baggage and endowed with capital, that would mean an easier runway to gains.

Shrinking Fleets

The pain is already showing. Airlines have needed fewer aircraft. Selling planes or terminating leases on market terms is not easy in this buyer’s market. Airlines have had to strike a balance between retaining planes for a rebound and managing cash. Airlines that are financially stronger have a greater ability to retain planes, even take planned deliveries. They will also be in a better position to ride a pick-up in demand.

Of the six major domestic airlines, the fleet size of three shrunk during the pandemic. These are, once again, SpiceJet, Go First and Air India. Each has great stress on their balance sheets. Even Vistara and AirAsia are stretched, but their parents have big pockets and long-term goals. SpiceJet has seen the biggest pullback, with its seat capacity falling 23% between March 2020 and July 2021. Meanwhile, market leader IndiGo added 9%.

Stress Limits

The longer the pandemic rages, the greater the challenge for all airlines, especially the stressed ones. For the three troubled airlines, their equity stands eroded. The cash on their books is precariously low. In an extended scenario of truncated operations and operational losses, they will need to either raise fresh capital or loans.

Air India continues to wait to be privatised, and will cling on to the extent the government supports it. SpiceJet has added cargo in a significant way. In the last quarter of 2020-21, cargo accounted for 22% of its revenues and it was also profitable. Go First was planning to raise 3,600 crore from the public, but its equity issue was stuck after the capital market regulator raised observations allegedly related to the company’s promoters. Such signs of stress create room for corporate vultures to prey upon aircrafts, slots, staff, or even buyout an entire company.

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