The tale of two airlines

By next month, the Tata group takeover of Air India is expected to be complete. 

By the summer of 2022, a new airline —Akasa Air—is readying for launch. The airline is floated by aviation industry veteran Vinay Dube, has former IndiGo chief executive officer Aditya Ghosh as an advisor, and is funded by marquee investor Rakesh Jhunjhunwala.

Between them, they represent the two biggest stories in Indian aviation, all set to play out next year.

Even as we keep our eyes peeled on the unfolding action, there are a couple of strategic issues that could impact the game for both airlines.

Regulation vs open skies: As a state carrier, Air India was done in twice by its own ministers in the government, when they bartered away routes to the Middle Eastern carriers without asking for reciprocal rights for our state carrier, and also scuppering Air India’s own fleet acquisition plans.

This time, Covid may have provided a perfect cover for the Modi government to delay the resumption of international scheduled flights —suspended due to the pandemic —and drag on the temporary air bubble agreements that India has signed with 28 countries. The pandemic may have willy-nilly created an opportunity to correct the anomalies of the past.

For the government, it helped kill two birds with one stone. The almost exclusive access to Air India to run repatriation flights helped increase yields and loads. This indirect subsidy also obviated the need to continually fund Air India’s losses. This may have also given Air India —and its new owner —a small window of opportunity to quickly replace and rebuild its ageing fleet.

Last week, a civil aviation ministry circular said it would resume scheduled international flights from December 15, except for 12 countries “at risk”, including the UK, China, South Africa, and Hong Kong.

But the very next day, with mounting concerns around the new Omicron variant, the prime minister said he would review the new flight arrangements and might actually be forced to batten down the hatches.

Now why is this critical? Already, the foreign embassies and consulates in Delhi, foreign carriers, supported by the mandarins at trade body International Air Transport Authority, have been fuming at India’s intransigence. How India manages to deal with massive diplomatic pressure from various governments remains to be seen though.

Existing air bubble agreements place constraints on both frequencies and capacities. And they do not allow foreign airlines to carry Indian passport holders to and beyond their hubs.

As passenger traffic starts to grow again, carriers around the world fear losing access to the huge outbound traffic from India —and with it, an opportunity to funnel it through their hubs in the Middle East and Europe.

Apart from the need to substantially improve its service, Air India needs additional new aircraft to expand its point-to-point, long haul international flights to both existing and new destinations in North America and Europe. There are wide-bodied aircraft available on lease, but it will depend on how quickly the Tatas are able to move ahead.

After all, the Indian government may not be able to withstand the diplomatic pressure to keep scheduled flights in abeyance for too long. (The December 15 timeline suggests the government will hold out, perhaps only till the formal transfer of power at Air India is over.)
 

Either way, this period has created a piquant situation, especially at a time when deregulation —or open sky policies —are gradually becoming the norm, as opposed to bilateral agreements between countries.
 

Legacy vs clean slate: Low-cost carriers (LCCs) have ruled the roost for a little more than a decade. IndiGo’s meteoric rise —and Jet’s fall —is seen as the biggest endorsement of the LCC model and the decline of the full-service model. Most air travellers, even business travellers, have opted for a reliable, efficient and comfortable option, instead of paying more for cold towels, hot meals, frequent flyer points and other goodies, doled out by full-service airlines. 

So the question is: How will Akasa break in? Does it have an opportunity to offer a reliable, comfortable experience for air travellers at a value-for-money price on a sustainable basis? That’s where most domestic airlines have come a cropper.

One thing is for sure: Akasa will need to side-step the mistake that Tata Nano made, when it got too strongly associated with its Rs 1 lakh price point. So while pricing will need to be competitive, it perhaps would do well to focus on creating (and communicating) value.

The real challenge for Akasa will be to match IndiGo’s cost structure, which is the benchmark across the industry on efficiency and scale. (Existing rivals are at cost structures that are at least 20 percent higher than IndiGo’s.)

Akasa could press home the advantage of starting on a clean slate — a single aircraft type (Boeing 737 MAX), a more balanced set of wage agreements with pilots, more efficient structures for its lease rentals and fuel, a direct online distribution model, plus smart marketing to chivvy up ancillary revenues. Mr Dube’s professional team at Akasa will have their task cut out in establishing the new airline in one of the most challenging industries of all times.

The writer is co-founder at Founding Fuel