What could work and what needn't for Rakesh Jhunjhunwala's airline venture

Rakesh Jhunjhunwala-backed Akasa Air has secured the crucial no-objection certificate (NoC) from the civil aviation ministry. He wants to set up the new airline in India on the optimism that more people will travel by air. The carrier expects to start operations next summer.

Billionaire investor Rakesh Jhunjhunwala, also known as Warren Buffet of India, has invested Rs 247.50 crore for a 40 per cent stake in an ultra low-cost carrier, Akasa Air. According to Forbes, Jhunjhunwala has an estimated net worth of $4.6 billion.

Another big name of Dalal Street, Madhav Bhatkuly, founder of investment fund New Horizon, has also has also invested around Rs six crore in the company. Bhatkuly is known for identifying big companies at early stage.

The ace investor is planning to launch the airline with former Jet Airways CEO Vinay Dube and former president of Indigo, Aditya Ghosh is also collaborating with him for the venture. Dube has roped in many of his former colleagues from Jet Airways and GoAir, where he served as CEO.

Senior executives on board are:

Sweat equity

The key executives have been allotted 63-125 company shares each in form of sweat equity. Till the time the company starts generating revenue, it has decided to compensate employees through sweat equity.

Now what is that? Sweat equity is a non-monetary benefit that a company's stakeholders give rather than a monetary contribution. This is offered normally in start-ups where employees receive stock or stock options, becoming part-owners of the firm, in return for accepting salaries, which are lower than industry standards.

About the new airline

Akasa Air will now have to apply for the Directorate General of Civil Aviation for operations permit. It would be flying as many as seventy 180-seater aircraft. The team has built a route network covering 30 airports with a 70 aircraft fleet.

In a statement, the airline said that it plans to offer flights across India, with an aim to be the nation’s most dependable, affordable and greenest airline. It aims to start operations by the summer of 2022 and plans to operate approximately 70 planes in the next four years.

The airline intended to place bulk aircraft orders and induct 20 planes within a few months of launch. Industry sources expect it could help it earn valuable sale and lease back income and achieve a certain scale to take on competition, such as IndiGo. Market leadership gives pricing power to control fares, favouring the market leader.

Airbus's A320 or Boeing's B737

Airbus Chief Commercial Officer Christian Scherer recently told PTI that the plane maker is in conversation with Akasa for an aircraft procurement deal. Although, multiple media reports had said two months back that the airline is in talks with US aerospace company Boeing for buying up to a hundred 737 Max aircraft.

Now, Airbus's A320 series of aircraft competes with Boeing's B737 series of planes in the aviation market. IndiGo flies the most successful single aisle airplane in the world (Airbus's narrow body aircraft) and it is also the most modern, which is the A320 and now the A321. Among all Indian carriers, only SpiceJet and Air India Express operate Boeing's narrow body aircraft. Christian said Airbus would be positioning A350 as a far superior alternative to B777.

Advantages of the venture

Rakesh Jhunjhunwala can use the start-up advantage to design a low-cost structure and have an edge over its financially weaker rivals, say industry sources. Low cost and vast fleet allows IndiGo to match competitors on routes and prices and Akasa will be aiming for a quick ramp up of fleet in initial few months,

Reduced aircraft lease rents, easy availability of pilots and expected buoyancy in air traffic will also help the airline. According to industry estimates there are 300-400 trained pilots in India without a job. These include former Jet Airways pilots and also those whose contracts were terminated by West Asian airlines after the outbreak of Covid-19. The cost of acquiring aircraft, hiring crew had significantly come down which would allow a startup airline to match the unit costs of IndiGo.

Disadvantages of the venture

According to Kapil Kaul, South Asia CEO of CAPA, $50 million startup capital plus aircraft sale and lease back gains will give the airline $300-350 million capital which is critical to make the venture work.

Domestic airlines are expected to post a combined loss of $4.1 billion in FY22 similar to that in FY21, according to aviation consultancy CAPA. IndiGo posted a net loss of Rs 5,806 crore in FY21 while SpiceJet made a loss of Rs 998 crore in the same fiscal.

It’s a bold bet by Jhunjhunwala, in a market that has seen some airlines collapse in the face of intense fare wars and high costs. Everybody knows that the aviation sector has suffered massive headwinds due to the global spread of coronavirus, with planes being grounded or running at muted capacities, and airlines burning cash big time.

That’s not deterring Jhunjhunwala though. “I think some of the incremental players may not recover. I’ve got some of the best airline people in the world as my partners.” he recently told a TV channel. When asked why he is investing in a new airline, Jhunjhunwala said that for the culture of a company to be low cost, one needs to start fresh. “I am very bullish on India’s aviation sector demand,” he said.

Even before the pandemic, airlines in India were struggling. Kingfisher Airlines Ltd., once the country’s second-largest domestic carrier, ended operations in 2012, and Jet Airways India Ltd., which was recently approved to fly again, collapsed in 2019.

The new airline should have enough capital to bear losses for at least for the first three or four years. Will Jhunjhunwala soar to new heights with this venture, or will this be just another grim story in the aviation space? Only the time will tell.