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Will Jhunjhunwala’s Airline plan take off?

by Tavaga Invest

India’s well-known investor Rakesh Jhunjhunwala intends to start a budget airline with a fleet of 70 planes. He’ll put in $35 million and own a 40% interest in the company. Jhunjhunwala, who has been branded as “Indian Warren Buffett” for his economic acumen, would be investing in a sector that has been devastated by the COVID-19 outbreak.‘Akasa’ will be the name of the ultra-low-cost carrier.

Yes, Just like The Sky!

 The team is looking at planes with a capacity of 180 people. A team of industry professionals, including Aditya Ghosh, former president of IndiGo, and Vinay Dube, who previously led Jet Airways and advised GoAir, is being put in place and they are also waiting for a No Objection Certificate which according to them will be passed within 15 days from the Ministry of Civil Aviation. An  Air Operator’s certificate can also be issued and they can soon commence their business by next year if everything goes well.

What stands out as encouraging is that there has yet to be any loose talk about profitability or changes to the civil aviation market. 

Jhunjhunwala has long been a supporter of the aviation industry. The ‘Big Bull’ made a controversial investment in budget airline SpiceJet in 2014, which many viewed as a miscalculation. Jhunjhunwala was also a component of IndiGo’s first public offering. While Jhunjhunwala’s airline stocks have dropped dramatically since the pandemic began last year, they nevertheless provided a big return on his initial investment.

While Jhunjhunwala appears to be on top, for the time being, only time will tell which billionaire got it right in the long run when it comes to the thorny aviation industry.

What does this mean for the Indian Airline Industry? 

India’s commercial aviation industry has been changed forever due to the pandemic. While demand for air travel has been impacted throughout the world, India’s aviation industry is expected to take longer to recover as the third wave of infections approaches. The repercussions are being seen by airlines.

Airlines in India were already struggling before the outbreak. The country’s second-largest domestic carrier, Kingfisher Airlines Ltd., ceased operations in 2012, and the reason behind the Kingfisher Airlines downfall was Vijay Mallya’s lacked maturity to manage such a large airline company, and as a result of his lack of skill and experience in the airline industry, Kingfisher airlines suffered a dramatic downfall owing to poor management. He borrowed money from 17 different banks, Mr Mallya lost a total amount of Rs 9,091.40 crore in November 2015.

Addressing the media, Civil Aviation Minister Hardeep Singh Puri called the national carrier’s current status extremely unstable. The government had previously issued a preliminary information memorandum (PIM) to solicit expressions of interest for Air India’s strategic disinvestment. Mr Puri went on to say that Air India is in a debt trap, with a debt of over Rs 60,000 crore.

GoAir is looking to collect Rs 3,600 crore in the main market, of which Rs 254.93 crore will be used to pay off outstanding debts to oil marketing companies for fuel supplies. The airline owned IndianOil Rs 257.21 crore as of April 19, 2021. Go Air’s December 2020 departures were roughly 63 per cent higher than December 2019 levels, and its growth available seat kilometres (ASKs) were roughly 72 per cent higher than pre-covid levels. As a result, Go Air’s revenues and profitability have dropped dramatically since late February 2020, and the company has posted a net loss of Rs 470.69 crore for the nine months ended December 31, 2020.

Why is Indian Airline Still Struggling? 

There have been several failed airlines in India. It’s a long list of multiple stars and many failures, from East-West Airlines and Damania Airways in the 1990s to the current cases of Kingfisher Airlines and Jet Airways. As another, Indigo enters a period of upheaval, This is due to a demand-supply mismatch, with airlines unable to offer additional flights on particular routes due to airport capacity constraints.

Airlines provide a necessary service, but problems such as the continued existence of loss-making carriers, bloated cost structures, sensitivity to exogenous events, and a reputation for bad service all combine to provide a significant barrier to profitability. While a few of them have been able to maintain regular earnings, profitable airlines are few and far between.

Is it Revival of the Airline Industry? 

The epidemic has irrevocably altered the commercial aviation business. While the majority of people believe it has harmed the ecosystem, this is not the case for all industry stakeholders. Sure, the incumbents are having difficulties. Indigo, GoAir, and SpiceJet have all had a difficult time dealing with the pandemic’s aftermath. Many airlines have even gone bankrupt in other countries.

However, this creates a chance for newcomers.

Right now, you can acquire anything for dirt cheap. This is a huge competitive advantage if you’re a newcomer to the commercial aviation business. You get into long-term commercial agreements when everyone else is struggling, and you reap the benefits in the years ahead. This isn’t to say it’s the right thing to do. It does, however, provide you with a financial reward.

More crucially, the incumbents are currently beset by a mountain of debt. They’ve borrowed money in the hopes of keeping it afloat, and even if things get better, this borrowing spree will follow them for years. Consider this: “How do you negate the increased interest costs accumulating from this tremendous debt burden when you’re attempting to compete in a cutthroat market where margins are razor-thin? Your only option is to raise ticket prices, which will make your offering less competitive in comparison to someone who is just getting started. And Indian shoppers adore a good deal. They don’t mind if you’re a newcomer as long as you offer them a great deal on specific routes.

So, for commercial aviation startups, now may be the perfect time to launch, and Akasa may be able to make a dent in the Indian industry soon enough.

Indian aviation is usually accompanied by a word of warning, with the failures of Kingfisher Airlines and Jet Airways serving as examples. Nobody knew how deep Vijay Mallya’s pockets were, just as no one knew how deep they were in the case of Vijay Mallya. Similarly, Jhunjhunwala’s net wealth is known, but no one knows how much he is willing to commit in the future or whether this is just another clever investment that will pay off when the airline goes public.

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