India’s new ultra-low-cost airline placed $9 billion order with Boeing, analysts say could lift the country’s entire aviation sector

Chhatrapati Shivaji Maharaj International Airport Tricolor Illuminated on Independence Day Eve

Chhatrapati Shivaji Maharaj International Airport is lit up in tricolor on the eve of Independence Day.Hindustan Times/Contributor/Getty Images

  • Akasa Air, a very low-cost Indian airline, Developed An order worth $9 billion for 72 Boeing 737 Max planes last week.

  • Industry analysts say the airline could potentially lift the entire Indian aviation sector.

  • The Indian aviation market is nascent, price sensitive, low penetration and heavily regulated.

Judith Philip is tense. The 32-year-old auditor’s work schedule is busy and her only recourse is travel, but the pandemic has badly hit her only recreation. To make up for lost time, Phillip pins her hopes on an upcoming solo trip to Sri Lanka.

“I think I could do a lot of retaliatory travel once these restrictions are lifted and things get a little better,” Philip told Insider from the southern Indian city of Bangalore.

She is among the millions of travelers waiting in wings to sail the skies over India as the country’s aviation sector prepares for change. At the center of this change will be the newly minted airline Akasa Air. Since its public debut in July, Akasa has become the most talked about airline in the country. And on November 16, it is Developed $9 billion order for 72 Boeing 737 Max aircraft. Industry analysts say the airline could potentially lift the entire Indian aviation sector, which has been struggling for several years.

Unlike airlines that have established their fleets in the capital city of Delhi or the financial hub Mumbai, Akasa’s fleet is slated to be based mostly in India’s tech capital of Bangalore. While the exact Akasa itineraries have yet to be announced, they are expected to reach destinations that are less traveled and at less expensive rates.

Backed by billionaire investor Rakesh Jonghunwala – aka Warren Buffett in India And Big Bull for its smart investments – the carrier aims to be a catalyst for a turbulent domestic market in Asia’s third-largest economy.

But Jhunjhunwala and Akasa are entering the aviation industry at a historically difficult time: the pandemic is far from over, the market is crowded, plaguing airlines with collapse, and profits are hard to come by.

Jhunjhunwala did not respond to multiple requests from Insider for comment for this story.

room for growth

Until the turn of the decade ending in 2010, luxury air travel was only within the reach of the wealthy in India.

India has a population of about 1.4 billion people 650 passenger planes. Domestic airlines carried 144 million passengers in 2019, according to the regulator Directorate General of Civil Aviation. By comparison, the United States (333 million people) has more 5000 civil aircraftWhile China (population 1.44 billion) is working nearly 3700 passenger planes.

Today, trains are still the preferred mode of long-distance journeys for the masses in India. In the 12 months ended March 2020, Indian trains have carried more than eight billion passengers.

But as India’s middle class grows and rival airlines keep domestic airfares low, air travel is slowly becoming a viable mode of transportation for more people. Delhi aims to unveil More than 200 new airports across the vast country in the next four years and is rapidly expanding existing airports. Prime Minister Narendra Modi’s administration expects civil aviation to play a crucial role in achieving its ambitious goal India has a $5 trillion economy by 2024.

“We can expect massive growth in the next five to 10 years,” Sanjay Kumar, chief strategy and revenue officer at IndiGo, told Insider of the Indian aviation market. IndiGo is the Indian market leader in domestic traffic by 55%.

“The growing middle-class population will start traveling like Americans or Chinese do. We haven’t seen that yet [in India] Absolutely “.

volatile market

Until the second half of 2018, India was home to the world’s fastest growing aviation market, with the number of passengers swelled.

Growth declined in 2019 due to factors including crew shortages, taxes on jet fuel and unsustainable business models.

He was at the center of India’s escalating aviation crisis Jet Airways collapse, the oldest and first successful private airline in the country. Rising debts, bad acquisitions and cheaper rates offered by competitors have killed 26-year-old Jet Airways.

The Indian aviation market is very volatile 50 players closed their shop In the past three decades they have turned billionaires into millionaires.

And this was all before the pandemic wiped out the industry.

But the turbulent industry also means an abundance of talent in the hiring market, low asset costs, and weak competitors, factors that could play a role in Jhunjhunwala’s favour.

A market dominated by low-cost carriers

In contrast to the aviation markets of the Western world, where the sector is multi-layered and caters to a wide range of travelers, carriers in India need to keep a close eye on ticket costs. about 80% of market share In India, models are besieged by low-cost carriers (LCCs), which profit by volume by selling seats at cheap rates.

India’s domestic airspace is dominated by six major airlines: IndiGo, SpiceJet, GoAir (renamed GoFirst), AirAsia India, Vistara and Air India. While Vistara and Air India are classified as no-frills airlines, the rest operate as LCC.

Unlike all the current players in the market, Akasa is an Ultra Low Cost Carrier (ULCC), which means that every little space inside the plane – from paper cups or luggage boxes – is for sale to advertise. Moreover, Akasa can cut all expendable costs and fly more hours per day while keeping seat prices separate from all other related services such as food. It’s basically like Spirit Airlines of India.

Akasa is expected to start operations by early or mid-2022, if speculation in the industry proves correct. Akasa has been busy hiring industry veterans including Vinay Dube, the former CEO of Jet Airways, and Aditya Ghosh, the former CEO of IndiGo. Regulatory approvals on the right track.

However, Akasa’s fate depends on more than one supportive billionaire and experienced leadership. Other variables that play a role in an airline’s success include how it manages its fleet composition, distribution models, and choice of flight destinations.

Airbus dominates Sky India: The A320 family makes up 70% of the country’s total passenger aircraft.

The emergence of Akasa means an opportunity for the US aircraft maker Boeing to make a breakthrough in an important market.

Jonghunwala said Akasa hopes to operate a fleet of 70 aircraft within four years Bloomberg In a TV interview in July. Meanwhile, Boeing’s market forecast predicts there will be demand for 2,200 commercial aircraft in the next two decades.

“In India, domestic traffic is driving the recovery. We’re seeing a double-digit monthly improvement in operations as vaccination rates improve and travel restrictions begin to ease,” Salil Gopet, president of Boeing India, told Insider.

Goupt estimates that passenger traffic numbers in India will reach pre-pandemic levels by 2023 or 2024.

“We are honored that Akasa Air, the innovative airline focused on customer experience and environmental sustainability, has placed its trust in the 737 family to deliver affordable passenger service in one of the world’s fastest growing aviation regions,” said Stan Deale, a Boeing business. Chairman of the Board of Directors of Aircraft and its CEO following the deal.

Challenges ahead

Industry experts say AKASA in Jhunjhunwala looks set to take Indian civil aviation to new heights, but they add caveats.

For example, fixed costs such as rent, parking, maintenance and employee salaries make up 40% of an airline’s cost structure, according to IndiGo’s Kumar. Industry experts said, to be successful, Akasa must have the right combination of these elements.

“Akasa is betting on the fragility of one or more carriers, and as a well-capitalized new entrant, it may be able to gain a solid foothold,” said Satyendra Pandey, managing partner of India-based aviation services company AT-TV. .

Pandey said that competing airlines will have to match Akasa’s fares from day one of their operations — which means they will enter an unprofitable growth environment.

Pandey said an accurate assessment of the market should include business trends and behaviour.

“Western frameworks just right for power just don’t work. Getting this wrong means that even very well-funded airlines have consistently failed to turn a profit and seen margins steadily deteriorate. The cranes that worked before the pandemic may not work in the same way.” Pandey added.

“If the ULCC model is implemented, Akasa Air may expand the market as a whole through stimulus due to lower airfares,” said Manvi Hooda, Head of Consulting and Research at aviation consultancy CAPA India.

“India remains a poorly penetrated air travel market. As India is a value sensitive market, lower airfares can stimulate the market significantly,” said Hooda.

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