If we were to ask you which industries suffered the most during the Covid-19 era, travel and tourism would be one of the top answers. Many airlines suffered considerably since March 2020 which is when the pandemic broke out.
In this environment, Rakesh Jhunjhunwala has decided to enter the playing field by starting Akasa Airlines – a low-cost service. He knows that the pandemic is almost on its way out with India recording nearly 1 crore vaccines per day recently. He also knows that he can strike a good deal on the actual airplanes with Boeing running deep in debt.
A few years ago in 2018, Boeing 737 Max crashed twice in a span of five months and killed 300 people. It was a brand-new plane which was banned from flying for two years. This resulted in a drastic drop in sales – they sold 837 units in 2018, but could manage only 69 units in 2019.
Now though, the sales have picked up as regulatory authorities have lifted the ban in many countries. Soon, SpiceJet is planning to introduce them in India. In an interview with The Times of India, Ajay Singh (chairman and managing director) said, “I am delighted to share that our 737 Max will be back in the air soon. As India emerges from Covid and air traffic picks up again, the Max aircraft will play a major role in our future expansion. With a better and a more efficient fleet back in operation we expect a significant reduction in our operating costs improving our bottom line.”
Even Rakesh Jhunjhunwala is planning to invest in Boeing 737 Max as these airplanes are being sold at throwaway rates. If he pulls off all the right moves, he could be saving a billion dollars by getting up to 50% discount.
It’s also a good time for him to enter the arena because his competition is suffering. IndiGo suffered a loss of Rs. 10,000 crore in 2020 alone. GoAir is planning an IPO to revive itself. Even SpiceJet is going through a tough time despite receiving hefty compensation from Boeing.
When all the airlines will start operating at 100% capacity again, they’ll have only one thing on their mind – to recover the losses. If Jhunjhunwala enters with low-cost tickets, people will tend to flock towards Akasa Airlines. “I’m very, very bullish on India’s aviation sector in terms of demand,” he said in an interview with Bloomberg TV. Along with Jhunjhunwala, Akasa also has Aditya Ghosh (former head of IndiGo) and Vinay Dube (former CEO of Jet Airways) in their team.
A classic case in running a low-cost airlines company profitably is that of Southwest Airlines. They’ve deployed some genius strategies to ensure that they remained profitable even during the 9/11 tragedy and 2008 recession. What they did was that instead of operating flights between most destinations, they operated only between destinations that had the most traffic. Also, they invested in oil hedging which saved them billions of dollars. In simple terms, oil hedging is a way to ensure that you keep paying the same price even when fuel prices go up. For example, if Southwest Airlines paid $20 per unit of fuel now, they agreed to pay $35 per unit to an insurance company. This made sure that even when the price went up to $65 per unit, they still kept paying $35 per unit.
For Akasa, the road will not be easy. Major airports like Mumbai and Delhi are already operating at full capacity and gaining the slots won’t be easy. India is also a long time away from the concept of secondary airports. Another pain point will be that in the ultra low-cost carrier (ULCC) model, it will not be feasible to allow 15 kg of free check-in luggage.
Whether or not Akasa Airlines is able to cross these hurdles successfully, only time will tell. For now, we can’t help but admire the genius of Jhunjhunwala. Where most people would have seen a sinking ship, he saw an opportunity waiting to be grabbed.