Can Indian airlines' defy the basic principle of economics?

A lot is being talked about the launch of Akasa Air and the potential relaunch of Jet Airways. And why not, the Indian airline industry is witnessing something good in the form of the launch of what potentially has the capacity to be one of the great airlines.
I have been fortunate enough to have worked with 2 of the great carriers India had - Jet Airways & Kingfisher Airlines. These were very different in almost all the aspects, the most visible being a 737-family dominated airline Vs A320-family dominated airline. I have been part of the launch and rise of Jet Airways and at Kingfisher Airlines, I have been through the heydays and the unthinkable merger with Air Deccan to being the “bad boy” in the eyes of the IATA to whom I used to chase to grant us unprecedented extensions in settlement of ICH dues. Each week, I was seeing the proverbial “Writing on the Wall” and so I chose to exit before the airline nose-dived for the one last time.
The intent of the article is to share my thoughts on why Indian airlines’ - existing as well as those that have plans to launch in the coming periods would need to defy the basic principles of economics. That principle being - that even if the demand is lesser or inelastic with a downward bias, it is possible to charge a higher fare as and when necessary in order to survive and therefore, thrive.
My thoughts have unfortunately been aided by the recent spike of Covid cases and the impact that it has had on the airlines already in business for the next several weeks/months. Also, recently I came across an article where the aspirations of the airlines from the Union Budget have been discussed. I have taken the liberty of picking some points from there .
I know that RJ has decided to back this airline that is founded by industry veterans with a proven track record. However, my post is not only related to Akasa but also for all the recently launched carriers and those that may be in the pipeline. Based on my experience and also thanks to my independent thinking of the given scenarios, I foresee bigger challenges ahead for the aviation sector in general in India.
Let me come straight to the key points that an airline would need to put in place before getting started. Since RJ is from the trading and investing world, it is good to compare the present scenario in aviation with the trading and investing world. It offers equal opportunities to all those who are willing to participate in the capital markets using different asset classes. There is no special treatment given to anyone by the market or the market participants and also the facilitators.
How then can one become successful and consistently profitable in the markets? The answer is simple - by following a disciplined and consistent approach in managing the funds that have been deployed. This sounds very easy on the web and on paper, but it is one of the most difficult areas that a participant has to manage. The one who is able to develop an “edge” is the one who will survive in the long run.

The same goes with the airlines, however, in the case of an airline that has been launched or is about to be launched, the start will have to be done from base zero. I am aware that it is a good point to start, but my experience and observations that are available for all to look at is that despite having some of the great people at the helm, Jet Airways and Kingfisher Airlines failed to survive. In the end, money is what matters and the day your outflow is more than the inflow, the game becomes hard to conquer and that happens from Day 1. Unless of course, the founders have an unlimited supply of funds that comes from their own sources and not from the financial institutions.
Now, let me share why an airline would find it hard to develop an “edge”. To explain this, I have listed the key areas that an airline would be required to manage and correspondingly I have stated whether it has the potential or scope to develop an edge. So here we go-
Type of Aircraft - all the available aircraft are more or less in line with the others. The edge is only in “how” they get used.
Destinations - Most of the airlines would operate the routes that are being serviced already by other carriers. In India, the only unique sectors one may think of operating are under the UDAN scheme. Very rarely we may see a monopoly sector/route.
Sr. Management Team - this is one area where an airline can certainly have an edge as having the right set of people especially when it comes to money matters as it can either help the airline thrive or barely survive or meet with an untimely demise.
Management Team - another area where edge creation is possible. Placing the right person for the right job is the key.
Operating Crew - All available resources get trained in line with the SOPs and there is no scope to do “innovative take-offs or landings”. This area is one where one is required to go strictly by the book as intense compliance is essential to make each flight a success. In fact, recently, there was an incident where an Emirates 777 barely managed to lift itself at the end of the runway at Dubai thanks to an inefficient operating crew. This danger would always be around as airlines expand and finer details may no longer be possible to observe.
In-flight Crew - the only edge an airline can have is by having the best in class cabin crew and rest is the same for all airlines. This area is also heavily regulated - we do not see Southwest-like announcements in India as they may not be well received by the authorities and or pax.
Airport Operations - we do not have ULCC or LCC airports unlike some other countries and this area too is heavily guarded and no service delivery edge is possible that may shift the business.
Marketing & Sales - this is a level playing field and all the tricks are known to the existing operators. However, I am also aware that this is one of the areas that can really help an airline gain a leading “edge” which may/may not be visible to the customers. As long as the airline is making money, it is good. I have been fortunate enough to have helped my ex-employer Jet Airways make millions of USD on an incremental basis without much effort and costs. Akasa AIr is lucky to have one of its Co-founders and its CMO who has a great mind with an innovative bent. I have seen his rise from the day he joined Jet Airways and I am so glad that he has reached the level from where he could play a pivotal role in defying the basic economic principles.
Financing - Money matters are the ones that matter in the end as the survival of a company leaving aside airlines is dependent on this. The only way to remain profitable and sustainable in the long run is by staying cash positive and this is not at all an easy target. We all know that some of the existing airlines have been struggling to stay profitable and in some cases had been put on Cash & Carry terms by some of their vendors. The fact is that if I had cash, I would not need credit and if the only form of payment that is accepted from me is cash then I would not be able to survive.
There are many other important areas and departments that form part of an airline but those are not the ones that would bring in incremental business or help an airline have such an edge that the competition is kept at bay.
IndiGo has become a big airline only because it has been run efficiently even if there have been changes in their CEOs and also in their senior leadership teams. Even then the airline is unable to remain consistently profitable as there are many challenges that each airline has on its plate and not everything can be read from the financial records of a listed company like IndiGo or for that matter even SpiceJet.
Fiscal concessions and industry-friendly policy measures to help it survive the turbulence caused by the still raging Covid19 pandemic.
Standards on air traffic movement and capacity utilization during the pandemic as also an end to the current practice of regulating short-term fares.
The operating capacity allowed in the country and to foreign countries. This is preventing the airlines from carrying out timely capacity adjustments.
A system for both domestic and international capacity so that airlines can plan out their capacity utilization if COVID-19 cases start rising in India.

It would be unwise to completely ignore the fact that the post-pandemic world would be the same as it was in 2019 and we do not know how many “waves” would Covid 19 have before it becomes as common as fever or viral flu. This has impacted the airline industry globally and would keep impacting it, until it ceases to be a threat.
As I am writing this article, the situation is worsening and I just read the news that IndiGo has decided to waive off reissue charges on all tickets valid for travel till 31 Jan 2022. The waiver would enable the travelers to complete their intended journeys within the next one year. Also, it has announced that a voluntary cut in services which may be up to 20% would be put in place as the demand is thinning out on some of the routes.
The above would also mean that the airlines would be forced to fall in line and naturally so. This big decision would cost all the existing airlines as it would mean that a lesser number of seats would be available as many travelers booked between 10-1 and 31-1 would consider rescheduling their travel dates. Even if we consider only 1/3rd of the travelers decide to reschedule their journeys, we are talking about adding 1 more week to the calendar year 2022. This roughly works out to around 2 Million seats . This is a big number to be dealt with by the airlines.
The launch of a new airline would obviously help generate employment, but I am not sure how many of these would be in the form of “new jobs” and not merely replacement of personnel from airline A to airline B. A painful history conveys that even a well-established airline can crumble in a matter of few years and even an airline with a path-breaking and trend-setting approach to customer services could end up as a failed airline.
A lot of pain and agony has been experienced by my ex-colleagues at Jet Airways and Kingfisher Airlines and during the pandemic for many of them, the alternate career path also failed as the pressure came from all over.
Are we and airlines in particular, ready to accept such a scenario in the time to come. I am not hoping for one, but when one is about to launch operations, I am sure one would think about these matters as well. And more importantly, the airlines that are already in existence would be forced to look at it as the pressure would be felt by them as well.
Now enter Akasa Air & Jet Airways 2.0.
Based on my back of the envelope calculation, with a fleet of 75-100 aircraft getting added to the existing fleet of aircraft over the next 2-3 years, there is likely to be a requirement of around 10,000 incremental pax per day for all the airlines to survive. I am not sure if India is ready to generate that kind of demand in the next couple of years given the present scenario.
And assuming that the airlines succeed in doing so, at what fare levels would they be adding these pax? A 25% premium or a 10% discount to the existing fare levels? Lower fares would need to be offered to get the traction on board the additional aircraft and that would not only hit the new airlines, but would also compel the existing airlines to lower their fares as pax would then become the king of sorts. So we are likely to face a situation of excess capacity, lower fares, and a variable demand with a bias on the downside . It is common knowledge that with this kind of a scenario, it would not be prudent to operate unless at the end of each month not only a positive cash flow is generated but also net profit is generated.

In view of the above, I observe that the great excitement about the launch of Akasa Air and the potential relaunch of Jet Airways is founded on weaker grounds. I would be delighted and joyful if my thoughts miserably fail and I am proven wrong. It would then be a victory for the airlines in India and for the country as well. I would also participate in it as a shareholder of the listed airlines.
I would love to hear the views of the readers as that will help us know what the feeling is in general.
Here is the link to the video:
I wish the very best to all the existing airlines and the new airlines on the tarmac - Akasa Air as well as Jet AIrways 2.0 and would love to see them cruise over not only Indian but also global skies.



The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.