India’s youngest airline Akasa Air announced a widely anticipated order with Boeing for 150 737Max Aircraft at the WINGS Airshow. The order comprises the 737 MAX 10 and 737 MAX 8-200 with deliveries through 2032. This is in addition of the late Rakesh Jhunjhunwala-promoted airline's existing order of 76 aircraft of which 22 aircraft have already been inducted and deployed.
With Akasa's latest order, India’s airlines collectively have more than a 1000 aircraft to be inducted by the end of the decade and it is hoped that competition in the skies will intensify giving consumers additional options and help stakeholders with balancing risk.
Reflecting the immense market potential
The new order will help Akasa position itself towards capturing a portion of the passenger and cargo volumes in India, which is to be the third largest aviation market, by the end of the decade. Air travel demand out of India continues to be strong and the 2024 traffic volumes are estimated at 160 million domestic and 73 million international passengers. This is all set to grow to 300 million and 100 million respectively by the end of the decade.
The growth shows no signs of stopping and with India’s macroeconomic elements aligned, the country is on track to register 6% to 7% GDP growth for several years ahead. Consequently, aviation growth in the mid-teens is bound to follow. And airlines— both domestic and foreign — are keen to capture the market potential.
In addition to macro-economic factors, infrastructure also continues to see exponential change. For aviation alone, the country has seen operationalisation of more than 140 existing airports; a host of policy changes, including the National Civil Aviation policy of 2016 (NCAP), have been implemented; tax policy changes for MROs; the regional connectivity policy namely the Ude Desh Ka Aam Nagarik Scheme (UDAN); a revision of the Aircraft Act of 1934; setting up of GIFT city as an avenue for aircraft financing; the sale of Air India; and a strict stance on bilateral access to foreign airlines (for now).
To accommodate growth, airport capacity has been gradually expanding and the fleet of approximately 700 civilian aircraft is expected to double by 2030. India currently has 1.5 aircraft on order for each aircraft flying and the OEMs including Boeing, Airbus, CFM and GE have already announced significant investments for setting up ventures in the country. It would seem all indicators point to a continued ascent.
India's market structure warrants a 3rd alternative player
The current market structure for the Indian aviation market is one where 2 airlines namely Indigo and Air India control more than 80% of the market. Akasa entered this market 17 months ago and steadily made a name for itself and now sits on approximately a 4.5% market share. Yet, both Indigo and Air India have structural advantages that Akasa will have to overcome. As such the orders may be the easiest part of the process.
The challenge also stems from the fact that India’s airlines fly in a sea of sameness with similar networks, similar financing structures and similar business models. To succeed cost competitiveness is a must and the scale and operational integrity of the dominant player makes it a challenge for others to succeed. For Akasa the challenge will be to put out a product that is at the most competitive in costs and one that is consistent. This is easier said than done given the marketplace challenges with talent, with management of infrastructure and with profits.
For Indian aviation as a whole, numbers paint a picture of a double-edged sword. While order books are strong, the fact remains that return on capital for the industry as a whole is negative and losses for the past decade have been well north of USD 15 billion. Profits let alone a consistent stream of profits are the exception rather than the norm and the industry continues to consume capital at rates that surprise even the most seasoned investors. Intense discipline, decisiveness and dedication in equal measure are all required for success. Whether or not the industry delivers this as a whole and whether Akasa can do the same is yet to be seen.
Akasa has to deftly navigate its way through an intense marketplace
Akasa enters an arena where on one end there is a well-capitalised, profitable and dominant airline in Indigo followed by a well-capitalised, yet to be profitable and patient airline namely Air India. On the other end is an airline with a fragile financial position but its own order book and a bid to takeover a now grounded airline (which if successful helps consolidate almost 10% of the market). Aviation growth notwithstanding, margins are thin, profitability is elusive and the difference between profit and loss is the degree to which costs are aggressively attacked and revenues are unapologetically captured. The intensity is expected to only deepen.
Akasa has positioned itself as a low cost carrier (LCC) and arguably, India for now does not have any true low cost carriers (LCCs). This as the traditional low-cost elements including secondary airports, direct distribution, asset strategy, talent strategy and network focus are constrained. Whether or not Akasa can change this remains to be seen. But by equal measure, Akasa has been the airline that has surprised naysayers. Whether it is the founding just after the pandemic in late 2021, launch just 8 months thereafter at a time where aviation stood significantly damaged; or the rapid scale up to 4% of the market within 12 months after launch; or the latest order 17 months after launch.
The announcement of the order itself is evidence of India’s strengthening position in aviation. Traditionally aircraft orders are announced at the legacy airshows – Paris, Farnborough and Dubai. This is one of the first orders of this magnitude that was announced at the Indian airshow WINGS.
The CEO for Akasa commented at the airshow, “This large and historic aircraft order puts Akasa on a path of becoming one of the top 30 airlines in the world, by the turn of this decade.” An ambitious goal and one that all well-wishers hope is achieved. Yet also a goal that requires a laserlike focus given that the marketplace is as intense as it has ever been and one where there is a unique shape and structure of demand and unique structural challenges. For now, the day belongs to Akasa and we wish the airline well.
—The author, Satyendra Pandey, is Managing Partner of the aviation services firm AT-TV. The views expressed are personal.
(Edited by : C H Unnikrishnan)
