Is the aviation market ready for new players ?

Forum Gandhi Mumbai | Updated on August 22, 2021

At least 3 new airlines set to take off

The aviation market is poised for the entry of new players including Akasa and Jet Airways with asset cost at an all-time low, talent in abundance, and incumbent airlines struggling with legacy issues.

The new airlines will be able to operate with vastly reduced costs at a time when passenger traffic is set to rebound.

Recently, Rakesh Jhunjhunwala had decided to invest in Akasa, an airline started by former -Jet Airways’ CEO Vinay Dube.

Jet Airways is also looking to restart operations by the end of this year under its new owners Kalrock-Kalan consortium.

This comes at a time when all the incumbent airlines are facing huge headwinds and increasing losses. Aviation is a sector in India where at least 50 players have shut shop in the past three decades.

But according to Koushik Jagathalaprathaban, Partner, AT-TV, a consultancy firm, the market is extremely ripe at the moment for a new player to enter, especially “with asset cost at an all-time low, talent in abundance and airlines unable to reset their cost bases.”

IndiGo, SpiceJet and Vistara have been negotiating their lease rentals, deferring payments to vendors, and cutting employee costs.

Boon for startup airlines

According to experts, This is a boon for startup airlines to get good talent at a lesser cost.

Vinamra Logani, Head of Operations for Sarin & Co. pointed out that post Jet Airways’ grounding in 2019, several pilots were jobless. With the pandemic at its peak, several Indian pilots who were employed by Gulf airlines were laid off too. In the current scenario, this would be extremely beneficial for the startups when it comes to hiring good talent.

“Not only that, Original Equipment Manufacturer (OEMs) such as Boeing, Airbus and Embraer will be more than willing to negotiate at this point in time for a large aircraft order. Even if they were to go for the SLB routes, lessors will be available to cut them a better deal,” said Logani.

Even though the existing players would try to reduce their costs, they would not have a vast difference to the pre-pandemic cost base “while a new entrant can set up a new cost base and hence has a chance for being more profitable.” This is the potential, AT-TV believes that Junjunwala has seen.

Whereas Logani said that there is more besides the current low costs. according to Logani, A major boon for the new entrants is that despite the pandemic, the Indian airports continued to expand capacity.

Both Delhi and Bangalore airports are getting their fourth and second runway soon. In the next few years, the Navi Mumbai airport too is likely to be operational.

“So for any startup airline, landing slots at key airports won’t be a paucity-which is extremely important for new airlines,” Logani said.

From a market point of view, Logani said that even today, only four per cent of Indians fly. Since India is a price-sensitive market, the new Ultra Low-Cost Carriers, with a cleaner balance sheet will be better placed. Whereas, existing airlines are still looking to raise cash to stay afloat.

Both Logani and Kavita Chacko, senior economist- Care Ratings believe that the new entrants would be better positioned in this case to be able to offer more discounts.

Chacko said that “It was noticed in the recent past that there was a pent-up demand for travel. This means that though people do not have a lot of money, they’d want cheaper options to travel.”

Aviation sector recovery

However, Jagannarayan Padmanabhan, director, Crisil said that it must be taken into consideration that the Aviation sector has been one of the hard-hit sectors globally. The expectation is that it will take at least 3 quarters more to reach pre-pandemic levels.

“Given this backdrop, it will be a significant challenge for a new entrant in the initial years to gain and establish market share. Much will depend on the business plan that they plan to adopt,” he said.

The challenges in Indian aviation continue to remainissues of higher operating costs, taxation on ATF, cutthroat competition resulting in the cheapest fare in the world and are not likely to be addressed any time soon.

This would surely mean more competition for the existing players and more options for Indian flyers in return to get competitive airfares.While failure or contraction cannot be ruled out for existing players with extremely weak balance sheets and issues with liquidity,” said Jagathalaprathaban,

“With the entry of a new airline pressure in cost, competition and cash-flow will only increase.” he added.

Published on August 22, 2021

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