By July or August 2022, a new low fare airline Akasa is expected to be in the Indian skies. Keeping the newbie company and giving it competition shall be the erstwhile Jet Airways, which has recently been granted an air operator’s permit (AOP).

If things go as planned, AirAsia India will be subsumed into the erstwhile national carrier and emerge as a new entity under the Tata umbrella, with its recently appointed CEO Campbell Wilson leading it. This promises to be a new, spruced up contender for a large chunk of the Indian traffic. As they concretise their plans and resuscitate the national carrier, it is safe to assume the Tata combine will soon emerge as a strong competitor to IndiGo, which currently carries over half of India’s domestic passengers.

Watching these developments will be all the existing players: Tata-owned Vistara and low fare airlines IndiGo, SpiceJet and Go First. If all the above plans fructify as outlined, by the end of this year, the Indian passengers are likely to be pretty spoiled for choice.

But as the two biggies — the Tata owned airlines and IndiGo — consolidate their grip on the Indian passenger, the smaller airlines — SpiceJet and Go First — with a market share hovering around 10%, and the new entrant Akasa are likely to feel the heat and will need to work together or reinvent themselves to survive.

“I don’t see how the small players will survive once the revamped Tata airline gets its act together”, says a senior Ministry of Civil Aviation (MOCA) official. Two large fish, he argues, could intensify the already stiff competition for the smaller ones with their impossible to match pricing and frequencies.

He further argues that even if Akasa starts with a clean slate, it will be a while before it begins to make money and it is far from clear what the appetite of the founders would be to absorb losses, and for how long. The fact that losses in the early days are inevitable has been amply demonstrated by both AirAsia India and Vistara.

“One has to factor in losses for some years, and with two big and strong competitors, high fuel prices and all the other variables that have brought the industry where it is today, losses are likely to be quite heavy to begin with,” said an airline industry official.

Although Jhunjhunwala, who is an investor, has deep pockets, nobody knows of his appetite for the kind of losses start-up airlines can easily tot up.

As the industry and observers take in all the changes that have taken place and that are poised to happen as all existing clouds clear up, there is a growing consensus that the existing small players have no choice but to “double or quit”, as one industry veteran put it. At least two scenarios are under discussion that this article will elaborate on. The scenarios remain in the nature of speculation but are not as “impossible as one might think” and one even makes “logical sense”, according to industry sources.

Pie In The Sky 1 : A rumor that has been gaining ground over the last few weeks that Rakesh Jhunjhuwala, the primary investor in Akasa, may not be averse to buying one of the two smaller players. Of the two smaller players, sources said that there was a “real case” for the new entrant with far deeper pockets (Jhunjhunwala) buying up SpiceJet which is in a weak financial spot and would have many synergies with Akasa.

There are at least three valid reasons, sources say, why this might work. One, the two airlines with Boeing fleet would not be adding a new kind of aircraft, keeping costs in check. Adding a second kind of aircraft to a low fare airline fleet has proved costly all over the world. Two, if Akasa and SpiceJet were to combine forces in some manner, they would have a strong presence in Mumbai and in Delhi as the former is headquartered in Mumbai and the latter in Delhi. The airport slots and frequencies of both together would offer passengers an array of options. Third but not last, SpiceJet is a listed entity and markets is what “Jhunjhunwala does best”.

“The fact that SpiceJet is listed makes it a more attractive buy than a Go First since there is a degree of transparency that listed entities provide, which is not true for privately held firms,” says a Mumbai analyst.

Two factors however may be of worry. One, the downside for anyone considering SpiceJet is that the airline is mired in too many legal tangles and few would want it unless these are cleared up. Second, its dues to vendors remain a concern; a plan by the chairman and managing director Ajay Singh to settle the dues by hiving off the cargo wing of the carrier remains on paper so far. Dues have been mounting since the pandemic hit.

An email sent to Jhunjhunwala and Akasa CEO Vinay Dube remained unanswered till this article went to press but sources who are close to him said that this cannot be considered “out of the realm of possibility”. A senior MoCA source even ventured to say that he would not be surprised if there was a “takeover attempt” as happened recently in the case of MIAL, leading to GVK's exit. He adds that while this may sound speculative today, eventually all the smaller players will have no option but to reinvent themselves to survive.

SpiceJet declined to comment on speculation. A spokesperson said that there has always been high competition in this sector. “Competition benefits everyone, forcing all to innovate and rationalise costs. While there are bigger players in the market, the competitive and economic landscape remains identical for everyone. In fact, the larger the airline, the higher is the need for rationalisation in the present economic environment”, the spokesperson adds. He says SpiceJet has weathered these difficult times and is on the course of recovery, adding that it will soon be separating the logistics business, which will result in a one-time gain of ₹2,555.77 crore, wiping out substantial negative net worth, a move for which shareholder approval has now come. The logistics arm of the business has grown from $30-40 million a year to around $300 million dollar yearly.

Go First CEO Kaushik Khona says it is confident of weathering any competition with its lower operating costs and on the strength of their network. In response to an email, he says: "The sustainability of airlines can be dependent on their cost-structure. We have the lowest operating costs, as may be verified through the audited quarterly results quarter-on-quarter from April 2021 to June 2021, July 2021 to September 2021 and from October 2021 to December 2021. Our operating costs are nearly 12.5% to 14% lower than Indigo (which is 5 times bigger in fleet-size). Even our EBITDA is higher than Indigo’s, by about 5% for the 9 months ended December 31, 2021”. He adds that Go First's operating costs are lower than SpiceJet's.

Industry sources are of the view that Jhunjhunwala buying Go First might not really be an option as the Wadias have deep pockets and can weather the present storm on their own might if they so choose. Further with Akasa opting for Boeing and Go First operating with Airbus planes, the fleets are not common. Moreover, both would operate out of Mumbai, which would not give the special advantage geographically that a SpiceJet could. Go First CEO Kaushik Khona says that the airline had not been approached by anyone so far and he declined comment on speculation.

Pie In The Sky 2 : A second possibility being discussed within the sector is whether Go First and SpiceJet might look at ways of combining forces in the new reality. Two better than one is the thinking. This could be either in the form of combining the airline codes and operating as one entity or in a more structured manner where the two companies even attempt some kind of merger and the two managements try and work together. A source in SpiceJet confirmed that these options have been discussed as the reality “is staring everyone in the face”.

A combination of the two would also result in some advantages to both. One, the dynamics of aircraft acquisition change substantially the moment an airline is manufacturer agnostic. “This typically improves the airline’s ability to negotiate and to pick the best deal”. Second, Go First holds many good slots and frequencies out of Mumbai and has a reasonably strong presence on certain routes out of the city and SpiceJet has the same out of Delhi. “The combination can be a winning one”, says a MoCA official. And last but not least, the ability of the two together to negotiate with all and any vendors improves with scale and size.

In response to an email query on possible merger or working together with SpiceJet, Go First CEO Kaushik Khona says, “We would not comment on pure speculation. SpiceJet has a mixed fleet of Boeing and Q400. It also had some Airbus aircraft. We at Go First are completely focussed with an Airbus A320neo fleet”. He adds that this fleet would reach 62 A320neos and 3 A320ceos by the end of this financial year, making it very cost efficient.

The heat, industry sources say, will be on not just Akasa, Go First or SpiceJet but even for leader IndiGo, which has been ruling the skies with over 50% market share. Even though it has been and is currently going through one of its most troubled phases. The market leader has lost one of its “sounding boards” with the exit of founder Rakesh Gangwal. Other top level exits including chief commercial officer William Boulter and CFO Jiten Chopra will be followed by its CEO Rono Dutta. By September the airline will have a new expat CEO to replace Dutta who is exiting before his term ends in 2024.

In other words, almost a brand new team will be taking on the new Tata combine. And last but not least, the airline is yet to get over the worst industrial relations crisis since inception, brewing since early April. Pilots, crew and staff across levels are far from pacified post the salary cuts and part restoration and lots of work on the human resource management front is required to keep the boat steady. All this in an increasingly tough macro environment with soaring oil prices and a depreciating rupee. The going is getting tougher even for the toughest.

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