On a Boeing 737 Max and a prayer: How Akasa Air’s Vinay Dube is taking on the IndiGo-Air India duopoly

Vinay Dube, who had been chief executive officer (CEO) of the airline for a short stint that had ended in August 2020, probably heaved a sigh of relief that he was not at the helm when Go First went under. He’d been in that situation once before, at Jet Airways four years earlier. It was a dubious distinction he was happy to avoid repeating, even if both airlines had been facing turbulence well before he joined them.

 

Dube is now the CEO of Akasa Air, which, like Go First, faces a recurring problem. Akasa Air’s entire fleet is made up of one aircraft type; while this is a practice followed by airlines around the world, as it helps keep operations and maintenance costs in check, the plane that Akasa chose to operate is the Boeing 737 Max. It is an aircraft that has faced frequent problems since its inception. Akasa has ordered 226 Max planes for its fleet, getting a discount thanks to it not being the first choice for most airlines. The plane’s frequent issues, however, pose a significant problem for the Indian airline.

Aircraft issues aside, the fledgling carrier is a bit player in its home market, which has effectively become a duopoly. It currently has just a 4.5% share in the market, which is overwhelmingly dominated by IndiGo with a 62.4% share, and to a lesser extent by the Air India group, with 29.4%. SpiceJet, the other contender, is now smaller than Akasa, and has been asthmatic for a while now.

Analysts underline that it is imperative for Akasa to succeed, noting that India needs a strong third airline to protect consumers. A duopoly, they point out, would lead to an uncompetitive aviation market, where fares would be dictated by these carriers.

But in the face of the formidable challenge posed by IndiGo and Air India, can Akasa be a strong third player or even a third player on the fringes? When Mint posed that question, Dube retorted, “Why can we not be the first player?" His sanguine outlook aside, however, the carrier faces multiple challenges.

Moreover, while Dube has tons of experience following stints with foreign carriers such as Delta Air Lines and American Airlines, so far he has not had much success in India. This time, however, he will start with a clean slate, and also has skin in the game, having founded Akasa with former IndiGo CEO Aditya Ghosh and legendary investor Rakesh Jhunjhunwala, who passed away in 2022.

To be sure, India’s aviation market is not for the fainthearted. Many an airline has met its end in its tough operating conditions over the last three decades. While IndiGo is an outlier and worthy of a case study for the manner in which it has taken a stranglehold over the market, Akasa has managed to hold its own so far. The fledgling airline is now hoping to emulate the leader's success and thrive alongside, a feat Dube firmly believes it can pull off.

Hatching an airline

In 2021, as the world limped back from the impact of the covid pandemic, a team of aviation professionals led by Dube met in Mumbai to quietly plot the launch of Akasa. Their plan was clear: keep costs in check, right from acquisition of the aircraft to maintenance. “70% of an airline’s cost structure is determined on day one... or can be determined on day one, and that is based on the aircraft and engine maintenance deal that you negotiate," Dube told Mint.

Akasa launched its first commercial flight on 7 August 2022. Since then, it has made the right noises, including having a comfortable crew uniform that includes sneakers and allowing pets in the cabin and cargo. Akasa also created a world record by being the fastest to induct the first 20 aircraft in its fleet.

In a statement, the airline said that since inception, it has served over 12 million passengers and now connects 27 cities with its fleet of 25 737 MAX aircraft. Akasa commenced international operations on 28 March, offering non-stop flights from Mumbai to Doha. Internationally, it operates flights to Doha, Riyadh, Abu Dhabi, Jeddah and Kuwait.

But all this has come at a cost. The carrier reported losses of over ₹2,400 crore in its first two years of operation, losing ₹1,670 crore in 2023-24 and ₹744 crore the year before. IndiGo, in contrast, had a loss of ₹174.13 crore in 2006-07 and ₹212.28 crore in 2007-08—the first two years of operations. The airline made a profit of ₹82 crore in its third year. While this was a decade and a half ago, a big factor in that short flight to profitability was its sale and leaseback (SLB) model, credited to co-founder Rakesh Gangwal, and one Dube plans to duplicate.

An IndiGo leaf

Dube has no qualms in admitting that he is taking a leaf out of IndiGo’s playbook. “We are super thrilled to copy the best of the best, and Gangwal is an incredibly smart aviation professional, so it’ll be an honour and a pleasure to copy him," he told Mint.

The sale and leaseback model played a role in IndiGo becoming India’s largest and most profitable airline. Under it, aircraft are purchased in bulk to fetch the best of discounts, sold to a lessor upon delivery, and then leased back. The upsides are hefty discounts at purchase and a neat margin during the resale to the lessor (there is generally a lag of some years between order and delivery and the list price of the aircraft increases during that period).

In purchasing the Boeing 737 Max, Akasa did the same. Dube claims that the timing of the purchase helped Akasa ink a fantastic deal: “We bought our aircraft when nobody in the world was buying. We bought our aircraft when Boeing planes were not being ordered (due to concerns over the computer system in the plane that had led to two crashes), when China was not taking deliveries."

The total deal size, for 226 Boeing 737 Max planes, is estimated to be about $30 billion based on the list price. Industry watchers put the discount Akasa got on the list price to be anywhere between 15 and 40%. While a good deal was one of the key reasons for choosing Boeing, another factor for choosing this aircraft over the Airbus 320 was the longer delivery time needed by the European aircraft maker.

But industry observers feel Akasa should proceed with caution in trying to follow IndiGo’s flight path. “There is no doubt that the model has worked for IndiGo and they survived the covid crisis on the back of a cash surplus generated over a period of time through SLBs. But there is no guarantee that the same model will work for Akasa," said an industry veteran, pointing out that the Indian aviation market has changed a lot from the fragmented landscape of 2006, when IndiGo was launched. “There was no IndiGo-Air India group duopoly in 2006," added the veteran, who did not want to be identified.

“This is a different aviation market with two strong players. Cash losses will be higher than 18-19 years ago. They should avoid getting into this pull of funding losses through SLB earnings," said a second aviation industry insider.

Dube, however, justifies the model, saying that an airline needs capital initially and SLB provides that. “There’s nothing that we are doing that is unusual or different from some of the world’s best airlines. They’ve gone through the cycle, through an operating loss that you fund through cash," Dube explained. “At some point, your operation becomes big enough, and that, for us, is not that far off. We are set to turn profitable in three years or even sooner, in 24 months. Once that is achieved, we stop using that (SLB income to fund losses)."

The CEO added that the cash that the promoters had put in to start the airline is in the bank and has grown over a period of time. Jhunjhunwala had invested $35 million (around ₹290 crore) for a stake of nearly 40% in the airline in 2021.

According to sources, however, Akasa is looking to raise funds to the tune of $120 million from a couple of family offices to fund its operational costs since the Jhunjhunwala family does not want to put in any fresh equity to fund working capital requirements. The change in strategy came after Jhunjhunwala breathed his last on 14 August 2022. The family reportedly plans to consolidate its portfolio.

Wobbly Max plank

“The biggest challenge that I see in Akasa’s growth trajectory or survival is problems with the Boeing 737 Max aircraft, which keep reoccurring. Every other day the aircraft is facing one issue or the other," said Mark Martin, founder and CEO at Martin Consulting, an aviation consultancy firm.

For instance, the aviation regulator Directorate General of Civil Aviation (DGCA) recently issued an advisory to airlines operating the Boeing 737 Max in India, including Akasa, warning of a potential problem in the rudder of the aircraft. Subsequently, a potential loose bolt issue in the rudder-control system also became a concern, prompting the DGCA to issue another advisory last week. It warned airlines not to use Boeing 737s with that particular rudder part for low-visibility landings, where the plane lands with the help of computers and the instrument landing system.

The Indian regulator cited a risk of “jamming" in the wake of an incident in February involving a United Airlines Boeing 737 Max flight in New Jersey. That incident had prompted the US National Transport Safety Board to raise a new red flag over safety issues. In January, a door plug flew off a new Alaska Airlines Boeing 737 Max 9 aircraft, leading to intensified regulatory scrutiny on Boeing.

Earlier, the 737 Max had been grounded worldwide for nearly two years after two fatal crashes involving Indonesia’s Lion Air (October 2018) and Ethiopian Airways (March 2019) killed 346 people. Both crashes were blamed on a new flight-control system called MCAS that malfunctioned. Operations resumed gradually around the world from December 2020 after the problem was addressed and the aircraft cleared. But a similar grounding will cause serious problems for Akasa, which has all its planes in the Max basket.

Given its frequent issues, the US Federal Aviation Administration (FAA) has capped 737 MAX production at 38 per month to increase inspections. Due to supply delays, production has fallen below even this cap in recent months. Boeing could make just 32 units in August and 25 in July. It aims to ramp up production to 38 jets by the end of this year, but analysts are doubtful that will happen.

The slowdown in production of the Max will affect Akasa, as delayed deliveries will impact not just growth but also its SLB cash flows. The drop is taking place at a time when it will be priming to expand domestic and international operations. Akasa officials, however, claim that there will be no impact as they plan to increase capacity by utilizing existing aircraft more.

The constant crises involving the Max planes forced Boeing CEO Dave Calhoun to resign in March, with Kelly Ortberg appointed as his successor. In recent years, the American manufacturer has been lurching from one crisis to another. In the latest setback, problems with the Starliner, its space crew transporter, have left two American astronauts stranded on the International Space Station.

Despite the many issues bedevilling the 737 Max, Dube is unfazed. “We’re going to stick to our deliveries with Boeing," he declared. Akasa, he added, would be “disciplined" and not try to acquire aircraft in the secondary market, ruling out acquiring planes from a struggling airline even if they are available at a bargain.

Ankur Goel, the airline’s chief financial officer (CFO), who started his aviation career with IndiGo and then joined Akasa, said whatever challenges the airline faces today are normal for a new entrant. “I think people don’t understand enough that the initial two-three years are the most difficult. Because your brand is building up, the cost structure is higher because of this fixed cost that we have," he explained.

Martin, however, felt that it would be best for Akasa to change its aircraft type so that there is some degree of certainty in its growth plans. But that is easier said than done. Changing aircraft midway would not only require cancelling the order but also a change in the cockpit and cabin crew as well as engineers. The engineering bases, spare stock, etc. would also require changes. So, for now, Akasa is all in with the Boeing 737 Max.

If Boeing can address the issues dogging the plane once and for all, and if Akasa can execute its home and international market strategies without any hitch, it could eventually become a serious contender. When that happens, it would be good news for passengers—if fares come down.