Will India's Newest Airline Akasa's Launch Help Bring Down Airfares?

India’s newest airline Akasa Air, backed by billionaire investor Rakesh Jhunjhunwala, began commercial operations on Sunday with the first flight on the Mumbai-Ahmedabad route. The low-cost carrier started operating 28 weekly flights between Mumbai and Ahmedabad.

While Akasa has a total of 72 Boeing planes on order, it initially started operations with two fuel-efficient 737 MAX aircraft. Akasa competes directly with other budget carriers like IndiGo, SpiceJet and GoFirst. But its network strategy will be to connect metro cities with smaller towns across India.

More locations will be added in a phased manner as the airline plans to deploy two planes each month in the first year. In an interview with Nikkei Asia in June, Akasa’s Co-Founder and CEO Vinay Dube said it does not make sense for the airline to become another player in the busier routes which already see cut-throat competition. Akasa will still have limited metro-to-metro flying.

Experts also say that Akasa's strategy to focus on smaller tier 2 and tier 3 cities has more to do with non-availability of slots at peak timings to bigger cities. Hence it is convenient for a new entrant to focus on departures from a metro to a relatively smaller city, where there is no paucity of slots.

On the Mumbai-Ahmedabad route, Akasa is pricing its tickets on par with other low-cost airlines like IndiGo and GoFirst.

On August 12, Akasa plans to start its Kochi-Bengaluru operations. On August 19, it will launch flights connecting Mumbai and Bengaluru. Its fares are among the lowest in both these sectors. Till recently, the cheapest fares in these sectors were dominated by IndiGo or on occasions by AirAsia India.

While Akasa is matching other budget airlines on pricing, it continues to rely on pricey add-ons like extra luggage fees, cancellation fees, and pre-ordered meals to generate additional money. Other services, including seat selection and priority boarding, have been priced to match IndiGo and other low-cost carriers.

While the entry of Akasa Air and the re-launch of Jet Airways is expected to intensify the competition for Indian carriers, rating agency ICRA said cost headwinds from fuel costs and depreciation of the

rupee will result in an increase in airfares.

However, it will be limited by the intense competition and endeavour of airlines to maintain and/or expand their market shares. According to the ICRA note, the near-term revenue growth will be supported by passenger traffic growth.

Domestic air travel has made a sharp recovery this year with airlines flying over 57 million passengers in the first half, up 238% from last year.

Mark D Martin, Founder & CEO, Martin Consulting believes Akasas shouldn't toe the line of getting into a price war. It should focus on providing quality and reliable service.

As experts say, it would be prudent for Akasa to focus on reliable, safe air transport and gain the trust of consumers instead of getting into pricing wars with competitors. Also, the impact of Akasa’s entry on airfares is likely to be minimal and negligible, at least in the near-term.