AirAsia’s India flight faces turbulence

He came. He saw. But Tony Fernandes, CEO of Malaysian low-cost carrier AirAsia, may find conquering the Indian aviation market a different ballgame altogether. Existing players and analysts are not yet sure if AirAsia will succeed in an industry where only one out of five airlines — the privately owned IndiGo — is making profits consistently.

AirAsia’s track record so far has been impressive — it is the largest low-cost airline in Asia, making profits in three out of five countries where it has subsidiaries. In 11 years of operations, the airline has increased its fleet size from two aircraft to 137 and established itself as a no-frills airline with a focus on cost control.

Replicating that success in India, however, won’t be easy.

To begin with, the circumspect way of doing business here is diametrically opposite to the AirAsia chief’s flamboyant manner, says a senior official at an existing airline.

He may have a point. How many airline promoters have come to the country all guns blazing — criticising the Indian Government’s policies and taking potshots at existing players even before getting permission to fly?

That is precisely what Fernandes has done. “There are some bizarre rules. I think the five-year, 20 aircraft rule for allowing an airline in India to fly abroad makes no sense. It is a negative for Indian airlines. I, as a one-plane operation, AirAsia Malaysia, can fly into India. It has probably been put in by Naresh (Goyal, Jet Airways promoter) or someone like that to protect themselves,” he said.

Analysts point out that one cannot be as dismissive as Fernandes is about the Indian aviation scenario. They point to IndiGo, another low-cost airline that started seven years ago and in that short time became the market leader.

“If you look at the history of the Indian aviation industry more often than not, those who make grandiose statements bite the dust. In comparison is market leader IndiGo. How many people know or have seen the 49 per cent shareholder in the airline — Rakesh Gangwal?” asks an analyst.

IndiGo President Aditya Ghosh is not unduly worried. He feels that any new entrant will bring new ideas. “We have no ego and are always eager to learn from others. We will continue to chase the under-penetrated aviation market in India. Our competition is what we were yesterday,” he says.

No freebies

Fernandes has been tight-lipped about how he will run his airline in India. But internationally, AirAsia follows the low-cost, no-frills model. (Though it does have AirAsia X, which operates larger planes and offers a basic business class and economy class.)

The airline manages to keep costs low through a high level of aircraft utilisation and by offering no free food and beverages. No frills also implies having to pay a heavy price for making any changes in a booking.

Equally importantly, AirAsia uses only one type of aircraft – the Airbus A320 — to save on staff training and aircraft maintenance.

“AirAsia stands a better chance of success if it focuses on point-to-point flights — like Bangalore-Madurai, Chennai-Srinagar or other virgin sectors — and utilises aircraft for 12-13 hours daily,” says an analyst. “Besides, pushing ticket sales through e-commerce will help.”

Pointing out that there was huge untapped demand in the under-penetrated Indian market, Dhiraj Mathur, Executive Director, PwC, says that if AirAsia is able to get its pricing and product right, there is no reason it should not succeed.

For now, Fernandes seems to be a little too optimistic as he believes AirAsia can break-even at 57-58 per cent load factors. It seems to be a daunting task given that existing airlines are struggling even at load factors as high as 80 per cent.

The standard reply Fernandes offers to questions on his strategy to achieve his ambitious targets is: “If I tell you guys my competitors will know.”

The only fact that he lets out is that one of his key advantages is brand, distribution and ownership of aircraft: “We own our aircraft, so cost of operating is much less than leasing or sale and lease-back.”

Says Amber Dubey, Partner and Head, Aviation, KPMG, “AirAsia, being a late entrant will have to do something disruptive. It can’t just be discounted pricing, since that is easily replicable and also because the cost base for airlines (fuel, lease cost, aircraft maintenance, salaries, overheads etc.) is similar.”

Typically, anyone setting up an airline has to put aside at least 50 per cent of the costs to meet fuel expenses, 10-12 per cent towards cost of aircraft maintenance and about the same towards staff costs. Here, Fernandes has no distinct advantage over his Indian peers.

Moreover, AirAsia will operate the costly Airbus A320 aircraft. The sales tax on ATF for large aircraft being operated by domestic airlines varies from 4 per cent to over 30 per cent. That will be an additional cost.

And the AirAsia chief’s willingness to sell tickets through travel agents may add to the costs as the airline will have to pay commissions to agents, something existing airlines already do.

International network

What works in AirAsia’s favour is the network of international routes on which it is already operating. It can attract people from the interiors and take them onwards to international destinations.

It can give a value-for-money proposition to passengers wanting to fly from deep within the country to destinations in China, South-East Asia and Australia. The idea will be to sell a ticket on AirAsia India say from Tiruchi to Chennai and then get the same passenger to fly onwards to Kuala Lumpur, Bangkok, Australia or China on AirAsia Thailand or AirAsia Singapore, say industry analysts.

In contrast, Indian carriers such as Jet Airways, IndiGo and SpiceJet, following Indian rules, operated only in Indian skies before they were allowed to fly abroad. To get really cheap fares on AirAsia, a passenger will have to decide on his travel plans months in advance. There was a glimpse of this recently when AirAsia asked travellers to book between July 8 and July 14 and get reduced fares for travel between February 10 and August 5 next year on AirAsia’s various subsidiaries, which connect destinations in India to international destinations.

Revenue options

In another indication of the way in which his business strategy is going to move, Fernandes has said that fares on AirAsia India will open 12 months in advance.

Then there is also the revenue that AirAsia will earn from ancillary services. The unbundling of various services like checked-in baggage and booking prime seats on an aircraft means that, like Indian carriers, AirAsia, too, will be able to earn extra revenues from these streams.

Internationally, AirAsia’s track record has not been disappointing. According to a report on the airline by the Centre for Asia Pacific Aviation (CAPA), out of its five companies (excluding India), only AirAsia Philippines and AirAsia Japan were making losses.

The airline’s original business in Malaysia saw its net profit increase 238 per cent in 2012 to $610 million while Indonesia AirAsia recorded a 129 per cent increase in net profit on a low base to $15 million. Thai AirAsia’s net profit dropped 10 per cent to $61 million.

A track record of profits is not too common in the Indian aviation sector right now. And given the diversity of the Indian market, it will be some time before it becomes clear whether AirAsia will be able to replicate its success here.

> ashwini.phadnis@thehindu.co.in

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