Course correction needed

On June 12, this year, AirAsia India turned one. But the fact that the low-cost airline has not met many of the milestones it initially set out to could have been a dampener to celebrations.

Its CEO, Mittu Chandilya, had at the time of launch said AirAsia India would breakeven within the first four months of operations. But the airline posted a loss of ₹126 crore till March 31, 2015. Not just this, AirAsia India also could not fly the one million passengers it hoped to in its first year, or operate 14 aircraft to 16 destinations. The Tony Fernandes-backed airline currently has only five (two added recently) aircraft flying to 10 destinations.

In an interview to New York Times last week, Chandilya blamed the country’s antiquated aviation laws for the delay in achieving targets. But few are sympathetic.

“They entered this perverted market eyes wide open, and more importantly mouths wide open,” says Devesh Agarwal, an airline analyst who runs the popular Bangalore Aviation website.

It now appears that the low-cost AirAsia Berhad misjudged the airline industry in India before setting up its entity here along with Tata Sons (30 per cent stake) and Telstra Tradeplace (21 per cent). AA Berhad owns the remaining 49 per cent.

Chandilya, who did not respond to a detailed questionnaire for this feature, is now trying to set things right quickly. The airline has decided to open a new hub in Delhi even though Chandilya and his boss, Tony Fernandes, owner of parent Air Asia Berhad, had repeatedly stated that the airline will never fly to India’s capital because of high costs.

Airline analysts, however, feel that AirAsia India would be better off sticking to its model. “They will take time to turnaround. It is impossible to do so in one quarter. They just need to stick around for a longer time. Otherwise, they will end up becoming another Kingfisher Airlines,” says an analyst with a brokerage house who did want to be named.

Incidentally, many AirAsia India employees have earlier worked with Kingfisher Airlines, including some in the top management.

To succeed, Chandilya will have to do several things immediately. First, he needs to lower the airline’s expectations from the market, draw up a fresh long-term plan and act quickly to fix loopholes. For example, even in another six months, the airline may still not have the fleet of 14 aircraft it planned to have by April this year. Flying to 16 destinations may not happen soon either. Also, the claim of 16 hours aircraft utilisation per day, is again a distant dream. The airline today has an average utilisation of 12:19 hrs per aircraft per day.

The airline needs to respond quickly to changing market dynamics. For example, it took 10 months for the airline to realise that there was no point in flying the loss-making Chennai route, which was a huge drain on its limited resources. Most flights flew half empty. If it had reacted quickly, it could have reduced losses.

Next, the civil aviation ministry is still sitting on plans to change the 5/20 rule and replace it with a domestic flying credit-based norm. Even if the rules are changed, it will still take another two years for the airline to fly international routes. Therefore, the airline needs to rework its fleet expansion plan keeping in mind the fact that flying to international routes will take more time than anticipated.

However, there have been some positives too. If one looks at the cost structure of the airline, 37 per cent of its total cost goes towards fuel expenses. For a low-cost entity, a higher share of fuel expenses means it has been able to maintain a fairly tight control over other expenses like maintenance cost, lease costs, parking charges and landing charges, amongst others. Spicejet’s fuel expenses constitute 35 per cent of the total cost. The maintenance cost for AirAsia India is the lowest among its peers thanks to new airplanes that aren't yet due for heavy maintenance.

Where the Tony Fernandes owned airline scores high is in terms of total operating cost per available seat km (CASK) which is at just ₹3.52 per seat-km. Spicejet’s CASK is at ₹3.98 and that of Jetlite is at around ₹4.69. AirAsia India's CASK is very close to IndiGo's, the market leader.

“Consistency in operation is what AirAsia India should aim at as the cost matrix is totally different in India,” says another airline analyst. He says Jet Airways suffered because of its inconsistency in its business model. He believes that AirAsia India’s aggressive fare strategy is in the right direction. “Seats that are deemed to fly empty, if sold early, helps improve both load factors and unit revenues.”

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