When AirAsia’s Tony Fernandes announced his plans to enter the Indian aviation space, industry experts expected the venture to shake up the country’s airline industry. After all, Fernandes had not only built a super-efficient low-cost airline in his home market Malaysia but also exported the model successfully to other countries like Thailand and Indonesia.
But some 20 months after starting operations, things have not exactly gone according to script. Far from shaking up the industry, the airline itself looks shaken. AirAsia India is now flying through turbulence due to various reasons — most of them self made.
Right from the time it was set up, the airline never settled. From shifting offices from Chennai to Bengaluru (after being promised incentives) and rolling out plans to only roll them back later, AirAsia India gave the impression that it could not make up its mind on which route to take.
Perhaps the episode that best showcased this confusion is the recent resignation of its CEO and MD Mittu Chandilya, who subsequently took back his papers. It was a bolt from the blue. Even as late as August last year, the airline board not only gave him the additional post of managing director but also inducted him to the board. AirAsia India's Chairman S Ramadorai and Fernandes, CEO of AirAsia Group, were effusive in their praise of Chandilya at that time, stating that he has done an exemplary job of leading the airline.
To show their confidence in the future of the airline, Tata Sons — one of the partners — even increased its stake from 30 per cent to 41 per cent, buying half of another partner, Arun Bhatia (Telstra TradePlace)’s stake, which now stands at 10 per cent. AirAsia Group owns 49 per cent.
What went wrong? How did one of the most exciting ventures in Indian aviation lose it way and falter?
Some say it’s a case of too many cooks spoiling the broth. Late last year Bhatia claimed that the carrier was being remote-controlled by Fernandes, but Tata Sons recently clarified that it was not so. But that hasn’t stopped BJP leader Subramanian Swamy from moving the Supreme Court claiming violations by the airline. This confusion meant that decision-making was almost bureaucratic and slow, preventing the airline’s management in India from reacting to changing circumstances. Even when the operating environment turned favourable with the steep fall in ATF prices, the airline could not capitalise on it.
A questionnaire sent to AirAsia India remained unanswered.
Strategy in doubtNupur Sarraf, a former analyst with Centre for AsiaPacific Aviation (CAPA), says the promoters lacked a clear, well-defined strategy. “They underestimated the complexity of the Indian airline industry,” says Sarraf who now works as an independent airline consultant. The haphazard way in which the airline introduced in 2014 a fee for all check-in baggage and then pulled back the decision following a DGCA crackdown highlights her point.
A back-of-the-envelope calculation suggests that airline is not in the pink of health. For example, in the fourth quarter of 2014, the average stage length (average distance covered by the airline’s flight) was 759 km at an average fare of ₹3,242. For the fourth quarter of 2015, the average stage length increased to 1,226 km at an average fare of ₹3,626. What it means is that even though the airline had longer flights (an increase of 62 per cent), the average fare grew a mere 12 per cent.
Unit maintenance cost went up 34 per cent on a per seat km basis (from 20 paise to 27 paise). Despite fuel prices going down, on a sequential basis (during the last two quarters), total unit cost (including fuel cost) have gone up from ₹3.27 per seat km to ₹3.55.
Also, Chandilya’s was not the only resignation. Days before Chandilya got his additional role as MD, the airline’s CFO Vijay Gopalan had put in his papers. Since then a few more from the top management have left, with the post of head of commercial lying vacant for sometime now.
There are others who say that Chandilya was the wrong candidate for the job. He had no knowledge of the Indian market and had not worked in any airline before. But there are others more sympathetic to him and say that he was given too many jobs and roles.
He also has very limited access to capital and less control which could have prompted him to quit.
Devesh Agarwal who runs airline advisory firm Bangalore Aviation says: “AirAsia tried to introduce the ultra low cost carrier (ULCC) model in India, which has sort of backfired.” The ULCC model has worked well with airlines such as Ryanair, EasyJet and Spirit Airlines. As per the model, all services on offer are charged and the only thing you get are extremely cheap tickets.
The lease rentals paid out to AirAsia Berhad has far exceeded the money put in by the Malaysian company. For the year ended 2015, AirAsiaIndia paid a lease rental of ₹111 crore for a year-end fleet size of six aircraft. In the previous year, it had paid ₹27 crore (with three aircraft). So the total payout is ₹138 crore while AirAsiaBerhad’s investment in the airline is ₹94 crore (of a total of ₹192 crore).
Such benefits should have led to more capital infusion, but it hasn't happened so far. According to Bangalore Aviation’s Agarwal, the airline badly needs someone who could get into the trench and slug it out. Sarraf says the promoters should completely restructure the airline, recapitalise it and create a separate brand identity that is different from that of AirAsia Berhad. She, however, feels that the airline won’t exit anytime soon because India is too important a market for any serious player to miss out.