Saturday, April 27, 2013


AirAsia India has filed for a No Objection Certificate (NOC) with the Aviation Ministry on 23 Apr 2013, after having obtained formal approval of the Foreign Investment Promotion Board (FIPB) on 06 Mar 2013. The NOC is for the launch of a low cost airline in India as a joint venture between AirAsia, Tata Sons and Telestra Tradeplace in the ratio of 49: 30: 21.   This newly-formed airline is the Indian arm of Malaysia's low-cost carrier group AirAsia, which is going to exercise control over its operations. As per reports, AirAsia India has plans to launch operations starting with 3 - 5 aircraft based in Chennai, and plans to connect small towns and cities in the South. Thereafter, as per reports, it proposes to ramp up to 36 planes in five years, with 12 each based at Chennai, Bangalore, and Kolkata. Dr Tony Fernandes, the AirAsia Group CEO is quoted to have said that, “India will be the final piece of the puzzle for the time being and there will be no further joint ventures”. He believes that India is a “huge opportunity” and that he has not “jumped in quickly”. He believes that AirAsia has done their homework and are entering “into the domestic market with eyes wide open”. Fernandes believes that a number of failures in the Indian market had been due to cost levels, and thus argues that cost would be the main differentiator in the Indian venture. How does he plan to keep the cost low?

India is known for high operating costs in terms of taxes, airport charges, landing and navigation charges, etc. This has been one of the contributing factors, besides others, for the losses that have continuously been mounting at the airlines. A study of the annual financial results of the three listed airlines, Jet Airways, Kingfisher Airlines and Spice Jet, from March 2008 to March 2012 indicates that they have been making huge overall losses every financial year; Spice Jet  made relatively small profits in FY 2009-10 and 2010-11. Reportedly Indigo Airlines, an unlisted airline, is the only one that has made consistent profits; although even it made a loss of Rs 80 Crores in FY 2011-12. Mounting losses led Kingfisher to gradually cut down on its services, and eventually it ceased to operate in the latter half of 2012. The closure of Kingfisher operations was good news for the remaining airlines, which made a profit in the QE Dec 2012, by commanding better ticket prices due to the sudden demand/ supply mismatch. India is known to have a very challenging environment for airlines to launch and sustain operations; we have had many start-ups like East West, Modiluft, Damania, and now Kingfisher fail. It is under these circumstances that AirAsia India is confident of replicating its proven business model in India; a ‘low cost, no frills’ model that assures low fares to the passengers, along with profits for the company. Considering these facts, will AirAsia be able to expand the available passenger base so that the profitable demand/ supply equation is not affected, after the increase in the number of players and services? What is it that AirAsia India would do differently from what the other three purely low cost carriers (LCC) operating in India has not been able to do thus far?

Fernandes conceded that, “It has been tough for us to develop a low-cost structure to compete effectively in India”,  and goes on to add that “we now have the recipe to achieve this”. Tony Fernandes told CNBC that he was confident the airline's "really low cost product" would work in India. All this sounds cliché and the real test is going to be in how this attractive new product is going to be configured. The company’s vision statement may hold some answers. AirAsia’s vision is “To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares”. Flowing from this, one of the mission statements is “To attain the lowest cost so that everyone can fly with AirAsia”. To achieve this, the key strategies are “Safety First, High Aircraft Utilisation, Low Fare, No Frills, Streamline Operations, Lean Distribution System, and Point to Point Network”. This is not something visionary that the other low cost carriers already operating in India are not privy to. What specifically is AirAsia India going to do that the others have not been able to do?

The most important difference between the present Indian LCCs and AirAsia India is that AirAsia India is part of a larger group that has deep pockets. Also, the group already has a large international network in place to 19 countries, along with domestic operations in 5 of these destination countries. Relevant to AirAsia India operations, the group is already operating international services to 5 destinations in India, and is connecting these cities to 23 destinations in 17 countries in the East, including Malaysia, Thailand, China and Australia. A study of the group network reveals that it is operating to 99 destinations in 19 countries, as on 17 Apr 1013. Comparing this with the present Indian LCCs is informative. The three LCCs in India primarily operate domestically within India, with limited international operations; Indigo operates to five international destinations in five countries; Spice Jet is operating to 8 international destinations in eight countries; GoAir is yet to commence international operations because of the government policy of 20 aircraft/ 5 years.

Also, AirAsia group has a total of 120 A-320s aircraft as on date. Compare this with Indigo’s 62; Spice Jet’s 48; and Go Air’s 13 as on 07 Dec 2013, as per the DGCA website. AirAsia group has a further order of 360 more A-320s/ A-320 Neo aircraft that are due to be delivered by 2026; this is excluding the leased aircraft. AirAsia group strength by the end of 2013 is likely to reach 150. All these factors give AirAsia India an advantage over the present Indian LCCs. More importantly, these factors help AirAsia India to technically circumvent the Indian government restriction of ‘20 aircraft/ requirement of 5 years domestic experience’ before a carrier can fly to international destinations that most of the present carriers have had to put up with. The already challenging Indian aviation environment is even more challenging with these restrictions.

India is a large country with a very well developed railway network that links to every small town across the country. As against this, the country has only 67 licenced aerodromes for public use, as per the DGCA website; adding a few defence and other airports to this still does not match the reach of the railways. It can thus be said that infrastructural constraints restrict a large population of India to access air travel, whereas rail travel is conveniently available to a majority of the population. Also, Indians by nature are very value conscious, and time is not yet considered a valuable resource with the vast majority of us. In addition, railways are considered a common man’s mode of travel and are also the largest public sector employer. These facts lead the government to directly and indirectly subsidise the operations, reflected in cheap rail tickets. Air travel is still considered elitist and thus is heavily taxed, which fact is again reflected in the ticket pricing. The large difference in ticket pricing between the railways and the airlines is one of the factors that is hampering rail passengers from making the switch to air travel. Air travel would grow much faster if the air tickets could be priced somewhere between the cost of 2nd AC and 1st AC train tickets. This can realistically happen only if the dynamics of the free market govern the ticket pricing of the railways, like in the case of the airlines. Air Deccan had unrealistically attempted this approach, but had bled through the process; it was however successful in luring rail passengers to travel by air.

Air travel is the preferred mode of travel when either natural or manmade barriers add problems to travelling by surface. Going across hills/ mountains/ large water bodies, or across international borders are good examples where air travel automatically becomes the preferred mode of travel. It is a fact that holiday packages in the tourist friendly ASEAN countries are very slightly more expensive than domestic holidays. It is also common knowledge that many utility items are available at much lower prices in these countries. These two facts open up a host of possibilities for AirAsia India. The low cost of items bought abroad helps partially offset the higher cost of the holiday, and also, people are happier to go abroad for their holidays. Indian government policies, limited & poor infrastructure at domestic tourist destinations and the Indian people’s fascination for travel abroad will work to the advantage of this new airline, as AirAsia’s focus customer is the leisure traveller. AirAsia India’s entry in to the Indian airspace will lead to a large increase in connectivity between India and the rest of Asia in the East. AirAsia India will be able to convert a lot of domestic leisure travellers to travel abroad Eastwards, by serving as a seamless feeder airline for the already established airlines of the group. In doing this it would be giving tough competition to the other Indian LCCs domestically. As per reports in the press, the airline in keeping with its strategy of keeping costs as low as possible, is likely to discontinue some status quo items of the Indian aviation sector; items like free transportation and free meals for the flight crew. This may discourage some experienced flight crew from joining the airline. However, this is not likely to pose a problem presently, as Kingfisher Airlines crew who happen to be qualified and experienced on A-320s are presently available to meet the initial requirements of this airline.

Innovative schemes are another hallmark of this group. Even before it had applied for the NOC, the group had announced up to 70 percent discount on international flights from India. The group offered two million seats under this scheme for bookings done in April this year for travel period between 01 January and 30 April 2014. The group is also known to earn 18% of its total revenue from ancillary sales. These and other such innovative features are likely to help AirAsia India maintain its profitable edge even in a challenging aviation market like India. How the other LCCs are going to fare is something that we will have to wait and watch.  

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