Pain or Gain?

AirAsia India will be able to capture a large segment of leisure travellers by serving as a seamless feeder airline for the already established airlines of the group. In doing so, it would be giving tough competition to the other Indian LCCs domestically.

After formal approval of the Foreign Investment Promotion Board (FIPB), AirAsia India applied for no objection certificate (NOC) with the Ministry of Civil Aviation on April 23, 2013, for the launch of a low-cost airline in India as a joint venture amongst AirAsia, Tata Sons and Telestra Tradeplace in the ratio of 49:30:21. The Indian arm of Malaysia’s low-cost carrier (LCC) group, this newly-formed airline plans to launch operations initially with up to five aircraft based in Chennai to connect the smaller cities in the Southern region. It proposes to ramp up thereafter to 36 planes in five years, with 12 each at Chennai, Bengaluru and Kolkata. Tony Fernandes, CEO, AirAsia Group, is quoted saying, “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 its homework and is entering the Indian domestic market with eyes wide open”. Fernandes believes that failures in the Indian market had been due to “high cost structure” and hence cost would be the main differentiator in the Indian venture.

Cost is the Key

India is known for high operating costs in terms of taxes, airport levies, and landing and navigation charges. These are the major contributing factors for the mounting losses the airlines are suffering. The annual financial results of Jet Airways, Kingfisher and SpiceJet in the period March 2008- March 2012 generally indicate huge losses overall with the exception of SpiceJet that posted meagre profits in the financial year 2009-10 and 2010-11. Reportedly, IndiGo Airlines, an unlisted company, is the only one that is believed to be consistently profitable although in the financial year 2011-12, it is reported to have incurred a loss of Rs. 80 crore. Mounting losses led Kingfisher to curtail services and eventually cease operations in 2012. The demise of Kingfisher was good news for the remaining airlines which made a profit in the quarter ending December 2012, by commanding higher air fares owing to the sudden mismatch between demand and supply.

AirAsia is entering India at a time when the airline industry is reportedly burdened with losses of around Rs. 19,000 crore. India is known to have a very challenging, high-cost environment to launch an airline and sustain operations. Many start-ups like East West, Modiluft, Damania, Air Sahara and even the financially powerful Kingfisher have failed. It is in this difficult environment that AirAsia India would have to replicate its proven business model in India. AirAsia has a ‘low-cost, no-frills’ model that assures low fares while being profitable for the company. The question is, “Will AirAsia be able to expand passenger base without disturbing the existing profitable demand and supply equation with its unique lowfare model? What is it that AirAsia India would do that the other three Indian LCCs have not been able to do so far?

A Competitive Market

Fernandes conceded, “It has been difficult to develop a low-cost structure to compete effectively in India,” but goes on to add, “We now have the recipe to achieve this.” He told CNBC business news channel that he was confident the airline’s “really low-cost product” would work in India. All this sounds clichéd but the real test will be as to how this attractive new product is going to be configured. The company’s vision and mission statement may hold some answers. AirAsia’s vision is, “To be the largest low-cost airline in Asia serving three billion people who are currently underserved with poor connectivity and high fares.” Flowing from this is the mission statement, “To attain the lowest cost so that everyone can fly with AirAsia.” Does this imply a fare war and additional pain for the other airlines or competition leading to efficiencies and expansion in the passenger pool and consequent gains for the industry? What then is different about the entry of AirAsia?

As compared with the Indian LCCs, AirAsia India is part of a larger group that has deep pockets, an important prerequisite to sustain airlines for the long haul. Also, the group already has a large international network in place covering 99 destinations in 19 countries. With domestic operations in five of these destination countries, it gives AirAsia India a distinct advantage over Indian LCCs. In addition, as on date, the AirAsia group has a total of 120 A320 aircraft which is planned to reach 150 by the end of 2013. Compare this with IndiGo’s 62, SpiceJet’s 48 and GoAir’s 13 as on December 7, 2012. AirAsia group has a further order of 360 A320s/A320neo aircraft that are due to be delivered by 2026. This excludes leased aircraft. Large orders help lower the cost of acquisition, a distinct advantage over smaller rivals.

Specifically relevant to AirAsia India operations is the fact that the group is already operating services to five destinations in India and is connecting these cities to 23 destinations in 17 countries in the East, including Malaysia, Thailand, China and Australia. This gives AirAsia India an advantage over Indian LCCs by technically circumventing the Indian Government’s restriction of “20 aircraft and the requirement of five years’ domestic experience” before a carrier can fly to international destinations. In comparison, the three Indian LCCs primarily operate domestically and have recently started limited international operations. IndiGo operates to five international destinations, SpiceJet to eight and GoAir is yet to commence international operations. The policy on international operations has rendered the Indian aviation environment even more challenging for a new airline that is required to battle the routine impediments unique to India.

Rail vs Air Travel

India is a large country with a welldeveloped rail network that provides excellent connectivity across the nation. As against this, the country, as per the Directorate General of Civil Aviation (DGCA), has only 67 licensed civil aerodromes. Even including a few more military and private airports, it still does not match the reach of the railways. Infrastructural constraints therefore restrict access to air travel for bulk of the population. Also, Indians by nature are very ‘value conscious’ and time is not yet considered a valuable resource with the vast majority. 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 rail travel, reflected in the remarkably low fares. Air travel is still considered elitist by the government and is thus heavily taxed leading to high air fares. The large difference in ticket pricing between the railways and the airlines is one of the factors that inhibits rail passengers from switching over to air travel. Air travel would grow much faster if the air fares for normal routes could be priced somewhere between the cost of two-tier and three-tier AC and first AC train tickets. This can happen only if government policies do not differentiate between the railways and the airlines and consider both as means of transportation with fares regulated by free market dynamics. Having a Ministry of Transportation, rather than separate ministries for Railways, Shipping and Aviation can go a long way in the evolution of a common transport policy. Air Deccan had attempted somewhat unrealistically, to adopt a fare structure low enough to lure two-tier and three-tier AC rail passengers to its fold. While the carrier was successful in this effort and increased its market share, it bled heavily in the process. This strategy is thus not desirable for the long-term health of the industry. There is, however, a silver lining.

Air travel is the preferred mode of travel when either natural or manmade barriers inhibit travel by surface modes of transportation. Travelling across mountains, large water bodies or across international borders are good examples where air travel automatically becomes the preferred mode of travel. In such instances, airlines can charge realistic fares which again would be influenced by market dynamics. It is known that the cost of holiday packages in the tourist-friendly ASEAN region is only slightly higher than domestic packages. It is also common knowledge that consumer goods are available at much lower prices in these countries. These two factors open up a host of possibilities for AirAsia India. The restrictive policies of the Indian Government, poor infrastructure at domestic tourist destinations and fascination for travel abroad, will work to the advantage of this new airline as AirAsia’s focus is the leisure traveller. AirAsia India’s entry into the Indian airspace will lead to a large increase in connectivity between India and East Asia. AirAsia India will be able to capture a large segment of leisure travellers by serving as a seamless feeder airline for the already established airlines of the group. In doing so, it would be giving tough competition to the other Indian LCCs domestically.

The New Architecture

As per media reports, the strategy of the airline focused on ultra low costs is likely to change the status quo in respect of items such as free transportation and free meals for the flight crew. This will not be appreciated by the already serving flight crew in the industry, but may eventually become the norm. At this point in time, A320 qualified and experienced crew of grounded Kingfisher airlines are available to meet the initial requirements of AirAsia India. Extensive cost-cutting, enhanced revenue from ancillary services, high aircraft utilisation of 15 hours per day, high productivity, congenial working environment and access to the latest technology are some of the group mantras that are sure to find place in the architecture of AirAsia India. The focus of all this would be even lower costs and much higher levels of productivity than that of the Indian carriers. Will it help bring down costs and reduce air fares and spur growth of the market? Or will it be a case of too much competition with limited pool of passengers leading to more pain for the sector? Only time will tell.