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Given there’s been a drop in air traffic every month between May and December last year, that jet fuel now costs $137 per barrel up from $125 at the end of December 2012, and that airlines are resorting to discounting fares, it might not seem like the best of times to fly into India’s aviation space. But none of this seems to have have deterred AirAsia from wanting to operate in India; four years after the Malaysian low cost carrier first ventured into the Indian market, it has teamed up with the Tatas to run an airline that will have Chennai as its hub and will fly to tier 2 and tier 3 towns. AirAsia has been around long enough to know it’s not going to be easy to make money soon. According to a CAPA study, India has been the only market in Asia that has seen a decrease in AirAsia capacity over the last year—the AirAsia brand currently accounts for just about 10% of seat capacity in the India-Southeast Asia market, compared to about 14% one year ago, according to CAPA. Even after the exit of Kingfisher Airlines, which has created some space for the other carriers, pushing up yields by an average of 25% in the past three quarters, the current industry capacity of 70 million available seat kilometres, together with an anticipated increase of around 9%, appears more than sufficient to cater for the modest recovery in demand this year.
But AirAsia is clearly betting on the long-term potential for the Indian market and the synergies that it can extract from its existing operations in Asean countries. The idea of catering for the population in smaller cities is predicated on the view that aspirations in small towns are matched by rising incomes. Moreover, it can be more cost-effective to operate out of smaller airports—to cite an example, sales tax on ATF in all airports in Maharashtra other than Pune and Mumbai is just 4% compared with 25% in larger cities. Since the joint venture will no doubt follow an asset light model—the initial capital to be invested