Smaller cities key to AirAsia's aggressive flight plan for India

Feb 24 2013, 05:17 IST
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Armed with expertise and undaunted by competition, Malaysia’s AirAsia is gearing up to take its low-fare warfare to India’s smaller cities and towns. (Reuters) Armed with expertise and undaunted by competition, Malaysia’s AirAsia is gearing up to take its low-fare warfare to India’s smaller cities and towns. (Reuters)
SummaryArmed with expertise and undaunted by competition, Malaysia’s AirAsia is gearing up to take its low-fare warfare to India’s smaller cities and towns.

Armed with expertise and undaunted by competition, Malaysia’s AirAsia is gearing up to take its low-fare warfare to India’s smaller cities and towns. It promises to be a tough fight: SpiceJet already has a strong regional network with its Bombardier Q400 planes, while both IndiGo and Jet Airways have aggressive plans for tier-II and tier-III city routes. However, Tony Fernandes, chief executive of the Malaysian budget carrier, is not worried.

“I have faced competition throughout my career,” Fernandes said in a conference call replying to queries about the competition. “When we started off 11 years ago, AirAsia had two planes while Malaysia Airlines had 105; today we have a fleet of 118 and are one of the largest airline s in the market.”

“Also, I do believe that there is space for others in this market,” he added. “All the aircraft in India don’t even add up to the number of planes in Malaysia and India has five times more population. India is a huge market but the aviation sector needs a change in thinking.”

History shows Fernandes’ AirAsia takes competition head-on and ends up on top.

In 2001, AirAsia had a domestic market share of 9.8% in Malaysia and by 2011, it had climbed to become the largest carrier in the country with 58%. On international routes, it had a share of 0.9% in 2001, which rose to 39% in 2011.

Key to his battle is AirAsia’s low-cost structure which has enabled it to offer some of the lowest fares in the Asean region. The airline’s cost for providing each seat or cost per available seat per kilometer or CASK was the lowest globally at $4.1 in 2011. Indian competitor SpiceJet’s CASK was $4.7 while Jet Airways’ CASK was even higher at $7.9.

The low-cost strategy is set to continue in India as well. “Price will be our number one differentiator,” said Fernandes. “We will avoid certain airports which are most costly. We have developed a low-cost structure and this will help us offer low fares.”

“The fact that the government is upgrading smaller airports to handle Airbus A320s will also help us,” he added.

AirAsia’s entry with the focus on smaller cities comes at a time when the government is focussed on increasing connectivity for them. The Airports Authority of India is due to complete the modernisation programme of 25 airports in smaller cities by the end of this year.

Fernandes is so bullish about the tier-II/III market that he is even prepared to give Mumbai and Delhi a miss to adhere to his low-cost structure. “Mumbai and Delhi are clearly high-cost airports that won’t be our major focus,” he said. “Delhi has a low-cost terminal, but slot congestion is a problem there. Our business plan is not predicated in these two airports.”

Meanwhile, AirAsia will be investing Rs 80 crore to start off with, according its FIPB proposal. Tata Sons will invest Rs 48.58 crore while Telestra will invest Rs 34 crore. The airline will also be using its own brand name ‘AirAsia’.

“Further funding of the JV company will be undertaken on the basis of business needs,” AirAsia’s FIPB proposal states. The airline will start off with 3-4 aircraft and have a staff of 300.

Fernandes said that an Indian management team has already been picked. “We have already picked the management team and I was very impressed. We will announce the CEO in two-three weeks,” he said.

“Chennai is the obvious place to start off with since we already operate from there and also we know that region better,” he said.

For the moment, AirAsia’s plans are endorsed by analysts and consultants who say the carrier will be able to replicate its success in India.

“We think this is negative for the Indian carriers, especially SpiceJet given its major presence in Chennai and tier II/III cities exposure,” said Corrine Png, analyst at foreign brokerage firm JP Morgan. “With traffic under pressure, it would be challenging to sustain higher yields and the entry of new players could put pressure on pricing.”

Consultants say AirAsia has its plan well thought-out. “They are going to be entering with a low investment, not taking the baggage of any debt or existing brand name and they are targeting an untapped marketl; it’s a brilliant model,” said a consultant at a global audit and consultancy firm on condition of anonymity as the person is involved in negotiations for other airlines. “It is the best way to enter this market.”

However, Aviation consultancy firm Centre for Asia Pacific Aviation said AirAsia may have found the right partner but the market remains challenging. “The potential long-term growth opportunities in India, particularly in Asia’s fourth-largest domestic market, also continue to be of interest to Fernandes. But the market remains very competitive – even after the suspension of services at Kingfisher – and unprofitable,” CAPA said.

“Operating costs in India remain high compared to Southeast Asia due to high fuel taxes and high airport charges. The market fundamentals would likely need to change and/or further consolidation would likely need to occur before AirAsia pulls the trigger on a potential Indian affiliate,” CAPA added.

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