AirAsia India hopeful of profit in first year of operations

Written by fe Bureau | New Delhi | Updated: Sep 29 2013, 14:12pm hrs
The first board meeting of AirAsia India concluded with the tripartite joint ventures largest shareholder AirAsia expressing confidence that Indias newest low-cost carrier will be profitable from the first year itself. AirAsia India is a three-way JV in which AirAsia holds 49% stake, Tata Sons hold 30% and Arun Bhatia holds the remaining 21% stake.

First AirAsia India board meeting. Superb cooperation between partners, tweeted Tony Fernandes, the group CEO of AirAsia Berhad after the meeting. Im confident we will make profits in the first year and change aviation.

Fernandes went on to clear the air about AirAsias view on the Tata Sons latest announcement of opening a full service airline in India with Singapore Airlines as partner. I have and continue to have no issues on SIA and Tata joint venture, Fernandes tweeted. No differences on Ginger and Taj Hotels. These are two very separate businesses.

The board meeting was attended by chairman S Ramadorai, Bharat Vasani and R Venkataramanan from Tata Sons; Arun Bhatia, the 21% shareholder in the venture, and AirAsias Tony Fernandes and Kamarudin bin Meranun. AirAsia Indias CEO Mittu Chandilya also attended.

Chandilya expressed similar optimism after the board meeting and tweeted, Just finished a great board meeting as expected. Buzzing with ideas and raring to go ahead.

However, AirAsia Indias confidence about posting profits in the first year of operations comes at a time when the domestic airline industry in India continues to grapple with high losses due to soaring jet fuel prices, airport charges and large debt piles. Currently, IndiGo is the only profit making airline in the country and last week reported a R787-crore profit for 2012-13. This was while SpiceJet reported a loss of R191 crore, Jet Airways a loss of R485 crore and Air India a loss of R5,196 crore in 2012-13.

Analysts have already raised questions on AirAsias ability to manage its subsidiaries. AirAsia management could potentially be spreading itself too thin as they try to grow numerous joint venture airlines at the same time. Only Thai AirAsia, Indonesia AirAsia, and AirAsia Malaysia are profitable, wrote Connie Png, an analyst with US-based brokerage firm JP Morgan, earlier this year.

Since then, the AirAsia Japan JV with All Nippon Airways has collapsed, as it failed to turn around and post profits. Eventually, the Japanese partner, ANA, bought out AirAsias stake. Png also pointed towards declining demands because of sharp fare hikes, predatory pricing from competition and high fuel prices as some of the key challenges that AirAsia India would face.

Bank of America Merill Lynchs analyst Paul Dewberry also had concerns on AirAsias ability to manage and grow its JVs in a note written in March. It is noted that Philippines is still making losses and its proposed joint venture in India is likely to consume significant time, Dewberry wrote.

While Indonesia had a good Q4 results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition. More recently, aviation consultancy firm Centre for Asia Pacific Aviation said on August 27 that intense competition in south-east Asia has already begun to hurt AirAsias affiliates in the region.

While AirAsia still reaps the benefits of first-mover advantage in several of its markets and continues to outperform nearly all of its peers, competition is intensifying, CAPA wrote in a research report on AirAsia. Indonesia AirAsia reported both a yield and operating profit improvement for 2Q2013, but it remains by far the least profitable of the groups original three affiliates. Meanwhile, the groups newest surviving affiliate, Philippines AirAsia has struggled almost as much as the failed affiliate AirAsia Japan. Even in Thai AirAsia, profits increased in second quarter of 2013, but there was a 3% drop in yields.

While AirAsia is well positioned and has the cash to fight back, inevitably profits and yields will come under pressure as competition continues to intensify, the CAPA report added.