Malaysia’s Airasia ingression adds to the woes of Indian carriers, forcing them to slash prices, which will add to their losses.
By Rajendra Bajpai
The battle over supremacy of Indian air space is getting hotter and a rainbow of blood is on the horizon. The low-cost carrier from Malaysia, AirAsia has joined the fray to battle the domestic no-frills airlines, while a Tata-Singapore Airlines (SIA) full-service joint venture is getting ready to join the air war.
There is no doubt that blood will be spilled, even though passengers will benefit as a result of discounted fares. AirAsia’s inaugural flight from Bangalore to Goa on June 12 was sold out within 10 minutes of the opening of bookings and 25,000 cut-price tickets for travel later this year were snapped up within 10 hours.
Indian carriers have already lost about Rupees 600 billion and AirAsia’s arrival will add to their pain. “It will hurt all of us,” says Kapil Bhatia, Chairman of IndiGo, the only Indian carrier which is currently making a profit.
AirAsia will be operating in an environment where cut-price tickets will further add to airlines’ losses. Still Mittu Chandilya, 32, a model-turned-business consultant, who now heads AirAsia India, is hopeful of breaking even in a few months, although no low-cost carrier has achieved that feat in such a short period. IndiGo, the fastest-growing and the largest airline in the country, took a few years to register its first profit.
The new kid on the block is actually a bully. It has deep pockets and an insatiable desire to carve up a market share. And cut-price fares are at the heart of the company’s business model. “I believe that you have to be disruptive; you have to be disruptive all the time. I think that 30-35 percent (lower fares) would be disruptive and we will continuously look to see how we can bring that even lower,” says Chandilya.
AirAsia’s mantra is simple. It plans to keep its aircraft airborne for 16 hours a day and have a turnaround time of 20 minutes against 30 to 35 minutes for other low-cost carriers, which fly their aircraft for only 12 to 13 hours a day. The longer an aircraft is up in the air, the more money the company makes. A quick turnaround helps companies keep aircraft airborne for a longer period.
Turbulence in the skies
“Indian carriers have a track record of engaging in unsustainable fare discounting and an unusual willingness to bear losses,” notes Kapil Kaul, head of the Indian unit of the Center for Asia Pacific Aviation. Over the past seven years, Indian carriers have lost a combined Rs. 594 billion or an average of $22 every time a passenger boards an aircraft, he says.
Amber Dubey, a partner at business consultancy KPMG, agrees with Kaul’s assessment that financial distress would increase with the arrival of AirAsia. It is probable that one or two low-cost carriers might exit the market in the next 12 to 18 months, he says, adding that this could lead to consolidation in the Indian market.
Heavy discounting was much in evidence as soon as AirAsia announced its base fare (the price of an airline ticket before surcharges, fees and taxes are added) between Bangalore and Goa at Rs. 5, selling tickets for the one-way journey for Rs 990, including taxes and fuel surcharge. “What is predatory, disruptive, and dangerous? Offering Rs. 5 fares in the peak season and that too within 14 days of travel,” tweeted Sanjiv Kapoor, COO of Spicejet. He said his airline had no intention of joining the fare war. But it’s easier said than done.
IndiGo retaliated by cutting the base fare to Rupees 1 and other airlines also started selling discounted tickets on the route. This is expected to -spread to other sectors, as Air-Asia expands its footprint across the country. It has begun its operations with a single Airbus A320 but the fleet is expected to expand to 10 or 12 by March next year.
Kaul says it will be remarkable if the airline is able to break even in four months as Chandilya has claimed it will. Bhatia of IndiGo agrees with that assessment, saying that in all likelihood the new airline will initially incur losses.
Dramatic takeoff
But the threat of losses has not diminished the enthusiasm of Tony Fernandes, the founder of AirAsia Malaysia—the parent company. He is seen as a street fighter who has been through the rough and tumble of the aviation industry.
Fernandes bought the loss-making Air-Asia from a Malaysian government company for one Malaysian ringgit or `19 in 2001. He began with two old aircraft and 200,000 passengers in the first year. But now, AirAsia and its subsidiaries have a fleet of 150 aircraft and fly more than 44 million passengers. Its net income in 12 months to December last year was 362 million ringgit, although in 2012 the net income was almost double, at 789 million ringgits. Today it is considered Asia’s biggest budget carrier.
While AirAsia India causes much heart-burn, Tata-SIA full service airline will further add to the agony of Indian carriers when it begins operations, hopefully, in September. But Tata-SIA’s targets are not as ambitious as AirAsia India’s.
Tata-SIA hopes to make a profit of $16 million in the fourth year, after three years of projected losses— $37.6 million in the first year, $23.1 million in the second year and $6.2 million in the third. The airline will provide direct competition to other players like Air India and Jet Airways as well as indirectly hit low-cost carriers in India.
The next few months will be full of anxiety and despair for the airline industry.