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AirAsia: Slow to soar

A year has gone by and AirAsia India has not lived up to the expectations it built at the time of its India entry. Currently, the airline is rethinking its flight path against the backdrop of a competitive landscape and an adverse regulatory environment

Published: Jul 8, 2015 06:50:05 AM IST
Updated: Jul 2, 2015 04:02:31 PM IST
AirAsia: Slow to soar
Image: Paul Gadd / Corbis
AirAsia Group CEO Tony Fernandes

Sir Richard Branson, chief of British airline Virgin Atlantic, once famously quipped that the easiest way to become a millionaire is to start out as a billionaire and invest in an airline. In India, the last decade has seen many noteworthy airlines perish as the domestic aviation sector has become synonymous with high operational costs and cut-throat competition, resulting in huge losses. It is only natural then, that a smooth take off in the Indian market eluded even Asia’s largest low-cost carrier (LCC), AirAsia, which flew its maiden flight in the country—amid much fanfare and expectations—a year ago.

From legal battles to regulatory hurdles, the airline’s India operations were fraught with stumbling blocks right from the outset. “We’ve definitely faced challenges in getting started in India,” says AirAsia Group CEO Tony Fernandes, in an email interaction with Forbes India. Fernandes—who is credited with scripting a unique low-cost business model that has grown AirAsia’s annual passenger traffic from 200,000 in the early 2000s to 45.6 million in 2014—has said in the past that India’s aviation industry was “hostile” towards his airline’s foray into the country.

Regulatory clearances were the first hurdles AirAsia had to cross. To overcome the red tape and push the bureaucracy, the team comprising new recruits stepped on the pedal and hastened their work pace. “My colleagues and I would wait in the corridors of the aviation regulator’s office to get our Air Operator Permit (AOP) cleared. Often, we would have portable printers with us to make necessary changes to our application when demanded and print letters on the spot,” says AirAsia India CEO Mittu Chandilya, who is also the airline’s first employee. It took the airline nearly a year to get its flying permits in place.

Even as the airline’s freshly-minted team worked its way through the regulatory red tape, professional rivalries were brewing too. United under the aviation industry body, The Federation of Indian Airlines (FIA), incumbent Indian carriers petitioned the Delhi high court challenging AirAsia India’s permits to operate in the country. AirAsia was the first foreign airline to receive a nod from the Foreign Investment Promotion Board (FIPB), after the UPA-II government allowed up to 49 percent FDI in civil aviation in September 2012. (AirAsia India was instituted as a joint venture between Tata Sons, with a 30 percent stake, Telestra Tradeplace, which owns 21 percent, and AirAsia Berhad of Malaysia with a 49 percent stake. (Recent media reports suggest Tata Sons is looking to increase its stake in AirAsia India and may buy shares from Telestra.)

The FIA argued in court that the new FDI norms were meant for existing carriers and not new airlines, startup carriers or proposed joint ventures. The association also questioned the effective ‘ownership control structure’ of the carrier.

Outside court, there was a different sort of battle being waged. Little did the management expect that its flight crew, which was undergoing training, would be poached by competitors. “Before we launched operations, six of our experienced pilots were poached by another domestic carrier. Such a situation can cripple a new carrier as every airline requires, on an average, at least 5.5 pilots per aircraft,” says Chandilya. All this happened before AirAsia India had been issued its AOP, which meant pilots could leave without serving any notice, as per the regulatory guidelines. “We, however, rallied on and focussed on the crew that wanted to stay with us and on building internal progression plans as well as training plans,” says Chandilya.

Despite the hostility over the FIA court case, which is still in the Delhi high court, Chandilya has written thrice to the airline body, requesting to become a member, but he hasn’t received any response. FIA comprises IndiGo, Jet Airways, SpiceJet and GoAir. “Nowhere in the world are competitors easy. But here in India, competitors don’t compete with you in the true sense of the word. They tend to make the authorities work in their favour or put obstacles in your path,” points out Captain GR Gopinath, who pioneered low-cost aviation in India with Air Deccan and faced adversities in the initial years of the airline’s launch. Urging LCCs to focus their energy on growing the market, Captain Gopinath says, “Whether it’s a Flipkart, or any other business or consumer product, India is a huge market. It’s the low-income groups that we have to turn to and that has not happened in the aviation sector.”

AirAsia: Slow to soar
Image: Vikas Khot
AirAsia India CEO and COO Mittu Chandilya

AirAsia’s entry into India was expected to shake up the local aviation market and grow the domestic airline sector, which reported passenger traffic of 67.38 million for the calendar year 2014. “AirAsia has been a force to reckon with in all the markets it has entered, and has been a very successful and unique low-cost operator. Therefore, there were lots of expectations when it landed in India,” says Mohit Gupta, chief operating officer-online at internet-based travel company

A few weeks after AirAsia India launched its inaugural flight from Bengaluru to Goa on June 12, 2014, Fernandes and Chandilya along with Ratan Tata, chairman emeritus of Tata Sons, boarded an AirAsia India flight on the same route. Before boarding, Fernandes—a Malaysian with Indian ancestry—with much bravado said he wanted to usher in “democracy in air travel” in India through innovative business practices. AirAsia India was going to offer airfares 30 percent lower than competitors, even as it entered a market where 60 percent of the domestic passenger traffic was spilt among homegrown LCCs.

“The hype it (AirAsia) created around ushering in a revolutionary change in the Indian market has not happened. Given its very low share of the overall market, the airline is still a fringe player,” says Jitender Bhargava, former executive director of Air India.

As per data available on the website of the civil aviation regulator, the Directorate General of Civil Aviation (DGCA), for the January-March quarter of 2015, AirAsia India had a 1.2 percent share of the domestic air travel market. Overall domestic passenger traffic in the three-month period was 18.54 million. “AirAsia had a certain reputation and people were expecting that to come into play in the Indian aviation market,” adds Bhargava.

Chandilya, though, isn’t perturbed. In July, the airline will carry its millionth passenger and Chandilya says, “It definitely means we have had an impact.” However, in the same breath, he concedes that there have been disappointments along the way. From an aircraft operations standpoint, growth has been 50 percent lower than the airline’s expectations. “We always hoped that in our first year of operations, we would have about 10 operational aircraft. However, we only have five,” he says.

Many factors have contributed to AirAsia’s muted growth, including government regulations and the airline’s improper assessment of the Indian market. While the airline’s management had anticipated problems, it was not to this scale. “I’ve said, on various occasions, that the Indian aviation sector is burdened with too many archaic regulations, like the 5/20 rule to fly international, which leads to too much bureaucracy and inefficiency. I think these are very inefficient systems and don’t breed the right kind of competition,” points out Fernandes.

Flying international seems to have been critical to AirAsia India’s growth. CEO Chandilya says when the airline was planning its fleet projections for the first year of operations, the management had factored in international and domestic routes. For an Indian airline to fly overseas, regulations stipulate that it should have completed five years in operations and have a fleet of at least 20 aircraft (the 5/20 rule). This rule has been a major peeve for many startup airlines in the country. But, the domestic airline industry has learnt to function within these confines. In 2007, when businessman Vijay Mallya acquired Captain Gopinath’s erstwhile airline Air Deccan, the acquisition helped his now-defunct Kingfisher Airlines circumvent the 5/20 rule and fly international a year ahead of its fifth anniversary. Since then, there has been a paradigm shift in the government’s view of the rule.

On March 1, 2014, The Times of India ran a story on how the UPA-II was looking to scrap the 5/20 rule. The Narendra Modi-led NDA government has been more vocal about rescinding the rule, but nothing has moved on the ground. At the same time, all major Indian airlines that have waited for five years and built up a fleet of 20 aircraft in order to fly overseas have opposed the government’s plan. They claim that while they have had to comply with the rule, startup airlines get the undue benefit of not having to do so.

According to Amber Dubey, partner and head of aerospace and defence at KPMG, India, AirAsia India’s intention to fly international was to capture a share of the heavy west-bound global traffic from the country, which is now serviced largely by Emirates and Etihad Airways, among others. “The west-bound traffic from India is nearly 70 percent of the overall international traffic from the country. It [AirAsia India] could have leveraged its presence in south-east Asia and helped provide last mile connectivity to its international passengers,” says Dubey.

Explaining AirAsia India’s international-domestic route strategy, Chandilya cites the strategic importance of Goa to his company. “It was our first destination and has the potential to be of major importance in our model, with international and domestic operations, because we aren’t that dependent on corporate travellers.” Goa, he says, could have become a hub as opposed to Delhi if AirAsia India was allowed to fly international.

Fernandes, though, continues to “see tremendous opportunity in India”. He says, “India remains one of the fastest-growing economies which will only lead to more demand for air travel. The domestic market is there, but the international market, especially to ASEAN countries, has a massive upside.”

With no regulatory changes on the anvil, AirAsia India is back to the drawing board reworking its growth strategies. The airline recently added Delhi as its northern hub. Earlier, Delhi wasn’t on the radar as Chandilya was pushing forward with a Blue Ocean strategy of going where there is an opportunity to grow the market.

For example, last December AirAsia India launched a direct flight from Pune to Jaipur, the first between the two cities, adding 5,000 seats per month on the route, as per data shared by Gupta of Prior to that, the airline had connected Bengaluru to Chandigarh, another virgin route. But on a route like Bengaluru to Kochi, AirAsia India has looked to expand the market by operating two return flights a day and has adopted a predatory pricing strategy. Shyson Thomas, 53, owner of the country’s newest regional airline, Air Pegasus, with its headquarters in Bengaluru, is finding it difficult to launch a flight connecting the southern technology hub to Kochi. “AirAsia India offered tickets at Rs 699 on the Bengaluru-Kochi route, which is less than the cost of a Volvo bus ride. This forced others like IndiGo, which was charging Rs 4,000, to drop fares. Currently, I’m just watching as somebody is going to get killed on this route,” says Thomas.

This is one of the trademark commercial tactics of the AirAsia Group—to offer attractive fares. AirAsia India adopted a similar pricing strategy on the Bengaluru-Chennai route, but has withdrawn its flights due to oversupply of seats and what Chandilya calls “brutal” departure and arrival time slots.

Besides, AirAsia India’s attempts to ‘unbundle’ airfares hasn’t succeeded. Unbundling of fares allows airline passengers to pay for only the services they use, such as preferential seats, meals and check-in baggage among others. AirAsia India was looking to charge Rs 199 for every piece of check-in luggage. The idea was that if you don’t have check-in luggage, pay less. However, the regulator objected to the plan.

Any aviation analyst will admit that the Indian aviation market is tough to operate in because of high taxes, low affordability, low penetration, and cut-throat competition. Barely 1 percent of India’s 1.3 billion people fly. “Besides, around 80 percent of flyers are business travellers, for whom the employer bears the travel cost. Such travellers are concentrated in around 10 to 12 cities. At other places, there is an aspiration to fly but the per capita incomes are not enough to fill a 180-seater aircraft day after day,” says Dubey from KPMG.

According to a recent report by aviation research and consultancy firm CAPA India, cumulatively, Indian airlines posted approximate revenues of $11.1 billion in FY15, while the combined losses were approximately $1.21-1.27 billion. While the Indian LCCs showed up with combined profits of $41 million to $67 million, the full service airlines reported losses totalling approximately $1.28 billion to $1.31 billion, says the report.

Currently, AirAsia India operates five aircraft (A320) and connects to Bengaluru, Kochi, Goa, Chandigarh, Jaipur, Pune, Delhi, Imphal and Guwahati. Due to its slow growth in aircraft addition, AirAsia India has missed its earlier stated milestone of connecting to 13 cities in India by 2014-end.

Chandilya admits that he held back on domestic growth despite the window of opportunity when rival LCC SpiceJet flew through a rough patch in the third quarter of the previous fiscal. “We could have taken over all the routes it had, and in the process grabbed market share. But that would have taken us away from our core network strategy. We decided to let the dust settle and pick routes that matched our strategy,” he says.

AirAsia India’s story so far can’t be construed as being a blot on the successes of its parent company or a complete misjudgement of the Indian landscape. When comparing AirAsia India’s one year of operations to what the group has achieved in other markets, Fernandes is not in the least disappointed. “The demand we have witnessed in India in our first year is far more than that experienced by other AirAsia Group companies. I would say that’s the biggest difference in India, as aircraft load factors here are very high,” says Fernandes. In the first three months of this year, AirAsia India reported average load factors of 79 percent, as per AirAsia Group’s latest financial results.

AirAsia has flown 262 million passengers since its launch over a decade ago, and has proven that low-cost travel can be a profitable business. As per AirAsia’s 2014 annual report, the group registered a net profit of 82.83 million Malaysian ringgit (RM) (around $22 million) last year on a revenue of RM 5.41 billion (around $1.44 billion). Though its profits declined sharply in 2014, compared with the previous year, the airline has been consistently in the black. It has come to represent aggression, given its passion to succeed and may be termed as the dragon over Malaysian skies—the airline’s home market where it has scripted a rags-to-riches story. For seven consecutive years, from 2009 to 2015, AirAsia has bagged the award for the world’s best low-cost airline at the Skytrax World Airline Awards.

AirAsia: Slow to soar
Despite the many feathers in its cap, failures are not new to AirAsia. For one, the airline is looking to start operations again in Japan after a failed attempt the first time in 2012-13. Another recent CAPA report on AirAsia’s three-year-old Philippines operations shed light on how Philippines AirAsia (PAA) has been an unprofitable venture. Published on May 5, 2015, the report pointed out that: “PAA failed to gain traction in a crowded and highly competitive market”. One could draw similarities between the Philippines market and India, given the market dominance of LCCs and the fierce competition between IndiGo, SpiceJet and GoAir. “In Malaysia, we probably saw the fastest growth, a big factor being that we were growing against only one airline—legacy carrier Malaysian Airlines,” points out Chandilya.

Thirty-four-year-old Chandilya juggles between two critical roles at AirAsia India—he is the company’s CEO and the COO. He believes AirAsia India “is truly a startup in every way”. He was named CEO in May 2013 despite having no experience in running an airline. This is also Chandilya’s first job in India. “Not having somebody from the aviation industry run the business; having an entire team of department heads for whom the role was a first; understanding the Indian landscape from an aviation perspective; understanding the operational requirements, which is very different from AirAsia as a group. In some ways being a startup differentiates AirAsia India from other Air Asia entities,” says Chandilya.

An entrepreneur at heart, Chandilya, at the age of 19, while in college in the US, started his own company, which was later sold to a large US-based beverage bottler. Looking back at the year gone by Chandilya says he is happy with how AirAsia India is placed. “I think the way we balanced and managed our capital has turned out to be far better than what we expected. We expected our initial capitalisation of $30 million to have come a long time ago. But, we didn’t draw that out till only a month ago,” he says. The initial capital of $30 million was drawn in three tranches and covered operational, financial and marketing costs, including lease payments of five A320 aircraft.

Coming from outside the industry, the dual role has helped him constantly seek answers. “My number one pet peeve is when someone from the team says ‘this can’t be done’ or ‘it’s impossible’ or worst of all ‘this has never been done in aviation’.”

How different will the next one year of operations be for AirAsia India? The airline has already stepped up its domestic growth, recently adding destinations such as Imphal and Guwahati. By next year, AirAsia India’s fleet of aircraft would have grown to 15 from the current five. “I think only when you have a fleet size between 10 and 20, can you do damage [disrupt the market],” says Chandilya and adds, “I’m competitive at heart, and I never give up because I want to be the best.”

Captain Gopinath seems to be of the opinion that Fernandes has put India on the back burner for now and may plan to scale the business when the market (and particularly regulations) turns more favourable. But Fernandes tells Forbes India that India remains key to AirAsia’s long-term growth and his goal continues to be to change the aviation landscape in India. He needs to change the timelines though. It would take more than a year, that’s for certain.

(This story appears in the 10 July, 2015 issue of Forbes India. To visit our Archives, click here.)