Air Asia India – The hungry tiger

The stage is all set for Air Asia to become India’s latest Low cost airline. Last time a LCC (Low Cost Airline) started operations was in 2006 with Indigo, although Air Mantra (a Religare venture) started operations in 2012 but packed up before celebrating its first birthday a couple of days ago.  The brand Air Asia has built and its association with one of the most admired business houses in India has evoked mixed reactions. The media is upbeat with every move made by Air Asia monitored closely, the general public is happy to have another LCC in their basket of choice, Indian carriers are probably spending long hours in their boardrooms trying to thrash out a strategy to counter the latest threat and consultants are busy making predictions based on market information. Whatever the situation you might be in, for the industry these are very interesting times.

Coming to an airport near you

Last year proved to be sort of a disaster with Kingfisher going bust (well almost) and domestic passenger numbers dropping for the first time in many years. All the listed airlines are still running back and forth between red and black. Banks were skeptical towards aviation financing and private airports are also feeling the heat due to dwindling passenger numbers. Amid much gloom the ministry of civil aviation announced part liberalization of the industry by allowing 49% stake by foreign airlines (in Indian carriers) and recently discontinuing the aircraft acquisition approvals. The liberalisation was a silver lining in the dark skies. Following which two major announcements were made. Etihad announced its interest in buying equity in Jet Airways and Air Asia’s entry into India. The Jet-Etihad deal is in process and will open access to India’s domestic market, which will feed Etihad’s global network. Jet will benefit from much needed cash and a wider global network, which it could not develop on its own. However, the most exciting thing happening to Indian aviation is Air Asia’s entry into the market.

Ever since Simplyfly Deccan (later Air Deccan and Kingfisher Red) was launched in 2003 the Indian flyer associated LCC with low service (Deccan had extremely poor service reputation). That was until Spicejet and Indigo were launched. Many Indians started travelling by air and liked the low prices and good service. But after many IATA seasons Transport Journal feels that there is no longer a real low cost market in India. To start with Indian LCCs never had the advantage their European and South East Asian cousins had. Unlike other LCCs Indian LCCs have to pay the same airport charges at all Indian airports (more at private ones). The biggest advantage (of lower airport charges) simply does not exist for Indian LCCs. But LCC is not only about lower airport charges. There are many ways an airline can reduce costs. Almost all Indian LCCs must be doing those things. But then why isn’t there a true LCC market in India?

Ideally a LCC should transfer the benefits of low operating costs to its passengers by means of low fares. After all that’s their USP. Transport Journal did a quick internet search for fares on a popular online travel shop. Three busy routes were chosen and fares were compared for 1 July 2013 and 1 September 2013 (three and six months hence). The results confirmed the hypothesis. The table below shows the fares in INR (fares were same for 1 July and 1 September) offered by major airlines –

Sector	Air India	Go Air	Indigo	Jet Airways	JetKonnect	Spicejet
DEL – BOM	3,981	3,906	3,906	4,033	3,876	3,906
MAA – BLR	2,280	-	2,175	2,280	2,175	2,611
DEL – BLR	4,852	4,609	4,609	4,904	4,663	4,609

In the above table the maximum difference between a LCC and legacy carrier fare is INR 295. As a passenger one does not have to think long to make a choice. At INR 295 more there is a full range of hot meal, a newspaper, free water, tea and coffee and of course the frequent flier miles. On the other hand one has to pay anywhere between INR 100 to 200 for a cold sandwich and a drink on board a LCC. So why almost three quarters of Indians are flying on LCCs? The answer lies in the capacity offered on legacy carriers. The legacy carriers have decided to offer more capacity on their LCC arms. And this is why Transport Journal thinks there is no true LCC market in India. The miniscule fare difference suggests that either the airlines are not passing on the benefits to passengers or they are keeping the fares artificially low to survive. Either case is a bad business plan.

 “Airlines waste a lot of money when guests do not show up for a flight due to refunds and rescheduling. Whether a guest shows up or not, the cost of flight to the airline is the same. LCC are unforgiving to no show guests and do not offer refunds for missed flights”.

Air Asia is ruthless when it comes to its business model. The above statement on Air Asia’s investor relations page speaks a lot on how seriously they want to stick to the fundamentals of LCC business. Air Asia has a perfect chance to shake up the airlines business in India. Indian LCCs will have to change the way they do business. Air Asia like other professional LCCs charges for everything from first piece of checked-in bag to a hot meal and offers many ancillary services like hotels, tours, insurance, etc. Free boarding ensures quick turnaround (Director General of Civil Aviation of India is not a great fan of this procedure) and works well for Air Asia. It manages twelve block hours a day ensuring high aircraft utilization and hence more revenue. Air Asia also hedges 100% of its fuel and manages to absorb price shocks.

Having said all this we should not forget that India is a very difficult market to work in. Many tried and tested strategies have failed in India (India is probably the only country where Coca Cola is forced to retain a second cola brand). Indian consumers have rejected popular sales format and multi nationals were forced to come up with India specific marketing strategies. Will Air Asia be able to replicate its model in India is yet to be seen. But Indian LCCs will have to prepare a grand strategy to deal with the hungry tiger.