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.

Saving the king of good times

When Kingfisher airline started in 2005 it generated widespread curiosity. The curiosity was understandable. The brand was and is extremely popular especially among young Indians due to a strong association (Kingfisher beer is extremely popular in India). Kingfisher stood for everything premium and people expected the same from the airline. Operationally the airline started off as a fully web based booking platform like Air Deccan. The airline bypassed the conventional GDS (global distribution system) an interface which helps B2B transactions between travel agents and airlines. This also meant huge savings on GDS hosting costs. However, it soon back tracked and hosted itself on major GDSs. Being absent from the GDS probably put the airline in the same league as a low cost carrier (which Kingfisher was not willing to be positioned as).

Kingfisher was soon India’s first and only five star airlines. Passengers were called “guests”, red carpet was literally rolled out for business class passengers and economy class passengers had the privilege of in-flight entertainment and got a takeaway travel kit. Operationally Kingfisher did a spectacular arrangement of tying up with then Indian Airlines for its ground handling services. This meant getting airport facilities at par with the national carrier. For example in Delhi the airline operated from terminal 1A, which was much less busier than the chaotic terminal 1B. The domestic network expanded quickly and Kingfisher was talk of the town. Industry experts predicted that Kingfisher will bleed other airlines and soon be the numero uno in Indian skies. Sadly things did not go the way they were projected.

What went wrong?

Buying out Air Deccan and the global financial crisis of 2008 together sealed the fate of Kingfisher. Air Deccan which was supposed to give access to international operations to Kingfisher proved to be a liability instead. Poorly managed and with poor service standards, Air Deccan sapped Kingfisher of its finances and energy. Kingfisher Red (rebranded Air Deccan) created confusion and brand ambiguity. Once known for its premium service Kingfisher Red was not same as flying Kingfisher. The airline started losing its five star image. It was a low cost airline after all. Kingfisher’s international network, which was supposed to grow rapidly, did not grow. Whatever international flights the airline started was on extremely competitive routes like London Heathrow, Singapore, Hong Kong, Bangkok and Colombo, resulting in low yields. The airline also ordered a large fleet from Airbus including an A380 super jumbo, which further pressured the balance sheet.

The present state of the airline can be blamed on a few bad decisions like slow network expansion, inefficient fleet utilisation and brand confusion with induction of Air Deccan. In the last couple of months the airline has been hit by serious challenges. Accounts being frozen by tax authorities, suspension by IATA (International Air Transport Authority) for non payment, cash and carry operations by airport operators and oil companies, strike by cockpit and cabin crews, mass cancellations, etc. None of these stand for a five star airlines. Reputation of the airline has taken a serious hit and market share has been lost to rivals like Indigo, SpiceJet and Go Air. It is time for the airline to do some destructive innovation.

Time for housekeeping

Its time to fill the empty seats

First of all Kingfisher has to come out of the denial. The regular press statements coming from the airline assuring passengers that everything is fine reflects a deep sense of denial. Such statements will further damage the image of the carrier. The next step should be to cut the flab. Kingfisher needs a lean top management team which can multitask efficiently. A complete overhaul of its schedule is urgently required. It should look at reducing the number of destinations offered and fly only on sectors which it has at least breakeven operations. It should also reconsider its international operations. Flying on highly competitive routes will only reduce yields and further pressure the finances. Untapped yet fast growing markets like Indonesia should be considered. Indonesia and Malaysia offer both O & D (origin and destination) traffic and huge potential of transfer passenger to the Middle East via Delhi or Mumbai. Reducing the fleet by leasing out aircraft or selling them will reduce costs in short term. This will also reduce operational and maintenance costs.

Kingfisher needs cash urgently. Reports suggest that it might get emergency funds from investors; however with current operational set up there is hardly a business case for investment in the airline. Kingfisher needs to do a lot of housekeeping to become attractive for an investor. The policy change allowing FDI (foreign direct investment) in Indian carriers by foreign carriers beyond 25% seems a distant dream, especially after a poor show by the party of current aviation minister in recent elections. Even with a quick decision on the topic it will take months for the policy to fully come into force and for an airline to make up its mind to invest in India. Kingfisher should make use of this time to tidy up and get ready for potential investors.

The fundamentals of Indian aviation industry are still strong and growth will continue in the long run. What the industry needs is efficient management and self regulation. Predatory pricing seen in the Indian aviation industry of late will not help anyone in the long run. The ministry of civil aviation should further liberalise the sector by making it easy for airlines to operate in an unconstrained environment. The king of good times is in a gloomy mood these days, cheering it up will be a long process but not impossible. 

Clearing the turbulence – Need for a contemporary civil aviation policy

The last two decades of economic growth have also lead to exponential growth in air traffic in India. In the financial year ending 2001 India counted 30 million passengers per annum (mppa) on domestic routes, which went up to 106 mppa in year ended 2011. Total passenger traffic (international and domestic traffic put together) grew from 42.5 mppa to 106 mppa during the same period. The two large aircraft manufacturers, Airbus and Boeing have both projected a demand of around 1,000 aircraft for India in a twenty year period ending 2028. Indigo, India’s largest low cost airline created history by ordering 100 Airbus A320 aircraft and recreated history by adding another 180 recently. On top of the growth in aviation, the sector creates jobs directly and in related sectors like airports, ground handling, airport retail, public transport, cargo and warehousing, etc. According to International Air Transport Association (IATA) aviation in Singapore contributes 5.4% to the national GDP and supports over 100,000 jobs. In India the figure is 0.5%. What is wrong with Indian aviation?

There is more than one leak in the tub, the biggest being absence of a comprehensive and relevant civil aviation policy. The delayed civil aviation policy along with rules like a “minimum of five years” experience of continuous operation of domestic scheduled air transport services; and at least a twenty aircraft fleet” are suffocating the growth potential of Indian carriers. Such restrictions not only stifle the competitiveness of the industry, but also give an unfair advantage to foreign carriers. A case in point is the Middle Eastern carriers. From full service carriers like Emirates to low cost carriers like FlyDubai, all started as small companies with a handful of aircraft and took their maiden flights to Indian subcontinent. Indian carriers on the other hand have to wait for a period of five years.

Second area is ground infrastructure. Barring the five private airports (Delhi, Mumbai, Bangalore, Hyderabad and Cochin) most Indian airports are struggling for better management and expansion. The government started the process of privatising thirty five non metro airports in 2008, but the process was cancelled without any explanation. The most likely reason was immense pressure from labour unions that rightly feared for job losses. A handful of Greenfield projects were awarded but progress has been slow due to land acquisition issues. The latest approach of the Airports Economic Regulatory Authority (AERA) to shift towards a single till model (where airfield operations are subsidised by commercial revenues) has made airport investments unattractive. Such arrangement will deter investors from putting their money in airports.  

The third area where the civil aviation policy can help is Maintenance Repair and Overhaul (MRO) business. The large fleet orders placed by Air India, Indigo, Jet Airways and others will need MRO facilities to service their fleets. At present Air India is the only airline to have its own MRO centre in India. All other airlines send their aircraft to neighbouring countries like UAE, Singapore and Sri Lanka for the maintenance works. This results in major loss of revenue, which could have been added to the GDP. A major reason for lack of MRO facilities in India is high tax and import duties on original equipments. The low labour cost advantage in India is offset by the high taxes and duties. This is true for both scheduled airlines like Air India, Jet Airways, Indigo and business aviation companies.

Fourth, aviation as such is not considered as a priority sector. Long standing demands like allowing Foreign Direct Investment in airline by foreign airlines, standardising aviation fuel taxes and a liberalised air service agreement regime (which allows airlines to operate flights between two countries) have not been addressed. Troubled airlines like Kingfisher can benefit from FDI and other airlines too can gain expertise and know how.

Fifth, painfully slow procedures for air freight clearance. Singapore and Hong Kong process air freight shipments within hours; In India it takes a couple of days. Countries which have a thriving aviation sector like that of Dubai or Singapore have given a priority status to aviation and accordingly framed policies. India needs to think of aviation as a sunrise sector and lay down policies to facilitate the business. The policy framework should provide a level playing field to all stakeholders and should not discriminate.