How will Air Asia’s entry affect Indian aviation?
After establishing joint ventures in Indonesia, Thailand, Japan and Philippines, the Malaysia-based AirAsia Bhd has submitted an application to the Indian government seeking approval to start domestic operations. As per the proposal, the airline’s investment arm AirAsia Investment Ltd will hold 49% in the proposed Indian joint venture with Tata Sons Ltd (30%) and Arun Bhatia of Telestra Tradeplace Pvt Ltd (21%). This move comes in the backdrop of the September decision by the Indian government to open up the aviation sector to foreign direct investment from foreign airlines.
How big is the threat?
Apart from AirAsia being the leading and largest low-cost carrier in Asia, the cost structure of the airline is the lowest in the world. According to local airlines’ representatives, AirAsia’s cost is at least 30% lower than Indian low-fare carriers because of low-cost terminals in other countries, cheaper jet fuel and other advantages.
With this huge cost advantage alone, AirAsia can give local low-fare carriers—IndiGo, SpiceJet Ltd and GoAir—a run for their money. Full-service carriers such as Jet Airways (India) Ltd and Air India will also feel the heat. Also, AirAsia chairman Tony Fernandes is known for unleashing Rs.1 fare from Mumbai to Kuala Lumpur.
J.P. Morgan Securities Singapore Pvt. Ltd’s analyst Corrine Png, in a note on 21 February, wrote AirAsia’s India entry is negative for Indian airlines, especially SpiceJet, given its major presence in Chennai and exposure in smaller cities. “With traffic under pressure, it would be challenging to sustain higher yields. The entry of new players could put pressure on pricing,” Png wrote.
On a conference call last week, Fernandes said it would not opt for 70-seater planes at any point and it will stick to Airbus A320 planes that have around 200 seats each. India has around 40 runways where such big planes can land. This would mean that AirAsia’s proposed Indian venture would add pressure to crowded routes, although the carrier is known for flying to smaller cities.
What can go wrong in AirAsia’s strategy?
According to a note by consultancy firm CAPA, the AirAsia brand has entered nine Indian markets since late 2008 but has had to drop three, including Mumbai and Delhi, because of lack of profitability and high airport costs in India. But AirAsia’s Fernandes is unperturbed. He says he has done his homework to stay low cost before finalizing the proposal.
So how immediate is the AirAsia threat?
AirAsia has plans to start operations with three to four planes. The smallest low-fare carrier GoAir has 13 planes. So it will take some to scale up. More importantly, AirAsia has just applied for the permission with Foreign Investment Promotion Board.
It has to seek an air operating permit. The aviation ministry is in no mood to give permission to import planes, so issuing a fresh licence would take some more time. The ministry is also concerned about the financial health of domestic airlines as two of them—Kingfisher Airlines Ltd and Paramount Airways—were grounded. This would mean it will take around a year for the threat to materialize.