Home / Companies / AirAsia take-off hit by headwinds in India

Mumbai: A business model that worked wonders in several countries. A local partner that pioneered aviation in India. Victory over concerted efforts to block its entry.

When AirAsia spread wings over India in 2014, the continent’s largest low-fare airline seemed to have everything going for it. Local rivals braced for fierce competition and a research report even called its entry a “negative" for Indian airlines.

“The good always win," gushed Tony Fernandes, the Malaysian carrier’s charismatic founder-CEO. “We are gentlemen with good intentions."

A year later, AirAsia India, the local unit of Malaysian fare warrior AirAsia Bhd, is merely a blip on the radar. During this period, SpiceJet Ltd emerged from a near-death experience, Vistara, the joint venture between Tata Sons Ltd and Singapore Airlines Ltd, took to the skies, and IndiGo prepared for a public sale of shares.

AirAsia, however, managed to win little over 1% of the country’s aviation traffic, and has frozen plans for an ambitious scale-up. 

Good intentions were clearly not enough.

On the runway

Fernandes’s choice of a CEO to head the Indian operations was itself unconventional: Mittu Chandilya, previously head of services practice for the Asia-Pacific at executive search firm Egon Zehnder. Chandilya had never worked in India, and had no prior experience at an airline.

Fernandes was a natural with social media. All his key announcements, including Chandilya’s appointment, appeared first on Twitter. He regularly tweets about press conferences and asks reporters to get in touch with his executives for interviews. In September 2013, after a board meeting of AirAsia India, Fernandes tweeted that he was confident the airline “will make profit from the first year and change aviation". Chandilya followed: “Just finished a great board meeting as expected. Buzzing with ideas and raring to get going."

Fernandes set the cat among the pigeons when he announced his Indian venture with the $100 billion Tata Group and Arun Bhatia of Telestra Tradeplace Pvt. Ltd. Lawyer and politician Subramanian Swamy moved the Supreme Court to quash the airline’s licence. Private airlines in India, themselves masters of fare wars and flash sales, closed ranks to keep AirAsia out.

India’s top airline by market share IndiGo, run by InterGlobe Aviation Ltd, along with Jet Airways (India) Ltd, SpiceJet and GoAir, operated by Go Airlines (India) Ltd, said AirAsia should not be allowed to fly in India because the law, in their view, allowed foreign airlines to invest only in existing local airlines. Nothing worked.

Their fears were underlined by a 21 February 2013 note from JP Morgan Securities Singapore Pvt. Ltd. Analyst Corrine Png wrote that 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. Ahead of AirAsia India’s lauch on 12 June 2014, rival low-fare airlines such as SpiceJet and IndiGo cut fares and braced for another bruising battle.

To celebrate its Indian beginning, AirAsia India put up 25,000 tickets at a promotional fare of 5 plus taxes and charges. On 12 June 2014, Chandilya said he wanted “to change the way people travel in India", and to make AirAsia India ultimately “the biggest airline in India". He expected the airline to break even within four months.

AirAsia India had followed a clear path to profits in every market it entered: offer deep-discounted fares, and go for aggressive expansion. Founder Fernandes had polished this model in his home market of Malaysia and successfully exported it to the Philippines, Thailand and Indonesia. Why would India be any different?

The different market

AirAsia, knowingly or unknowingly, flew into a graveyard of failed airlines. The years since 2009 saw the closure of Kingfisher Airlines, Air Deccan (which had merged with Kingfisher), Deccan 360, Air Mantra, MDLR Airlines, Paramount Airways and Indus Air. Previous history isn’t encouraging either. At least six private airlines—Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air—which started operations after 1992 when the airline business was opened up to private companies, closed shop in the first five years of open skies.

In retrospect, it appears AirAsia underestimated the heavily regulated nature and the fierce competition in India’s aviation sector. Airlines in India lost a combined $10 billion since FY09, according to a June report by aviation consultancy Capa India. Airline debt stands at around $11.3 billion, nearing $14 billion if dues to vendors are included. Accumulated debt now equals more than 100% of airlines’ revenue in India. In the case of some airlines such as Air India Ltd, it is more than 200%. Cash balances remain tight, and according to Capa, just enough to pay for a few days of expenses, in some cases.

Jet fuel costs at least 70% more in India than in Singapore, and Indian airlines spend 45-55% of their revenue on fuel. A 4% reduction in fuel costs can add around 2% to airlines’ operating margin, according to rating firm India Rating and Research Pvt. Ltd. India’s airport charges are high, too. For instance, airport tariff regulator allowed the Delhi airport operator to raise aeronautical charges by 346% effective from 15 May 2012. From the beginning, AirAsia stayed away from Mumbai and Delhi, citing high airport costs.

Kapil Kaul, chief executive officer (South Asia) at Capa, said AirAsia India did not prepare sufficiently before the launch, especially considering India’s complexities and aggressive competition. Possibly, the airline underestimated the challenges, he said. He also noted that AirAsia India was not able to fully capitalize on the strength of AirAsia’s brand in India.

Still on the runway

According to Directorate General of Civil Aviation, AirAsia India had just 1.1% of India’s domestic passenger market share in April. AirAsia India reported a loss of 19 crore in the first three months of 2015 on a revenue of 74.39 crore, according to AirAsia Bhd. In a February interview, India CEO Chandilya said the airline is expected to break even as soon as it starts flying its sixth plane, likely by May or June.

Currently, it flies five planes. Chandilya said the airline was running on a cash-flow positive basis. The original deadline for breaking even for AirAsia India was in November last year. He admitted that the break-even deadline was pushed back owing to various external factors. The airline had plans to take delivery of four more planes last year, he said. “We are planning to take 10 more planes in 2015," he said in the February interview.

What could have saved the day for the airline was more lucrative overseas flights, but like others that preceded it, AirAsia India, too, flew into a thicket of regulations. Airlines in India are not allowed to fly abroad unless they have flown domestically for five years and have a fleet of 20 aeroplanes.

The rule effectively serves as a barrier for younger airlines with overseas ambitions. Despite voices and proposals in the government in favour of repealing the rule, there has been no progress. The rule previously scuppered Air Kerala, an airline proposed by the government of Kerala to serve the state’s expat population.

Capa’s Kaul agreed the continuation of the 5/20 rule has had an impact on AirAsia’s strategy and future direction.

A relaxation of rules would have allowed Chandilya to restructure flight schedules so that it has more international flights connecting domestic destinations. Fernandes has publicly criticised the 5/20 rules several times.

On 26 June, Reuters reported, quoting Chandilya, that AirAsia India has halted its expansion plans, awaiting progress on overseas flight rights. The report said AirAsia India will not lease any more planes until the government decides whether to retain or reform the 5/20 rule.

“We’ve said (that) let’s have a wait-and-see approach... There were promises about getting some clarity on that before we launched. I haven’t seen anything from this government that is about open skies and free markets," Reuters quoted Chandilya as saying.

When contacted on 29 June, Chandilya said he would not be responding at this time. He did not reply to an email in early June, seeking comments on the airline’s performance in India.

Last week, Fernandes said he is very satisfied with the way AirAsia India is shaping up. “I think we have done very well. That is all I will say," Fernandes said while refusing to answer questions in detail.

In a 22 June article, The New York Times quoted Chandilya as saying, “I believe in free markets and open skies, but if you look at the policies we have in place, I don’t think we have that at all."

Chandilya said he talks to ministers and policy makers about how they can help the industry and promote growth, but it is very difficult to get them to understand that reducing fuel taxes and airport charges will probably boost their states’ economies.

He acknowledged that he misjudged India’s regulatory environment, which is uniquely stringent for airlines. “The ministries aren’t coordinating with each other—they only have their own interests in mind," Chandilya told the paper.

Change of plan

AirAsia had to make some changes in its flight plan as well. The airline, which decided to stay off Delhi and Mumbai due to high airport charges, on 21 May started flying to Delhi, since it’s a lucrative market.

“We realized that we need to be more visible, both to fliers and to policy makers. Flying to Delhi will simply give more people a chance to experience our product," Chandilya told The New York Times.

Competition has forced AirAsia to be more cautious as well.

“AirAsia India’s actual progress has been slower than previously announced, reflecting a cautious approach to growth in the face of stiff competition by the incumbent carriers," said Hitanshu Gandhi, senior engagement manager at consultancy firm Strategic Decisions Group.

The cheap-ticket model may not have worked very well either. While AirAsia India’s tickets are often significantly cheaper than those of full-service rivals such as Jet Airways or Air India, the differential with low-fare carriers is very little, Gandhi said.

“Interestingly, IndiGo often has competing departures at similar or slightly better times, on many direct routes. Being a very well-respected brand with excellent operational performance, IndiGo is able to sell better. Hence, while AirAsia India managed very respectable load factors (74.4% in April 2015) and excellent on-time performance (100% at four metro airports in April 2015), it had the second-worst load factors among all Indian scheduled airlines (IndiGo had 85.7%)."

Like other airlines, AirAsia India is also offering all-inclusive select one-way promotional fares as low as 799.

Gandhi said weak revenues will overwhelm any operational efficiencies that AirAsia India may have been able to leverage from its Malaysian parent. He says its parent AirAsia had its own financial issues, with comprehensive income dropping from 806 million ringgit ( 1,363.6 crore) to 337 million ringgit ( 570.9 crore), primarily due to hedging cash flows, foreign exchange losses, and the weak performance of its Thailand, Indonesian and Philippines units.

“This would have reduced AirAsia India’s ability to stimulate the market and to ramp up, which would erode potential economies of scale," Gandhi said. “Indian LCCs (low-cost carriers) have shown that they are willing to fight hard and are set for a long-drawn battle for domination in the Indian skies. AirAsia cannot expect to repeat its performance in markets such as Thailand, where it became the third largest airline and was profitable within 10 months of launch," Gandhi added.

A senior executive from an airline that competes with AirAsia India said Fernandes underestimated India’s complexities, competition in India, and rivals’ ability to take new entrants head-on. This executive surmises AirAsia India may have expected one or two airlines more to go down after Kingfisher Airlines and clear the market, but encountered feisty rivals, forcing it to alter their plans dramatically.

“AirAsia overestimated its own capabilities and hired inexperienced people. It imposed ideas that work elsewhere, but not practical in India. It developed a cult of personality rather than a culture of professionalism—started believing they were infallible. In other words, they overpromised, created a lot of hype that is hard to live up to," he said, requesting anonymity.

Looking up

However, AirAsia India is unperturbed.

A presentation on AirAsia’s website dated 28 May said the overall performance of the Indian subsidiary had been better than expected with strong loads, and that it is working on keeping costs under check.

“In time, we will answer," Fernandes said in a text message when asked about AirAsia India’s performance. In every press statement, AirAsia India religiously asserts that it is constantly working towards making air travel affordable for every Indian.

A senior executive from a travel agency, who requested anonymity because his company has close ties with AirAsia India, said the airline’s delivery had fallen short of its promise. He said AirAsia India had not been able to scale up sufficiently enough to make an impact in India. However, he said, AirAsia India has nothing to lose as it has not invested heavily—it can grow slowly and steadily in the coming years.

“AirAsia India’s promoters and board are committed to make the airline stronger and more competitive. I see AirAsia India in India for a long term," Kaul said.

Tata Group is also looking at increasing its stake in AirAsia India, in a gesture of confidence in the venture.

Still, the experience of AirAsia in India serves as a cautionary tale for aviation entrepreneurs willing to bet on the Indian market. Discount fares, aggressive expansion plans and a recognized brand name aren’t sufficient to notch up quick success. At the end, what will count is the ability to persevere.

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