AirAsia's model faces fuel, airport cost hurdles in India

Last Updated: Mon, Feb 25, 2013 19:54 hrs

AirAsia's unique selling proposition (USP) is its low fares and the airline can afford to offer those round-the-year because its unit costs are among the lowest. The airline earns 18 per cent of all revenue from ancillary sources. Experts say replicating the business model in India will be a challenge because of a high-cost structure and taxes.

AirAsia's unit costs are significantly lower than Indian carriers on low-cost terminals, lower distribution costs, single aircraft type operation, higher aircraft utilisation, etc. Unit costs or cost per available seat kilometre (CASK) refers to expenses on flying a seat (filled or empty) over a kilometre. A J P Morgan report shows AirAsia's Cask as very low. One of the reasons for low operating costs is that fuel is not taxed in Malaysia.

So, how does the airline keep its cost under control? About 85 per cent of AirAsia tickets are sold through its website, limiting agents' commission. (In India, 70-80 per cent of tickets are sold through offline agents and portals). In Kuala Lumpur and Bangkok, AirAsia flies to low-cost terminals (there are none in India). "We get a rebate in landing and parking charges at Bangkok," explains Benyamin Ismail, who handles the investor relations in AirAsia. Other aspects of cost optimisation include higher aircraft utilisation (12-14 hours a day), lower turn around time (25-30 minutes), use of dedicated kiosks for passenger check-in, and reducing the manpower requirement.

Another aspect where AirAsia differs from airlines in India is its stress on ancillary revenue. It sells tickets at rock bottom prices, but charges for virtually all services - onboard meals, entertainment, preferred seats, pillows, baggage and so on.

Full service airlines give a preferential treatment to their executive class passengers, whereas AirAsia does the same at a charge. Known as AirAsia Red Carpet, it offers passengers special check-in counters, priority baggage delivery and use of lounge for a fee. In 2011, 18 per cent of AirAsia's revenue came from ancillary sources. (In Jet Airways the share is about five-seven per cent).

"We have a fare war even without AirAsia. I expect AirAsia to try its best to focus on the fundamentals of their business model like closer to 14 hours-plus utilisation, high-labour productivity, very low distribution cost and big on ancillaries," said Kapil Kaul of the Centre for Asia-Pacific Aviation.

According to Kaul, other Indian carriers will further strengthen their network from Chennai before the launch of AirAsia's domestic service. "It will be interesting to see how AirAsia deals with the regulatory framework and excessive government intervention especially on key commercial issues like fares and ancillaries," he added.

'Our fares are 80% lower'

AirAsia believes in the no-frills, hassle-free, low-fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Efficiency creates savings which are then passed on to guests. AirAsia's service targets guests who will do without the frills of meals, frequent flyer miles or airport lounges in exchange for fares up to 80 per cent lower than those currently offered with equivalent convenience.

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