For AirAsia, it's going to be a fare game

Last Updated: Tue, Feb 26, 2013 04:13 hrs

His airline has been synonymous with rock-bottom fares that cannot be easily undercut by rivals. So, when Tony Fernandes, chief executive of AirAsia, announced last week that he was setting up a joint venture with the Tatas to enter the Indian skies, no one in the aviation business was amused, except, of course, the millions of passengers who expect the new entrant to unleash a fare war that could force other domestic carriers to follow suit.

After taking over the near bankrupt airline in 2001, Fernandes changed the rules of the game by challenging Malaysian Airlines with fares of just 1 ringgit (Rs 17.42) from Kuala Lumpur to various destinations in Southeast Asia. It is a strategy which Fernandes has replicated across Southeast Asia. AirAsia's tickets are priced at nearly half (on Kolkata-Kuala Lumpur route) to a sixth (on Singapore-Kuala Lumpur) of its nearest rivals. And the tried and tested strategy is reaping results. The company posted a profit of $291 million in 2011.

Fernandes,48, who has spent several years in Kolkata, makes no bones that he plans to reprise his winning strategy, which has made him the undisputed king of low-cost carriers in Southeast Asia, this time too. "India is an underserved market where 1 million people travel on trains every day. Price will be our main differentiator," he had said, after the announcement of the deal. He also bluntly added he does not think that any Indian airline has the right cost structure, which could help in stimulating the market.

Cautious approach

AirAsia has decided to pick up 49 per cent stake in the proposed joint venture. The Tatas with a 30 per cent stake and Delhi-based businessman Arun Bhatia with a 21 per cent stake will be the other partners. The Tatas, however, have made it clear that they only want to be "financial investors" and their commitment would be capped at $9 million. Obviously, they want to tread carefully considering their earlier attempts to set up a domestic airline have failed to take off due to opposition from local players.

On the ground even Fernandes is being chary as he does not want other competing players to scuttle his plans and prevent him from getting an operating licence. He says he wants to initially invest only $30 million and operate with not more than three or four A-320s. He is also not keen to fly to Delhi and Mumbai from where his rivals in the domestic sector make the bulk of their money, as he thinks the airport costs are way too high for a start-up. For now, he will concentrate on southern and western markets and will think of expanding services to Delhi and Mumbai once those airports have separate terminals for low-cost carriers with lower charges.

But can this strategy create magic in the Indian skies? If his international tryst with India is anything to go by, he has surely not cracked the Indian market. In 2008, Fernandes stirred the airline industry when he announced that he would fly into India from Southeast Asia. He played on what he knows best �" cutting fares to compete. He offered a direct flight from Kuala Lumpur to Trichy for only Rs 12,000, half of what others were offering. He also shocked the market by offering a one-way Delhi to Kuala Lumpur ticket at a basic fare of Rs 1 (Rs 1,623 after taxes). Consumers, of course, lapped it up.

Yet, despite these aggressive offerings, AirAsia has not been able to make any dent in the market or sustain these rock-bottom fares. In recent years, the airline has even shrunk its India operations. It has pruned the number of destinations from nine to six and has moved out of key markets of Mumbai and Delhi because of high airport taxes.

As a result, AirAsia's share in the market in terms of seats on offer on the India-South-East Asia route has fallen from 14 per cent last year to 10 per cent now.

However, experts say this time round Fernandes is betting on more than just prices to draw in fliers.

In the last four years, he has worked on a clear strategy to enter the domestic skies. He has announced publicly that his focus will be connecting Tier-II and -III cities, an unserved market where price is the key driver. He has also said he will look at opening up new markets where there is no connectivity (50 per cent of the routes it operates are new routes). Its A-320s, which Fernandes wants to use in India, can fly into 36 airports in the country. Analysts say not flying to Delhi and Mumbai won't be a miss for the airline as those markets are already saturated. Obviously, new potential fliers live elsewhere.

His entry also comes at an opportune time. In the past one year, Indian low-cost carriers have raised fares by over 20 per cent, bringing them at the level of the traditional full-service carriers. That gives AirAsia a window of opportunity. The airline has some cost advantages which its Indian competitors with smaller operations size do not have. It can, therefore, benefit from the economy of scale. For instance, AirAsia has ordered over 475 A-320s for its global network, one of the largest orders in the world. In contrast, the largest order from India is by IndiGo, which ordered 150 Airbus A-320 family aircraft.

AirAsia is also likely to get a more attractive price for direct import of jet fuel �"which has been permitted by the Indian government �" in comparison to its competitors because of its sheer volume requirement (it has a fleet size of 117 compared to IndiGo's 64).

Besides, it has a clear domination in Southeast Asia where it services over 70 cities. It is the second most popular region Indians travel after West Asia and they are increasingly looking at more and more connectivity within the region. AirAsia's wide connectivity within India and an array of destinations in Southeast Asia cannot be matched by any Indian player. The largest Indian low-cost carrier, IndiGo, only operates to Bangkok and Singapore.

Crowded skies

However, unlike in Southeast Asia, where it had a first mover advantage in the low-cost carrier space, it is a different story in India. IndiGo with over 45 per cent of the low-cost carrier market under its belt dominates the sector. It has already overtaken Jet Airways to become the largest airline in the country. Just like AirAsia, it is also backed by an equally maverick promoter in Rakesh Gangwal, the former chief executive of US Airways group.

"We will stick to our plan. There is no need for a change", is all that a top executive of IndiGo was willing to say on the AirAsia deal. To be fair, just like AirAsia, IndiGo has dramatically kept its costs down by flying planes for 12 to 13 hours, turning around aircraft within half an hour, ordering large number of planes to get a volume discount and sticking to one kind of aircraft to save costs. But it has not been able to lower the price differential between low-cost carriers and full-service carriers. AirAsia has been able to do that in Southeast Asia even though it has been struggling to cut costs in India, as over 50 per cent of its costs in the country are not under its control.

Lording it over in Tier-II and -III markets will not be a cakewalk for Fernandes' airline. IndiGo, for instance, has over 60 per cent to 65 per cent of its capacity already covering these cities. The group is also thinking of setting up services to connect even smaller cities where only ATRs can land. SpiceJet has taken to the smaller cities too. It flies 12 Bombardier's, accounting for one-third of its daily flights, and its CEO Neil Mills says the strategy would soon enable them to fly to and from as many as 96 airports in the country.

AirAsia can drop fares dramatically to build its market share in these regions, but that is an option which even the Indian low-cost carriers will have. Many are already testing that route to growth. SpiceJet, for instance, offered over 1 million seats at just Rs 2,013 each early this year and they were lapped up in no time.

For the consumers, the ensuing days could be the best they may have seen in years.

(With inputs from Anees Phadnis)

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