New Delhi: Asia’s biggest budget carrier has set a target for its India venture to break even in four months, a goal some of its local rivals haven’t achieved in three years.
The India venture of AirAsia started operations on Thursday as airlines in the world’s second-most populous nation offer base fares lower than 2 US cents as they woo 61 million domestic flyers. Jet Airways (India) and SpiceJet have posted annual losses, while Kingfisher Airlines, saddled with $1.4 billion (Dh5.1 billion) of debt, has been grounded since 2012.
AirAsia’s entry heightens competition in India, where over the last seven years airlines are estimated to have lost $22 every time a passenger has stepped on board. That’s added up to a $10 billion loss in a market where the number of domestic travellers are forecast to triple in the decade to 159 million by 2021. The challenge is how to make money while fares continue to drop even as costs increase.
“The war in the Indian skies has just become more intense,” said Amber Dubey, partner and India head of aerospace and defence at KPMG. “If an unbridled fare war continues, including, God forbid, peak hour seats, we may see financial distress increasing and probable exit of one or two airlines in the next 12 to 18 months.”
AirAsia (India) Pvt, a joint venture between AirAsia, Tata Sons and Telestra Tradeplace, started its maiden flight with an Airbus A320 plane from the southern city of Bengaluru to the beachside destination Goa.
“We’ve taken a long, long time, and we feel good that the timing is right to enter the Indian market,” AirAsia’s Group Chief Executive Officer Tony Fernandes said in an interview with Bloomberg Television on Thursday.
Budget airlines had already been cutting rates to woo Indian flyers before AirAsia’s venture announced details about the start of its operations.
SpiceJet in January sold tickets at a 50 per cent discount. In April, it offered basic fares starting at Rs1 (Dh0.06) that don’t include taxes and other charges. In this case, the average comes to about Rs800 rupees all inclusive, Sanjiv Kapoor, SpiceJet’s chief operating officer, wrote on his twitter account on May 30.
Just before AirAsia India opened its bookings on May 30, the carrier offered a fare of Rs490 that included all taxes but excluded baggage fees, Mittu Chandilya, chief executive officer of the carrier’s local venture, wrote on his Twitter account.
Closely-held IndiGo last month started giving discounts of up to 25 per cent for a family of four or more. Then on May 30 it also offered Rs1 base fares on the Bengaluru-Goa route. Indigo had net income of Rs7.87 billion for the 12 months ended March 2013 and operations were profitable for a fifth straight year, according to President Aditya Ghosh.
Arun Benjamin, a Bengaluru-based retired air force pilot planning a holiday in Goa with his family, found IndiGo and Go Air offered cheaper fares than AirAsia on the same route.
“I will go for the cheaper option, because the services are comparable anyway,” Benjamin, who has previously flown AirAsia to and from Malaysia, said by telephone.
During the weekend in which AirAsia India opened bookings, geo-location based searches for Bengaluru surged 93 per cent, while those for Goa jumped 84 per cent compared with the previous week, according to Rajesh Magow, CEO of MakeMyTrip, which operates an online travel portal.
The Rs1 fares are for a few seats and prices typically rise after a certain number of tickets are sold. The high costs of operation mean more seats need to be sold at higher rates.
“It is very difficult to operate in a market in which your competitors seem to have an almost insatiable appetite to lose money,” Kapil Kaul, the South Asia CEO for Capa Centre for Aviation, said in a report dated May 29. “The incumbents have shown a regular tendency to discount heavily to generate cash, gain market share, fill excess capacity or simply to respond to competition.”
Airlines in India have lost a combined Rs594 billion over the past seven years, Capa has estimated.
A decade ago, Air Deccan sold tickets starting at Rs1. It ended up being acquired by liquor tycoon Vijay Mallya’s UB Group, operator of Kingfisher. Mallya’s carrier lost its airline licence in 2013 amid losses.
India is one of the most expensive aviation markets to operate in the world. State taxes of as much as 30 per cent make jet fuel, which contributes to about half an airline’s costs, the costliest in the region.
That’s meant making money is a struggle. Jet Airways, in which Etihad Airways PJSC owns a 24 per cent stake, said last month it won’t be profitable until the second half of 2016 after posting six consecutive annual losses. SpiceJet is estimated to post a loss for a fourth successive annual period in the year ending March, according to analysts’ estimates compiled by Bloomberg.
Spokesmen at Jet Airways, SpiceJet and IndiGo didn’t respond to phone calls and emailed questions.
By contrast, AirAsia, based in Sepang, Malaysia, has posted a profit for the last five consecutive annual periods. The India venture, which got its operating licence in May, can lean on AirAsia’s experience to keep costs low and gain revenue from services such as carrying baggage.
The airline plans to break even in the next four months, Chandilya told reporters in Chennai May 30. The company didn’t respond to phone calls and emailed questions on their plans to make a profit.
To make money, it will probably reduce check-in counters, baggage handlers, ferry buses and loading ramps, KPMG’s Dubey said. Passengers may also be ushered faster for a quicker turnaround, he said.
AirAsia is also pushing to charge for checked-in luggage.
“Strong ancillary revenues will be necessary to support a low base fare pricing strategy,” said Capa’s Kaul, who estimated carriers in India may generate an additional $500 million annually from such services. “However, it may take some time to grow these given it will involve driving behavioural change among passengers.”
Carriers could also benefit as Indian travellers try to save on baggage charges, said Mark D. Martin, CEO of Dubai-based Martin Consulting. Corporate travellers are also increasingly turning to low-cost carriers, he said.
“Overall it will lead to a sensible reduction in fares,” said Rajan Mehra, India managing director for Universal Weather and Aviation, a US-based private jet operator, and who formerly headed Qatar Airways’ India operations. “After all, IndiGo is making profits with the same fare structures.”
— Washington Post
