AIRASIA - A FLY ON THE WALL OR AN ELEPHANT ON THE STREETS?
By Ruma Dubey
Jet Airways and SpiceJet, both which were flying high for some time now seemed to have hit turbulence today. Both the stocks ended the day in the red.
And this turbulence was caused by the late afternoon news which came in – the Foreign Investment Promotion Board (FIPB) approved the JV between Malaysia’s Air Asia and Tata group to start a passenger airline. Air Asia is essentially a budget airline and it hopes to spend Rs.80 crore initially to get a succulent bite into the juicy airline sector of India, especially for Budget airlines. In the JV, AirAsia will own 49% stake, Tata Sons will hold 30% and the balance 21% will be held by Arun Bhatia, son-in-law of billionaire Lakshmi Mittal.
The existing companies are spooked as it is being perceived as increased competition. Air Asia has promised that it will bring in air fares like never before, in fact wants its air fares to be the biggest differentiator. There is even talk of the company offering vacant seats for free. This, at a time when Jet and Spice are hiking fares to cover costs, making most of the void left by Kingfisher.
And this competition from Air Asia is not be taken lightly as within a short span of time, less than 10 years, it has emerged as the largest low-cost player in the world. This entry into the Indian aviation sector, will probably be the best thing that happened to the Indian fliers is a long while and probably the worst thing for existing airlines. Air Asia is not a fly on the wall which can be ignored, it is an elephant which can come trampling down on all.
The FIPB clearance does not mean that Air Asia will start operations from tomorrow. It will now apply for Airline Operators Licence under the DGCA. Other approvals will be required like – approval to bring its aircraft to India for flying as that can work out to be the cheapest option. It will also need approval on the number of Indian representatives on the Board and its senior management team. Yes, it will face red tape at every step, for every approval.
The only profit making airline in India, Indigo is a budget carrier and it has managed to make profits by keeping costs low, charging for every morsel of food, reduced turnaround time, low ticket prices to bring in more volume, sticking to schedules but all this has been done on well etched and most flown routes. Air Asia, on the other hand, plans to bring in new passengers through new routes. It will be an online bookings only service with no frills at all. Reminds you of Air Deccan? It sank soon as it tried to expand too soon and got grounded as there was no enough capital to sustain all routes. Also other airlines, the moment they caught onto new routes, under cut Deccan. But Air Asia, in that sense is better off as the founder, Tony Fernandes has enough capital and his logic is that he will price his fares so low that for others to undercut him, they will have to bleed first.
Air Asia will keep its costs low by having a very thin organisation – only 20 employees per aircraft. Like all budget airlines, there will be no assigned seats for passengers, no frequent fliers mile, no airport lounges, charge for every check-in baggage. Air Asia will have no agents and as stated earlier, its own website will be its sole booking agent for sales. This obviously works as 65% of its sales in 2012 came in from its website.
While other airlines have been cribbing that it is uneconomical to run an airline in India, Air Asia feels that our 1 billion population is a monster of an opportunity and feels that fares not yet low enough!
Based on Air Asia’s track record it seems that it’s entry will indeed shakeup the entire Indian aviation sector.