Turbulence at AirAsia India: Can it Turnaround?

Turbulence at AirAsia India: Can it Turnaround?

“Of course, there was hype. Have we lived up to that? No. But no one expected all these issues that we have been caught with. Are we giving up? Clearly not.”¹

–Tony Fernandes, CEO, AirAsia Group

It has hardly been a smooth flight for AirAsia India (AAI) since its establishment in March 2013. AAI, an Indo-Malaysian budget airline, a tripartite joint venture, started operating in India since mid-2014. However, even after 20 months of its operations the airline faces turbulence with the mounting losses, acute cash crunch, differences between the partners and exit of its top-level executives. While the low-cost operating model of the parent company, AirAsia Berhad (AirAsia Bhd), the largest Low-Cost Carrier (LCC) in South-East Asia, was highly successful in other countries, AAI was facing problems. While the company officials termed deficit of funds and aviation  regulations in India as the core reasons for the airline’s tepid growth and problems, experts opined that the reasons are mostly internal. However, during March 2016,  there was a change in the shareholding pattern of the partners, raising hopes of the stakeholders that AAI could fly smoothly and in the right direction.

AirAsia Berhad – The Parent Company

AirAsia Berhad (AirAsia Bhd), the Malaysian low-cost airline headquartered in Kuala Lumpur, was established in 1993, by government-owned DRB-HICOM² and started its operations on November 18^th 1996. In December 2001, the heavily-indebted ($11 million) company was bought by Tune Group Sdn Bhd³ for a token sum of one Ringgit⁴.⁵ Tony Fernandes (Fernandes), CEO, AirAsia Group, bought the company, turned it around and made it the first highly successful budget no-frills airline.

Exhibits

Exhibit I: Evolution of Indian Civil Aviation Industry

Exhibit II: Profit/Loss Status of Airlines in India (FY-2012 and FY-2013)

Exhibit III: Market Share of Major Airlines in India 

Exhibit IV: FIA's Plea Against AAI's Entry

Exhibit V: AAI's Festive Discount Offer

Exhibit VI: Top 10 Airlines in India – 2015 (w.r.t Market Share)

Exhibit VII: AirAsia India Market Share

Exhibit VIII: AirAsia's Concerns

Annexures

Annexure I: AirAsia and Subsidiaries

Annexure II: AirAsia Berhad (Group) Financials (2011-2015)

Annexure III: AAI vs LCC Competitors (Routes, Schedule and Prices)

Annexure IV: Traffic and Operating Statistics of Indian Carriers on Scheduled Domestic Services

• 1 Tushar Srivastava, “Govt should provide level playing field: AirAsia CEO Tony Fernandes”, http://www.hindustantimes.com/business/time-for-india-to-enable-more-people-to-fly-airasia-s-tony-fernandes/story-tpQO7gM66INCY7Aw1XlngI.html, March 29^th 2016 (accessed date: April 7^th 2016)
• 2 DRB-HICOM Berhad is one of Malaysia’s leading corporations, involved in the automotive manufacturing, assembly and distribution, services, property and infrastructure sectors. It assembles cars in Malaysia for TATA Motors, Honda, Isuzu, Suzuki, Mercedes-Benz, Volkswagen, Higer, JAC and BeiBen.
• 3 Tune Group Sendirian Berhad (meaning ‘private limited’) is a leisure and entertainment corporation founded by the Malaysian entrepreneurs Tony Fernandes and Kamarudin Meranun, which offers affordable leisure and entertainment activities via its subsidiaries – airline, hotel, telecommunication, financial services, sports, media and creative industries.
• 4 1 Malaysian Ringgit (MYR/RM) equals 16.66 Indian Rupee (INR/`) and $0.25 as on May 5^th 2016
• 5 “The Beginner’s Guide to AirAsia: Hi, We’re AirAsia!”, http://www.airasia.com/in/en/about-us/hi-we-are-airasia.page (accessed date: April 7^th 2016)

Turbulence at AirAsia India: Can it Turnaround?

Synopsis

AirAsia Berhad (AirAsia Bhd), a Malaysian low-cost carrier, operated nine subsidiaries in Malaysia, Thailand, Philippines and Indonesia, which included both Low  Cost Carriers (LCCs) and Full Service Carriers (FSCs). With its low-cost business model, it went on to become the largest LCC in South-East Asia. In 2013, with the intention of replicating its low-cost business model, it entered India through a tripartite joint venture with Tata Sons Ltd. (Tata) and Telestra Tradeplace Pvt. Ltd. (Telestra) and established AirAsia India (AAI). It was the first foreign airline entering into the Indian aviation space, after a change in the FDI rules (permitting 49%  stake by foreign company). Though it faced objection from the existing players and other entities, it successfully entered India and started its operations from  June 2014. At the time of AAI’s launch, its executives had promised that its fares would be a third less than the rivals, which would make air travel affordable to  common people. They also said that the airline would operate on the less popular routes and connect tier-2 and tier-3 cities.

Mittu Chandilya (Chandilya), CEO, AAI, had expected the airline to break-even in 4 months, but after 20 months of its operations his expectation did not come  true; instead, the airline was more into trouble. The airline had siphoned off the initial investment of $30 million and was surviving on advance sale of tickets.  There were disagreements among the partners regarding the infusion of more capital and managing the airline. In addition, few top-level executives left the  company owing to these issues. This case study enables the participants to look at the market entry strategies of AirAsia into India as a low-cost carrier and debate on the reasons for its failure and the ongoing problems. Why could not AirAsia’s low-cost model airline succeed in India (as it had in other countries)? Was it because of the external or internal factors? Can the airline make a turnaround?

Prerequisite Conceptual Understanding (PCU)/Before the Classroom Discussion

The students/participants should be asked to read the following article:

• Michael E. Porter, “What is Strategy?”, http://cfe.unc.edu/pdfs/what_is_strategy.pdf, November-December 1996 – To understand that a company needs to have a  differentiating strategy and preserve it over a period of time to outperform its rivals

Case Positioning and Setting

This case study can be used in the MBA Program for:

• Strategy Course – Market Entry Strategy – Challenges in designing and executing a wellintended and well-crafted market entry strategy of a joint venture in a regulated industry like airlines.

Assignment Questions

• I. AirAsia entered into India with a tripartite joint venture. Discuss and analyze the efficacy of its market entry strategy.
• II. Given the nature and business dynamics of Indian Civil Aviation industry, what could be the reasons for AirAsia India’s questionable business performance? Was it due to its strategic missteps or due to the external business environment?
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