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.”
–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-HICOM and started its operations on November 18th 1996. In December 2001, the heavily-indebted ($11 million) company was bought by Tune Group Sdn Bhd for a token sum of one Ringgit. Tony Fernandes (Fernandes), CEO, AirAsia Group, bought the company, turned it around and made it the first highly successful budget no-frills airline.....
AirAsia India – The Launch
AirAsia India (AAI), a subsidiary of AirAsia Berhad, is an Indo-Malaysian low-cost airline headquartered in Bengaluru, India. The airline was formed on March 28th 2013, as a tripartite joint venture between AirAsia Berhad, Tata Sons Limited8 (Tata) and Telestra Tradeplace Pvt. Ltd. (Telestra) owned by Arun Bhatia (Bhatia) and commenced its operations in June the following year.............
Indian Civil Aviation
Civil aviation in India started with the commencement of the first domestic air route between Karachi and Delhi in December 1912, by the Indian Air Services in Collaboration with UK-based Imperial airways. Following this, many air transport companies tried their hand at carrying air cargo and passengers – Tata Sons Ltd. was one of the firsts that operated without any backing from the government............
AirAsia India: Bellwether Foreign Airlines in India
AAI was the first to gain from the reforms and became the first foreign carrier to enter the Indian civil aviation space since the government changed the FDI rules. In the process it paved way for other global players to enter the Indian aviation space. The start of AAI was expected to cause a price war among the players, an increase in air traffic and consolidation in the Indian aviation sector.............
Challenges for AAI
The announcement of AAI’s entry into India was expected to benefit the Indian consumers because of its pricing and marketing tactics; it was expected to change the face of aviation industry and disrupt the competitive Indian civil aviation market by waging a fierce price-war. But it was embroiled in problems since the beginning..........
Objections on AAI’s Entry
Soon after AAI got its FIPB clearance (March 6th 2013) to establish the airline in India, the Civil Aviation Ministry sought clarity on whether the FDI policy permits a foreign airline to invest in an existing Indian airline or a new one. The September 2012 policy, was interpreted to allow foreign airlines to invest in existing Indian airlines, while it was later clarified by some arms of the government to include both existing and new airlines.............
Pricing, Marketing and Operations Strategies
AAI’s strategy was to target the large pool of people who have never flown before, with very low fares. Fernandes announced that to quickly gain market share, the price of its tickets would be a third less than its rivals30 and would be the number one differentiator for his airline. Chandilya backed it and said, “We would be disruptive in pricing. My competition is not the other airlines operating in this country. My benchmark is the first-class fare offered by the railways.”.............
The Disagreements Within
In the press conference held on July 3rd 2014, the statements made by the company officials indicated the internal disagreement. Chandilya spoke about how the company would achieve the break-even – by enforcing a low-cost discipline in the everyday lives of each of its staff; work with airports to reduce charges; go to places that no one has; increase frequency of flights and grow quickly.............
The Competition
AAI faced competition from other LCCs – IndiGo, Spicejet, Jet Lite, GoAir – and other FSCs operating in India. It stood seventh in terms of overall market share (Exhibit VI) in 2015, way lower compared to other LCCs and FSCs. But, by October 2015, it had performed better and garnered around 2% market share – still an insignificant amount. However, it performed much better in 2016 in terms of Pax (Passenger) Load Factor (Annexure IV), compared to its performance in 2015............
Money Matters
With high costs, aviation is a tricky business in India and needs over $100 million to start an airline, given the market structure and costs, opined an industry expert. Vistara and Jet Airways had invested more than $100 million, while the promotors of AAI thought that $30 million were enough for the regulatory process and starting the operations...........
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?
III. ............
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