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FEATURES/Big Bet | Mar 8, 2013 | 14107 views

Will AirAsia Disrupt Indian Aviation?

AirAsia’s entry into the Indian skies could shake up the established order
Will AirAsia Disrupt Indian Aviation?
Image: Vikas Khot
AirAsia owner Tony Fernandes will try to capture the Indian market by getting new passengers and opening new markets

A

ny foreign investor entering the Indian civil aviation market will know the unwritten rule before making any public announcement of his intent: Always seek the blessings of the ministry beforehand. Jet Airways chairman Naresh Goyal and Etihad CEO James Hogan, both well-versed in the workings of the Indian system, did just that before their planned equity link-up. In late January, they did the rounds of the corridors of power—meeting not only the civil aviation minister Ajit Singh, but also the finance minister and the minister for trade and commerce for good measure.

On the other hand, Tony Fernandes, the feisty owner of AirAsia, has never believed in sticking to established rules. His stated philosophy has been about ‘controlled anarchy’—or unleashing the full creative energies of all his employees. That’s been at the core of his hugely successful strategy to disrupt the aviation market in Asia and helped him emerge as the largest low-cost player in this part of the world in less than a decade.

So it should have surprised no one when Fernandes suddenly announced his plan to launch a domestic airline in India, in partnership with the Tata group, all the way from his base in Kuala Lumpur. The mandarins at Rajiv Gandhi Bhavan, which houses the powerful ministry of civil aviation, were left completely stumped though. The next morning, minister Singh admitted to the morning papers that he had been kept completely in the dark.

Eventually, chairman emeritus of the Tata group Ratan Tata met Singh in the last week of February to possibly make sure the path is smooth. Tata, a keen aviator, is reportedly eager to see that the airline gets off the ground. In a conference call with journalists after the deal was announced, Fernandes joked that he was trying to get Tata to start flying the A320s, but was afraid that he may charge too much!

The Indian establishment seldom takes kindly to an iconoclast. But one thing is clear: None of his rivals are likely to underestimate Fernandes and his latest venture, AirAsia India. Most experts reckon that his entry into the Indian civil aviation market could shake up the established order.

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Over the past seven years, IndiGo has grown to become the country’s largest airline by market share. Rahul Bhatia, its founder, has scooped up passengers from full-service airlines like Jet Airways, Kingfisher and Air India by employing classical low-cost airline tactics: Keeping ticket prices low, focusing on delivering a reliable performance, reducing turnaround times and charging for even a sandwich. But for most part, Bhatia has concentrated on competing in the key truck routes that make up much of the existing passenger traffic.

Fernandes, on the other hand, says he will focus on getting new passengers and opening new markets. India, he reckons, is a ‘monster of an opportunity’—with a population that is 50 times that of Malaysia. He first showed that incredible skill of expansion in his home market, so much so that the tiny nation now has more airplanes than all the Indian carriers put together.

The last time that a player tried a similar strategy in the Indian skies, it met with disastrous results. Air Deccan stormed the Indian skies with its low-cost model, promoting online booking and a no-frills service. The main reason why Captain GR Gopinath faltered badly was that he spread too wide, too quickly. Deccan scaled up to 63 cities at its peak, flying with A320 as well as ATR turboprops. Now, new routes take time to mature, and airlines have to often fly for months, before they have passenger loads enough to break even. Captain Gopinath was opening up newer stations every month—even while losses mounted. Next in line, IndiGo clearly benefited from Deccan’s experience, focusing on building more flights on one city-pair, rather than expanding to new cities.

Fernandes is likely to plan his scale-up carefully, also mindful of the other challenge that Gopinath faced during his scale-up: As soon as traffic on a certain route began to gather momentum, Deccan’s rivals would typically plonk an aircraft on the same route and look to undercut him. And Gopinath soon ran out of capital.

To guard against his rivals, the wily Fernandes has, therefore, ensured that he is well-capitalised to survive a bruising price war, if that were to happen. He’s also built his business model to ensure that his is the lowest cost in the business. That way, anyone looking to undercut him, will haemorrhage more than he will. Fernandes says he and his partners plan to put in $30 million to $60 million as initial capital—something that a first-generation entrepreneur like Gopinath simply did not have.

This article appeared in the Forbes India magazine of 22 March, 2013
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Comments (6)
Pradeep Mansingka Mar 9, 2013
sir it is good that airasia is cmng to indian domestic market with tatas. this will improve the quality of services and price for flying. the other airlines might be threghten with compitition is wrong. not like the other airlines to have the colobration comes in profit overnight. to do business in india u have to be regular in everything.
Srinivas Mar 8, 2013
Air Asia is all set to truly disrupt the business, models and the sector, for sure in India....perhaps its a dream come true to the Original Indian LCC propnent: Capt. Gopinath. Perhaps its a travesty of sorts for KF to look haplessely at such phenomenon. But then employees of KF may be the most exhilarated ones at the advent of Air Asia in India
Vaibhav Mathur Mar 8, 2013
Spot on! I am sure there would definitely be more articles linked to Air Asia, LCC and India.
As I had mentioned to you, discipline is much required in aviation and it has direct bearing on cost. Indigo was able to attract business customers primarily on plank of being on-time. By discipline I mean people being on time else pay for services. Air Asia has mostly self check-in kiosks and they work pretty well if a passenger is on time. Most of us do not need 3 people to issue the boarding pass ( that is currently the case). Recently some friends were travelling to Italy via London from Delhi. They were so scared of being charged for excess baggage on their London-Naples flight by Ryan Air that they actually posted some stuff. Meanwhile they were least bothered about the Delhi-London flight.
It would be great to see Air Asia operate here, I foresee culturally it fits well with the average India who wants to travel cheap, often, and not too far.
My first reaction to Ratan Tata's tweet announcing the JV was this would be a threat to railways! This again comes from first hand experience, flown Langkawi-KL for Rs. 750!
Response to Vaibhav Mathur:
Cuckoo Mar 8, 2013
Thanks Vaibhav. There is really very little difference between the FCC and the LCC products in the Indian skies today- apart from free food served by the former. The fares are very close and there's not too much difference in the inflight experience. The only concern is that Fernandes and co may not be allowed to make the changes that are necessary to bring fares down.
K A Prasanna Mar 8, 2013
The question of Air Asia disrupting the Indian aviation does not arise. Indian aviation is already in disrupted mode.
Response to K A Prasanna:
Taskforce101 Mar 10, 2013
Excellent comment.
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