Will AirAsia Disrupt Indian Aviation?
Image: Vikas Khot
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.
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.