AirAsia group struggles onwards in India

Vinay Bhaskara and Devesh Agarwal

When Malaysian budget carrier AirAsia X announced last week that it would be ending service to Mumbai, Delhi, London, and Paris earlier this month, industry analysts seized on the occurrence as a repudiation of the long haul, low-cost business model.

AirAsia X, an offshoot of Southeast Asian behemoth AirAsia, operated 377 seat Airbus A330-300s to India, with 12 premium economy seats, and 365 economy seats in a bone crunching nine-abreast configurations.

Additionally, the carrier’s Bangkok based subsidiary, Thai AirAsia, announced today that it would be cutting flight levels on the Bangkok-Delhi sector from seven per week to four per week on February 14th, before cutting it entirely

The moves represent a further setback for Asia’s largest budget carrier (AirAsia Group) in India, which had cut its ambitious growth targets for the country in late 2010 by withdrawing service to numerous destinations.

AirAsia’s group presence in India now numbers just 49 weekly departures, or 98 flights per week; 84 to Kuala Lumpur, and 14 to Bangkok. This is way below their 74 weekly departures in January 2010 and, at that time, none of the group’s carriers operated to the major metros.

As a rationale for their withdrawals, AirAsia X cited both restrictive Visa policies for visits to Malaysia and for Malaysian visitors to India, as well as the recent proposed 340% increase in airport charges at Delhi International Airport.

However, we feel that this is a bit disingenuous, and that the true issue with their India service is that AirAsia is still making the same mistakes that forced its earlier round of reductions, and that the AirAsia X service is not optimized for the Indian market.

AirAsia X has fallen into the same trap that parent AirAsia did

As has played out with Jetstar Asia, Tiger Airways, Nok Air, and others, India has typically been a very difficult market for Asian low cost carriers to crack. Low cost carriers (with the notable exception of Southwest Airlines in the United States) typically do not advertise their services heavily; especially ignoring traditional forms of advertising such as newspapers, magazines, and television.

While these forms of communication and information are slowly losing favor in the west, they are resurgent in India, with newspaper and magazine circulation reaching all time highs in 2011 and India becoming the world’s third largest television market.

AirAsia’s core audience is the middle and upper class leisure traveler taking one of his or her first trips abroad and this consumer is most effectively reached through the methods listed above. AirAsia does not have the necessary brand recognition amongst average Indians to pull in passengers because they have not given themselves enough time to do so.

AirAsia may have been able to counteract this lack of brand recognition had they engaged with travel agents locally. Over 85% of non-business international travel from India is still purchased through travel agents and carriers as diverse as global powers Lufthansa and Singapore Airlines, and low cost carrier flyDubai have contracted with Indian travel agents with great success.

Meanwhile, AirAsia has continued to rely on their singular Indian call center, failing to provide re-assurance and adequate aid to travelers concerned about the wide variety of additional paperwork and hassle that goes into international travel (hotels, visa, passports, tours, insurance, et. al). Perhaps if AirAsia were to sell these flights as parts of self-marketed packages (flight, hotel, tours, maybe car included), or better yet, bring on a couple of in house travel agents (for an extra fee of course), they’d more easily be able to tap into the growing market for Indian travel to Southeast Asia.

AirAsia has also failed to adequately judge the Indian market for travel to Malaysia, especially from Delhi and Mumbai. Add to this the fact that the Malaysian government shot itself and both Malaysia Airlines and AirAsia in the collective foot, by revoking the ‘Visa-on-Arrival’ scheme for Indian travelers in 2010, preventing Malaysia from participating in the boom of Indian tourists experienced in neighbouring Thailand and Singapore, and Hong Kong. Now the governments of both countries have been playing a ‘tit-for-tat’ and increasing visa restrictions, increasing formalities, and severely discouraging travel for the average citizen.

Ethnic and VFR (visiting friends and relatives) traffic is already difficult from the Malaysian side, and is South India dominated, both by a historic immigration of Tamil population, and recently the technology workers.

Thus the flights to Mumbai and Delhi had a higher dependence on corporate and government travel to make them work. For example, Kuala Lumpur is a rapidly growing financial hub (especially for customers from the Gulf) and Mumbai is India’s financial capital. AirAsia X’s A330-300s are not ideal to serve corporate travelers, with limited premium class seating and a bone crunching nine abreast seating in economy class. Add to this the aircraft’s capacity of 377 seats will far too much low cost capacity for markets like Mumbai or Delhi which have the highest percentage of premium traffic in India thanks to corporate money and government money respectively.

AirAsia would be better served with a narrow body aircraft like their 180 seat A320s, on these routes. However, their 180 seat Airbus A320s do not have the required range to fly Kuala Lumpur-Delhi/Mumbai nonstop fully loaded (even the longer-range A319 occasionally struggles to perform. AirAsia will need some of the A320neos from their world record 200 aircraft order, to overcome this hurdle. Alternately, they can learn from IndiGo which does operate the longer Mumbai/Delhi – Singapore routes with A320s fitted with centre-line fuel tanks and some minor payload restrictions.

For Thai AirAsia, the issue was as much competition as anything. Including Thai AirAsia, the Bangkok-Delhi routes sees 7 different carriers with service. Even for a fast growing market like Bangkok, that much capacity puts significant pressure on yields and profits. Thus the rate hike by Delhi Airport management might have been the “last straw”, the marginal cost addition that pushed the flight too far into the red for Thai AirAsia to continue operating it. The same cannot be said for partner AirAsia X however.

Ultimately, the confluence of Visa issues and the recent increase in airport fees were not the deciding factor in AirAsia X’s failure, though they did serve to increase costs and depress revenues. They simply provided a convenient excuse to cut unprofitable flights, much as the recently enacted European Emissions Trading Scheme (ETS) did for their services to London and Paris. Given their recent tie-up with Malaysia Airlines, it is also likely that AirAsia X elected to leave Mumbai and Delhi services to their full service partner, which has a far more optimized product.

AirAsia will not be out of Mumbai and Delhi forever, but an “AirAsia India” would be a mistake

Despite these short term execution failures, in the long term, you we expect to see AirAsia back in these two markets within the next 5~7 years. India is still a fast growing market for travel to Malaysia, and there are only so many markets within an A320neo’s range of Malaysia before you have to consider India. Moreover, if they correct the issues catalogued above, their Indian services would become far more viable. Travel to Bangkok from India is also booming, and Thai AirAsia’s (diminished) presence in that market can help build brand recognition for the overall group.

That being said, AirAsia recently responded to the news that India’s government is strongly considering allowing Foreign Direct Investment (FDI) by foreign airlines of up to 49%. When asked about investments into the Indian airline market, an AirAsia spokesperson responded by saying,

“Yes we will look at investing in India. This is very exciting news. My personal preference will be to look at setting up a subsidiary airline in India rather than look at investing in an Indian carrier. India is a market of a billion people. When they have access it will be good for growth,.”

The concept, in and of itself, is not revolutionary. AirAsia has numerous local franchises outside of its home country of Malaysia (Thailand, Indonesia, and Vietnam to name a few), as do a few other franchises (most notably Virgin: Atlantic, America, Australia, et. al). But the broader point is that another Indian low cost carrier would most likely be unprofitable. There is ample competition in India’s low cost sphere, and despite the growth, the current rate of growth is economically unsustainable under current economic conditions.

AirAsia would face numerous challenges unique to India, such as insanely overpriced jet fuel, a convoluted airport fees scheme, ineffective governmental oversight and regulation, and poor infrastructure. IATA too has pointed out that the current situation in India is unsustainable, with economist Brian Pierce stating that, “With load factors at 75% and such weak financial condition, some sort of consolidation or exit of capacity is called for.” AirAsia would be entering into such an environment, lacking (as mentioned above) significant brand recognition, and many of the tools required to effectively compete.

That’s not to say that there are not market opportunities in India. We actually feel that in the long term, a full service carrier (with heavy international concentration) can successfully step in to fill the void that has been and will be created by the shrinkage at Kingfisher and Air India. On the other end of the spectrum, a regional carrier using turboprop aircraft could step in and offer some interesting point to point routes, perhaps replicating a portion of Vayudoot’s old network. However, AirAsia is not likely to invest in either of these products, having failed at running a turboprop carrier even in Malaysia. Thus we are highly skeptical of the potential profitability of an “AirAsia India”

Ultimately, AirAsia X was doomed by a variety of factors; the airport charges were not the deciding factors, but simply the rationale that would play most effectively in the press. AirAsia is not doomed to failure in this market however; and hopefully they will get it right with their next expansion. But attempting a local subsidiary is a path fraught with risks, and one unlikely to yield significant profits. Regardless, it is evident that the story of AirAsia in India has not yet concluded, and it will hopefully have a happier ending than the one experienced by their low cost peers from Southeast Asia

About Vinay Bhaskara

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