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First flight of AirAsia India. Plane at the gate.
First flight of AirAsia India. VT-ATF at the gate at Kempegowda International Airport. Bangalore Aviation copyrighted photo.

How the Indian airline industry is attacking AirAsia India

Over the last year, the media has covered the various challenges AirAsia India is facing. Ranging from executive level departures late in 2017 onwards, to filing a First Information Report (FIR i.e. a criminal complaint) against former officers of the airline, to CBI (Central Bureau of Investigations) investigations of its director.

In this analysis, we explore how the hyper-competitive Indian airline industry is reacting to, and taking advantage of AirAsia India’s woes.

We have used a variety of inputs including industry sources, we inform there is a minor element of speculation in this analysis.

Competitors are hiring away from AirAsia

Seeing the ongoing challenges, AirAsia India staff are exploring career opportunities with competitors.

The airline has lost “C” level executives including its chief executive, chief financial, chief commercial officer, chief pilot, and heads of other departments. Other talent is being actively approached by, or is approaching, competitors.

With India leading the world in industry growth rate of 12% – 15% for the next five years and being a key source market for international travellers , competing airlines are actively courting front line staff and the highly demanded Airbus A320 pilots and engineers. India’s largest domestic carrier and fellow A320 operator IndiGo, recently announced salary hikes for pilots, further enticing AirAsia pilots to join. Expect similar incentives from other competitors for engineering and other “in-demand” roles.

Risk of grounding AirAsia India

In our estimate, if more than 10% to 15% of the flight and engineering staff leave the airline, AirAsia India will be effectively grounded. Expats from the parent company may tide the crisis temporarily but it is an expensive proposition and with AirAsia India losing money, it is unlikely.

Attacking the AirAsia India network

Competitors are zeroing on the AirAsia India network. As of March 2018, AirAsia India had, a capacity and market share, of only four per cent. In comparison, with the same fleet size, GoAir had double the market share i.e. eight per cent, just three years back.

Apart from aligning its schedule to feed the international flights of AirAsia and Thai AirAsia, AirAsia India was targeting markets with low penetration (which could be stimulated by low fares) from its Bengaluru base.

Competing airlines are already discounting on certain routes and adding significant capacity to force AirAsia into further losses. A recent example is the massive capacity induction at Surat by IndiGo, a destination AirAsia India had started. Similarly, the Bengaluru Goa, New Delhi Kolkata, and Bengaluru Kolkata sectors, which are strong for AirAsia India are witnessing intense price competition.

Competitors are also using a tactic of “masked fare sales”. The trade (travel agent) segment is a major influencer of airline choice. Competing airlines sell seats to travel agents in bulk at heavy discounts to the trade, enticing them away from AirAsia India. This then forces AirAsia India to dilute fares in an era of rising costs. The airline is the cheapest fare on several sectors. As an example the Bengaluru Kolkata route shows a 16% difference in fare levels.

Also, thanks to the negative publicity, passenger confidence in AirAsia India is lowered. Competitors are maximising on customer apprehensions of delays and cancellations, especially in the trade segment, who then advise clients away from AirAsia India.

All this is reflected in reduced passenger load factors between two and five per cent below competing LCCs. For ultra low cost carriers like AirAsia India, this is a critical metric. This is hurting AirAsia India twice over. It is selling seats at lower fares but is yet unable to fill flights compared to competitors who are offering higher fares and getting higher loads.

Forcing losses on routes

The controversial brand licence agreement between AirAsia India and its parent AirAsia Berhad, forces significantly higher costs on the former for leases and operational expenses compared to competitors. In addition, unlike most competitors the agreement also imposes royalty payments on AirAsia India.

The higher costs of operations in an intensely competitive market is the difference between success and failure. IndiGo continues to have the lowest CASK (cost per available seat kilometre) of ₹3.19 and SpiceJet is at ₹3.60. Industry estimates put AirAsia India’s CASK on a much higher side, and this is reflected in AirAsia India’s losses of ₹70 crores for the calendar year 2017. Competitors with their lower CASK are pricing tickets at cost or marginally ahead, forcing AirAsia to match and lose money.

Slow fleet expansion weakens AirAsia India further

AirAsia India’s current fleet strength stands at 18 A320ceo (classic engine option) but further expansion is uncertain at this point.

The higher fuel burn of the A320 ceo as compared to the new engine option A320neo plays an increasing role with the current high fuel costs. CFM powered A320neos (Vistara and Air India) achieve a 10% to 12% fuel burn reduction, while Pratt & Whitney GTF powered A320neo (IndiGo and GoAir) achieve a reduction of 12% to 15%. Jet Airways too has commenced operations of the new engine Boeing 737 MAX 8. (See our exclusive MAX cabin photos).

Delay in fleet expansion is also denying AirAsia India capturing valuable slots across airports in India as all its competitors are significantly scaling up.

The delay also adds to destination operating costs. IndiGo best demonstrates by following a mantra of saturating a destination with many flights thus spreading the fairly static costs of station equipment and personnel, across more flights.

Failing to integrate domestic and international networks

Sources indicate that AirAsia group’s Indian profit strategy hinges on its ability to feed its international network and commence international operations which are far more profitable than domestic.

The delay in fleet expansion along with the current challenges are limiting the integration of AirAsia India’s and its international affiliates’ networks. This is allowing competitors to seize valuable landing slots at desired times, and even more valuable, bi-lateral rights to critical destinations.

By not reaching the threshold 20 aircraft fleet size required, AirAsia India is also denied more profitable international operations. In comparison its sister Tata promoted airline, Vistara, which started much later, has crossed this mark and is preparing for international flights. All other major Indian carriers have crossed the 20 aircraft fleet size.

Outlook

As competitors attack AirAsia India from all sides, the short-term outlook is not positive. India is far too important a market and AirAsia India has to rethink its strategy or perish.

The promoters, Tatas and AirAsia, have to rapidly devise a new strategy and immediately induct a new leadership team to implement it before it is too late.

We wish AirAsia India well and will keep you updated with further developments.

Share your thoughts

Bangalore Aviation is a site written by #avgeeks for fellow aviation enthusiasts. As usual we invite our learned readers to share their thoughts via a comment.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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