AirAsia faces red tape in India: CEO Chandilya

The AirAsia India CEO criticises the country's stringent regulatory environment for airlines

When fast-growing Malaysian carrier AirAsia wanted to expand, India seemed the ideal frontier. The country had hundreds of millions of potential first-time fliers, many in second- and third-tier cities with only a few flights a day. With one-way airfares low, AirAsia aimed to capture huge chunks of tourism and holiday traffic from India's iconic but achingly slow trains.

Then, it discovered the difficulties of doing business in India. While it benefited from a recent loosening of restrictions on foreign investment in airlines, AirAsia India has had to contend with a web of red tape and regulations for new entrants, which have added significant cost and complexity to its operations. Competition has also proved fierce, and persistent price wars cut deeply into profits.

Mittu Chandilya, chief executive of AirAsia India, acknowledges he misjudged India's regulatory environment, which is uniquely stringent for airlines. Taxes on aviation turbines are higher than almost anywhere else in the world. Every airline, even those with just a few planes, has to fly regularly to remote regions, where flights often run half full. And, entrants such as AirAsia India are prohibited from flying lucrative international routes until they are five years old and have at least 20 aircraft (5/20 rule).

"I believe in free markets and open skies, but if you look at the policies we have in place, I don't think we have that at all," Chandilya said.

AirAsia also had to go head-to-head with IndiGo. One of the first budget carriers to start in India, IndiGo, with a reputation for punctuality, commands about 40 per cent of the market, according to government data. It's one of the few Indian airlines that has been consistently profitable. On each new route opened by AirAsia India, IndiGo has followed, setting off a price war. With price wars taking their toll, Chandilya has been making the rounds in India's ministries, pushing for reforms that would help him cut costs, such lowering the tax on aviation turbine fuel (ATF). Each state controls its own taxes on ATF; in many places, it is as high as 30 per cent. More than half of AirAsia India's operating costs are fuel-related.

"I talk to ministers and policy makers about how they can help the industry and promote growth, but it is very difficult to get them to understand that reducing these taxes will probably boost their states' economies," Chandilya said. "The ministries aren't coordinating with each other - they only have their own interests in mind."

After its first year in operation, AirAsia India accounts for just one per cent of the country's domestic passenger market, and the carrier is retooling its strategy. While initially focusing mainly on smaller, underserved cities in south India, it has now started flying routes from the national capital.

"We realised we need to be more visible, both to fliers and to policy makers," said Chandilya. "Flying to Delhi will simply give more people a chance to experience our product."

"To continue their rapid growth, they have been trying to diversify their portfolio," said Brendan Sobie, an analyst in Singapore for Centre for Asia Pacific Aviation. "These new joint ventures are in significantly more challenging markets, because AirAsia won't have the first-mover advantage it had elsewhere."

AirAsia left Japan in 2013, after an impasse over strategy with its joint venture partner All Nippon Airways. Most recently, the carrier's struggling offshoots have been prompting concern. In June, GMT Research, a firm based in Hong Kong, raised questions about AirAsia's accounting, accusing the carrier of "flattering its cash flow by abusing its associates". The report led to a sharp drop in the carrier's stock.

Soon, the company readied plans to raise capital and inject money into its associated airlines in Indonesia and the Philippines. In a statement to the stock market, it denied the GMT accusations.

The plan for the Indian subsidiary was hatched in 2013, when Chandilya was working as an airline consultant in Malaysia. There, he met Tony Fernandes, founder of AirAsia. "Tony and I had what couldn't have been more than a 20-minute meeting, but we hit it off immediately," said Chandilya, 34. "He said, 'Look, I think we can make the best and the biggest airline in India. I need you to create the vision.'"

Chandilya studied a dozen Indian airlines, some that had failed, and others he would be competing against. "I wanted to understand the industry myself," he said. "I wanted to grasp the prices and regulatory schemes through and through."

He settled on a bare-bones model, similar to that of its parent, that keeps fares as low as possible. He also decided to avoid the two biggest metro areas, New Delhi and Mumbai; both charge high landing fees and the route between the two is heavily saturated.

India's civil aviation ministry has proposed to ease the 5/20 rule. Under the proposed revision, new airlines will earn 'domestic flight credits' by flying to underserved regions, which can be spent on rights to fly internationally, or even sold to other airlines hoping to make that move more quickly.

While it is a step in the right direction, Chandilya figures it would take his airline at least three years and 15 aircraft to garner enough credits.

"It's antiquated, oligopolistic laws like these that make India's 'ease of doing business' ranking a lowly 142 out of 189 countries," said Amber Dubey, who oversees India's airline sector for KPMG.

In the meantime, AirAsia India is trying to make itself more visible. Advertisements for the airline now cover dozens of billboards across New Delhi. "When our first plane landed there, I made sure we could park it right between two of IndiGo's planes," Chandilya said. "I wanted their passengers to see us. We're taking on the big dog. We're now inside IndiGo's fort."

©2015 The New York Times News Service