Why Indian aviation cos are keenly watching AirAsia

Indian companies will have to tighten their belts further by bringing down rates, at least in routes where AirAsia is operating

Indian airline companies would have been more interested in listening to what Tony Fernandes, CEO of AirAsia had to say about his business plan. After listening to him most of them would have gone back to their drawing board.

For one,Tony Fernandes said that he will break even with 57-58% occupancy load with 7-8 aircrafts, that too in the first year of operation. This is unheard of in the Indian airlines sector, where passenger load of over 70% is needed to breakeven. Importantly, AirAsia intends to do so by offering lower rates.

What this means is that Indian companies will have to tighten their belts further by bringing down rates, at least in the routes where AirAsia is operating and by cutting cost drastically.

AirAsia management has said that they are hiring at the market rates, clearly signalling that it has its eyes on the cost button. It was earlier reported that AirAsia might poach on pilots from IndiGo.

AirAsia intends to start its operations from Chennai, Kochi and Bangalore and has said that it is not keen on Delhi and Mumbai initially. Most of the airlines in India have the Delhi-Mumbai route in their offerings given the high rates prevalent there and the high volume of traffic.

However, by not choosing this circuit, AirAsia has clearly signalled that it is clearly looking at efficiency and turnaround time, at least during its infancy. High traffic in Delhi and Mumbai results in longer turnaround time, which means there will be lower number of flights per day an aircraft can make.

AirAsia is one of the most efficient airlines in the world having one of the highest trips per day by an aircraft.But for its model to succeed in India,it needs relatively less crowded airports, closer distances between two airports and lower fixed costs like those charged by the smaller airports.

These factors are enough to keep Delhi and Mumbai out of its scheme of things at least for the time being, till it learns the ropes of operating in the country.

AirAsia has proven itself in terms of selection of routes. It started Trichy-Kuala Lumpur route with a single trip a day and later expanded it to three flights a day, a route which is offered by only one other Indian airline, Jet Airways. Yet Jet Airways is costlier and takes nearly 12 hours with one stop, while AirAsia does it in 4 hours with no stops. No prizes for guessing which flight has a higher occupancy rate.  

In Malaysia, AirAsia derives around 18% of its revenue from ancillary income. Ancillary income for an airline is revenue generated by charging a fee for excess baggage.AirAsia intends to allow 15 kg as free luggage.

Other Indian airlines have only recently brought their limits down to 15 kg from 20-25 kg earlier. An aircraft normally has same space above the deck as it has below the deck, utilising the space efficiently can make a big difference to the company’s profitability.

While most airlines in India are following the ‘sale and lease back’ model for owning an aircraft, AirAsia owns its aircrafts. This gives a head start to AirAsia as cost of servicing the asset goes down considerably.

For those airlines who were hoping to be picked up, Fernandes has made it clear that he prefers organic growth rather than mergers and acquisitions. In other words, he would prefer to occupy the space left over by players who would be sinking deeper in red, if AirAsia is able to successfully roll out its operations.