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AirAsia India to launch on 12-Jun-2014. The LCC's greatest test or its most lucrative opportunity?

AirAsia India has announced it will launch service on 12-Jun-2014. in this extract from the CAPA India Aviation Outlook Report 2014/15 we review the challenges and opportunities for the airline in this potentially massive market.  

The short notice startup in AirAsia's joint venture - including 30% shareholder Tata - has surprised competitors and could gain the airline the advantage of the early mover.

AirAsia's experience across the region could well lead to the introduction of new norms into the Indian market; but speedy introduction of changes to the 5 year/20 aircraft rule will be necessary to securing the success of the airline in the medium term.

CAPA's comprehensive 300-page India Aviation Outlook Report will be released on 15-Jun-2014. The Outlook includes CAPA's projections for traffic, capacity, yields and earnings and presents fleet induction plans, detailed operating and financial analysis, risk assessment of each Indian airlines and a review of prospective new entrants. The Outlook also outlines domestic and international plans, including expected bilateral developments.

Advance purchase discounts are available. Please contact Vishal Bhadola on capaindia@centreforaviation.com to order, or for more information.

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AirAsia India is the first start-up JV involving a foreign carrier to receive a licence in India in more than 20 years

When Jet Airways launched as an air taxi operator in May-1993 it was backed by foreign carriers. Gulf Air and Kuwait Airways equally shared a 40% stake in the fledgling airline, the maximum foreign direct investment permitted at the time. This strategic investment undoubtedly provided Jet Airways with a number of benefits including access to expertise and international feed, as well as the ability to wet lease aircraft when required.

However, in 1996 the Government of India declared that foreign airline shareholdings were not in the interests of India’s aviation sector and would no longer be permitted. Ostensibly this was because private carriers were still relatively small and the concern was that foreign airlines would control their development in such a way as to feed their offshore hubs, relegating the Indian carrier to the status of a regional carrier. But in reality it was a move designed to thwart the ambitions of the Tata Group and Singapore Airlines to jointly launch a domestic carrier in India.

This decision in 1996 was a reflection of the negative role played by vested interests in India’s regulatory framework. The industry paid a high price because it prevented the entry of strategic investors with expertise that could have supported the development of a more corporatised and professional sector.

In Sep-2012 the government finally overturned this restriction and allowed foreign airlines to invest up to 49% in Indian carriers. Six months later AirAsia was the first airline to respond to the opportunity and announced plans to establish a start-up JV LCC to operate under the brand AirAsia India. AirAsia was to hold the largest share at 49%, while two Indian partners, Tata Sons (30%) and Telestra Tradeplace (21%) would hold the balance.

The regulatory challenges faced by AirAsia India were in line with CAPA’s expectations; and reminiscent of the obstacles faced by Tata-SIA in 1996

When the JV was announced in Feb-2013 CAPA welcomed AirAsia’s decision and the involvement of Tata Sons, but cautioned that the process of obtaining regulatory approvals would be very challenging. That has certainly been the case.

A very speedy clearance by the Foreign Investment Promotion Board, just over two weeks after the venture was announced, raised hopes about the possibility of a launch date some time between October and December 2013. But the review of AirAsia’s license application faced unprecedented rigour. It took an unusually long 14 months to clear the Ministry of Civil Aviation and receive an Air Operator’s Permit, which was finally issued in May-2014.

The regulator’s process for reviewing the airline’s application for an AOP included some unexpected steps. In Jan-2014 the DGCA announced a 30 day period calling for any public objections to the planned launch of AirAsia India. This was done under Schedule XI of the Aircraft Rules Act of 1937 (updated 1965) but this is understood to have been the first time that this process has been followed. It is particularly unusual for this to occur at the AOP stage which should primarily be a review of the carrier’s technical preparedness. Any public representations should normally have been raised at the earlier No Objection Certificate stage. Air Costa, the last airline to receive a license did not face this step.

This diversion from the standard process and the extended delays in the award of a licence to AirAsia India are reflective of the unpredictability and lack of transparency in India’s regulatory framework, which continues to be the greatest strategic challenge in the market.

It has been a tough journey for AirAsia with Group CEO, Tony Fernandes in an interview with Economic Times in Mar-2014 stating that “I have never experienced this in my life, where the entire aviation industry has tried to block us”.

Regulatory scrutiny was primarily focussed on whether the government intended to allow foreign airline investment in start-ups, and on the issue of ownership and control

The two central issues that almost prevented AirAsia India from securing a licence were firstly, whether foreign airline investment was permitted in start-up airlines and secondly, the question of ownership and control. Dr Subramaniam Swamy and the Federation of Indian Airlines were the key protagonists.

When the government gave the green light to foreign investment it was stated that the aim was to encourage the infusion of capital into India’s heavily indebted incumbent airlines to support their recovery. There was ambiguity in the Department of Industrial Policy and Promotion’s note to the Cabinet as to whether investment was also permitted in start-up airlines. The issue was debated at the FIPB meeting in Mar-2013 and the quick foreign investment approval granted to AirAsia India appeared to provide clarity in favour of greenfield carriers on this issue. However the legal challengers argued that at the time that the Cabinet decided in favour of foreign airline investment, the Ministry had expressly stated that the intention was not to award licences to start-ups.

The other major issue of contention was that of ownership and control. While AirAsia’s equity stake of 49% is compliant with the foreign investment cap, and Indian investors hold 51%, Mr Swamy alleged that the airline would be controlled by AirAsia. He stated that while AirAsia is a minority shareholder, it is the single largest shareholder and has other business relationships with Telestra Tradeplace such that they may act in concert.

And despite Tata Sons holding the Chairman’s role in AirAsia India and being the largest Indian shareholder, they have largely come across as silent investors. Apart from initial meetings with the Minister of Civil Aviation when the venture was first announced, neither Tata Sons nor Telestra Tradeplace have been very visible and the perception was created that AirAsia was the prime mover of the airline.

For these reasons AirAsia India’s application was subjected to the highest levels of regulatory scrutiny. Although further challenges may still arise, now that the DGCA has issued an AOP, we do not expect them to have an impact on the airline’s operations.

Delays to the award of airline licences due to questions about ownership and control issues are however not unique to India, and in that sense it is not surprising that legal challenges were raised.Virgin America’s licence was held-up for a couple of years due to concerns that it was controlled by foreign interests by way of the 25% equity held by Richard Branson’s Virgin Group. Meanwhile Jetstar is facing challenges to the establishment of its Hong Kong franchise in which it holds one third of the equity, with Cathay Pacific contesting the licence application arguing that the airline will be controlled from Australia.

AirAsia India announces launch date of 12-June-2014; a tactical surprise that may catch the competition off guard

The timing of the award of the AOP on 7-May-2014 meant that AirAsia missed the opportunity to take advantage of much of the summer holiday peak season which occurs during the months of May and June.

Launching during the monsoon in July and August is not ideal both for commercial and operational reasons. It is traditionally the weakest period for travel demand and is prone to weather-related disruptions to operations, which can be challenging for a new airline trying to bed down its processes.

That left AirAsia with two options. To launch as soon as possible in Jun-2014, or wait for the monsoon to clear and commence services in Sep-2014, in time for the next peak travel period which occurs during the festival season between September and December.

A September launch would have allowed the airline to use the time until then to focus on strengthening its preparations, particularly in areas such as distribution, recruitment and training of additional staff, logistics preparations such as securing slots, and promotion of its network and schedules, all of which will be key to its success. And perhaps more importantly greater clarity will emerge by then on the policy direction of the new government, particularly on the critical 5 year/20 aircraft rule.  

Instead AirAsia India announced with just two weeks notice that the first flight will depart on 12-Jun-2014. This tactical surprise may have caught the competition off guard as they were expecting a later date. AirAsia must have concluded that having had a longer than scheduled pre-ops period and with an aircraft sitting idle on the ground they were ready to go. During the initial phase, operations are expected to be modest in scale with just one or two aircraft as the carrier tests the waters.

Competition will be aggressive; Indian carriers have a track record of engaging in unsustainable fare discounting and an unusual willingness to bear losses

AirAsia may have under-estimated the capacity of Indian carriers to pursue irrational pricing. The incumbents have shown a regular tendency to discount heavily to generate cash, gain market share, fill excess capacity or simply to respond to competition.

This is also a market in which full service carriers offer fares similar to LCCs, and sometimes lower. Airlines continue to price below cost despite their huge accumulated losses and weak balance sheets. It is very difficult to operate in a market in which your competitors seem to have an almost insatiable appetite to lose money. Over the last seven years Indian carriers have lost a combined INR594 billion (USD10.1 billion), or an average of USD22 every time a passenger boards an aircraft.

Indian Airline Industry Revenue and Profitability FY2008-2014E


Financial Year

Total Revenue

(INR bn)

Net Profit/(Loss)

(INR bn)

Profit/(Loss) per Pax (INR)

FY2008

327.1

(46.5)

(869)

FY2009

376.7

(90.7)

(1,832)

FY2010

372.7

(71.0)

(1,247)

FY2011

445.9

(72.0)

(1,076)

FY2012

496.3

(126.3)

(1,677)

FY2013

539.7

(100.9)

(1,411)

FY2014E

600.0*

(86.2)*

(1,134)*

The carrier’s start-up capital of USD30 million is likely to be conservative given the extended pre-ops phase and the competitive dynamics of the Indian market

The promoters committed to provide USD30 million of start-up capital for the Indian operation. We estimate that close to USD10 million has been spent to date on pre-operational expenditure. Salaries are one of the largest cost items as the airline has approximately 250-300 staff on its payroll, including pilots and engineers.

Given the high cost environment and intense competitive dynamics in the market, AirAsia’s remaining capital of USD20 million may be too conservative, especially if the carrier seeks to achieve its target fleet size of around 30-35 aircraft within five years. And the decision to launch during the weakest quarter is also likely to result in further cash burn during the first three months.

With Tata Sons having stated that they will not infuse any further equity above the USD9 million already committed, the remaining shareholders will need to identify other sources of long term funding should additional capital be required.

AirAsia’s experience in yield management is likely to see it focus on developing advance purchase sales which will be positive for cash flow. However, the carrier may need to look at generating liquidity from sale-and-leaseback transactions in the early stages even though it has indicated that it does not plan to do so in India.

The discounting triggered by AirAsia's entry will create problems for some of the incumbent carriers

The intense competition which is expected to greet AirAsia’s entry will increase financial challenges for all operators and place great pressure on some of the incumbent carriers which are struggling and whose holding power may be tested. Jet Airways and SpiceJet posted record losses in FY2014 and the industry as a whole is expected to report a combined full-year loss of approximately USD1.5 billion.

India’s carriers combined have cash on hand of around just USD500 million on annual industry revenue of close to USD10 billion. Some carriers are in a precarious state, with cash balances equivalent to less than one day’s revenue.

The carrier’s base and network strategy continues to evolve; the first hub will probably be Bengaluru rather than Chennai

AirAsia had originally announced Chennai as its initial base with plans to focus on routes to non-metro airports with limited competition. The company’s senior management has been stationed in Chennai during pre-ops as is its first aircraft. Chennai has great potential as a travel market with a strong economy and diverse drivers of traffic including VFR, leisure and business. AirAsia Malaysia already operates twice daily service to Chennai from Kuala Lumpur.

However, we expect that the first hub will be switched to Bengaluru which is an attractive market. It is a large, cosmopolitan city, with a strong corporate traffic base, and a young, tech-savvy demographic that is well aligned with AirAsia’s positioning. The private airport operator at Bengaluru is more likely to be willing to work together with AirAsia and accommodate its requirements than the AAI at Chennai. 

The likelihood that the state government will reduce sales taxation on ATF at Bengaluru from 28% down to 16% and possibly even 12%, compared with 29% at Chennai, is likely to have been another factor. And with a major terminal expansion having just been completed in Dec-2013 the airport has both spare terminal and runway capacity, whereas Chennai faces airside congestion. 

In convincing AirAsia to establish its hub at Bengaluru the operator has beaten off strong competition from other airports in South India. This switch should also serve as a wake-up call to the AAI that it does not have the appropriate commercial skills to compete for airline services.

We also expect a revision to the earlier stated position of concentrating on under-served or virgin routes. Market research is likely to have revealed that there may be a limited number of such city pairs that can sustain daily or higher frequency narrow body services.

The recent statement that the airline will operate to Delhi (although perhaps not in the first phase), despite earlier ruling it out as being too expensive, is in line with CAPA’s expectations that AirAsia would have to connect the capital if it had ambitions of being a pan-India carrier. In due course, and subject to slot availability, we do not rule out the possibility of AirAsia operating to Mumbai.

The actual network that the airline operates may be very different to that which was stated in its licence application. From a competitive perspective that is a wise strategy as submissions to the regulator are notoriously prone to being leaked.

If implemented, the proposed new Route Dispersal Guidelines will be yet another handicap for all carriers except Air India

India’s regulatory framework includes mandatory Route Dispersal Guidelines (RDG) for scheduled carriers, designed to encourage air connectivity to remote and less developed regions of the country. Under the current regulations airlines have to operate the equivalent of 10% of the ASKs deployed on certain designated trunk routes, to such regions. In the early stages, with a fleet of just 1-2 aircraft, AirAsia will likely be able to remain off the major trunk routes in order to avoid any remote route obligations.

However, under the new proposal raised by the Ministry a few months ago - but yet to be implemented - airlines would need to operate 6% of their total domestic ASKs (and not just their trunk route capacity) to remote regions. The definition of remote regions has also been narrowed making some of the relatively more attractive destinations ineligible.

This will be a challenge for most carriers other than Air India, but could particularly impact AirAsia during the early stages because a small fleet allows for less operational flexibility. In addition, if AirAsia operates a South India focused network as it has indicated, this places it at a disadvantage in terms of accessing some of the remote regions with the greatest traffic potential which are located in the North and North East of the country. Within the southern region there are just two airports which qualify under the RDG, Port Blair (which has a viable market) and Agatti (which is too small to accommodate AirAsia’s narrow body aircraft).  

The RDG will be subject to review by the new government and could be revised. However, if implemented as proposed they may force a restructuring of AirAsia’s network plan.

AirAsia’s proposed pricing strategy is unlikely to allow the carrier to achieve break even within 4 months as targeted

AirAsia has indicated that it will offer pricing that is consistently 30% lower than the incumbent airlines, a proposition which was designed to generate media attention. But at this stage it is difficult to read too much into such statements, as we have not yet seen the fares.

Based on the established behaviour of the incumbent carriers the competition will respond aggressively to AirAsia's entry with tactical fares intended to erode any price advantage that it plans to offer with the intention of presenting AirAsia's proposition of a 30% differential as a myth. SpiceJet has already introduced special discounts in response to AirAsia's announcement of its launch. In the ensuing low fare, high cost environment, it would be remarkable if the start-up was able to meet its target of achieving break-even within four months of launch.

With the strategic pricing that is expected to greet AirAsia's arrival it will be a case of which airlines can sustain these levels. In such scenarios the lowest cost - or deepest pocket - wins

The question that remains to be answered is whether AirAsia can achieve a sustainable and significant cost differential from its competitors. There are likely to be certain areas where AirAsia could generate cost advantages, but it is difficult to see how it can develop a transformational business model that will allow it to reduce costs by up to 30%.

Given the very high prevailing tax rates and the weak Rupee, fuel accounts for close to 50% of the operating costs of Indian carriers. There is little room to move on this front. Any savings therefore will have to be generated from the non-fuel costs.

Seat density is an important driver of costs, but AirAsia will have no more seats than India’s LCCs on an equivalent aircraft. IndiGo and GoAir are both configured with 180 seats on their A320s.

Airport charges across the country have also been increasing in recent years, in some cases steeply. And while AirAsia may have been able to negotiate attractive packages from airports in other parts of Asia in order to incentivise services, this may be more difficult in India.

The state-owned Airports Authority of India, which manages more than 90% of the operational airports in the country, is not permitted to extend preferential charges to one airline over another, nor does it pursue a commercial strategy of proactive air services development.

Meanwhile private airports, which account for the majority of traffic in the country, are able to offer incentives, however such concessions are to be adjusted against their permissible rate of return as fixed by the regulator. And it will be difficult for them to offer preferential rates to what at this stage is a relatively small start-up.

AirAsia is however likely to benefit from lower aircraft ownership costs due to the competitive pricing that the airline would have received from Airbus at a Group level given its combined in-service fleet and order book of more than 550 aircraft. And the carrier has indicated that it does not plan to engage in sale-and-leaseback transactions for its initial aircraft transactions in India which should provide it with a further advantage. This financing structure is widely used by Indian carriers and tends to increase the average lease rate.

AirAsia India is also likely to target some savings from a greater focus on direct distribution and efficient work practices, as well as from economies derived from shared services at a Group level (e.g. maintenance and training). But as valuable as any reduction in cost is, the magnitude of these savings is unlikely to be sufficient to drive a downward step-change in the cost structure.

That leaves one major lever, namely aircraft utilisation. AirAsia is reportedly aiming for average utilisation rate of 16 hours per day. This compares with a maximum of around 11-12 hours being achieved by the leading performers in India at present. But it would also be significantly higher than the 12.1 hours being achieved by AirAsia in the ASEAN region. Best practice utilisation globally for a narrow body operation is around 13+ hours so this target is very ambitious; in India 12-13 hours is likely to be the structural maximum for a domestic operation.

Without a significantly higher aircraft utilisation rate it is difficult to see how AirAsia India can achieve a competitive cost advantage over IndiGo, which is the market leader at present.

AirAsia India's reported operating targets appear optimistic in the Indian environment; but if 16 hours utilisation and 20 minute turnarounds are achieved it will set a game-changing benchmark

For a purely domestic Indian network a daily utilisation target of 16 hours appears unachievable. Even with 20 minute turnarounds – which would be tough - with few domestic sectors being longer than two block hours, this would require aircraft to be operating a schedule of close to 20 hours a day. That would mean domestic flights arriving and departing in the early hours of the morning.

Red eye domestic services have not been successful in the past in the Indian market except on a couple of routes such as Mumbai-Delhi and Bengaluru-Mumbai, and that too primarily to connect with international flights. Sufficiently low fares might stimulate traffic to some extent but unlikely to the level required to support such sustained high levels of utilisation across the entire fleet. It might be possible with 1-2 aircraft but it will be difficult to maintain this as the fleet expands as there is not enough demand for night time flights.

Similarly, 20 minute turnarounds are very ambitious in the Indian airport environment. Whilst it is possible to achieve that at non-metro stations, it would be very challenging at the larger metro airports, especially if Delhi is included in the network, given airside congestion issues. There may also be problems associated with securing slots at the precise required times.

However, if AirAsia is successful it will set a game-changing precedent which will force other carriers to re-look at their processes to see if it is possible, particularly 20 minute turnarounds at metro airports.

Abolition of the 5 year/20 aircraft rule will therefore be critical for AirAsia: the scalability of their operations is dependent upon it

The only way that AirAsia could conceivably achieve utilisation rates approaching 16 hours would be by operating back-of-the-clock international services to the Gulf and Southeast Asia. However, it may be difficult to structure a network that can support such rates across an ever expanding fleet. But if it can be done, AirAsia will establish a new benchmark and will have continued their tradition of re-writing airline business models.

Current regulations in India prohibit start-up airlines from launching international routes until they have completed five years of domestic operations and grown to a fleet size of 20 aircraft.

Regional international services on sectors up to four hours are a natural – indeed necessary – next step for AirAsia. In due course long haul LCC operations could also have very strong potential. AirAsia X has found that sectors of up to eight hours have worked best for its model. From India such a range would encompass most of Europe and Asia.

Management strength may need to be reviewed to induct greater operational expertise; a proven COO is key

The structure of the senior management team at AirAsia may need to be reviewed. In particular, given the importance of high utilisation and fast turnarounds to the cost base and business model, the carrier may require an experienced COO. At present the CEO wears a dual hat which includes responsibility for operations. He comes from a non-aviation background, which can be very positive for out-of-the-box thinking when it comes to leadership and strategic issues. However, in order to achieve the very ambitious operational benchmarks that are necessary for the business to succeed, proven expertise is required for the COO role.

Establishing operational excellence is never easy. But it is particularly challenging given the constraints inherent in the Indian environment. India’s airports, airspace and suppliers are not yet set-up to support the highly efficient, fast-moving and responsive operation that AirAsia India seeks to be. They can and will learn over time, but it may require an experienced, specialist COO to drive change and to maximise what is possible in the interim given the ground realities.

The Chief Commercial Officer role is also very complex as it encompasses critical elements of the business such as network planning, pricing, revenue management and distribution. This will require a specialist CCO unless the core of these functions will be conducted at a Group level. Apart from the C-level positions, the key will be to recruit staff with sufficient skills and experience in the supporting roles below them.

Tata Group is unlikely to continue as a shareholder in both AirAsia India and in a JV with Singapore Airlines

The Tata Group is a 30% shareholder in AirAsia, but six months after the venture was announced, in a surprise move it announced that it was also taking a majority 51% stake in a JV with Singapore Airlines to establish a full service airline. There has also been some speculation that the Tata Group would be interested in taking a stake in Air India (an airline which they originally founded in 1932 and ran until it was nationalised in 1953) should the government consider privatisation.

Initially it was argued that AirAsia and Tata-SIA would pursue two distinct business models serving different markets and hence there was no conflict. The Tata Group it was stated are very familiar with segmentation, operating high-end brands alongside low cost ones in other industries such as cars and hotels.

But there is increasingly limited price and product differentiation between FSCs and LCCs in India, and more recently there appears to be an acknowledgement by the promoters that some cannibalisation between the two carriers is inevitable. It therefore remains to be seen whether the Tatas will continue their involvement with both ventures. Should they decide to exit, as is possible, AirAsia India could lose some important leverage given the positive relationship that Tata Sons enjoys with the newly-elected Prime Minister.

AirAsia has the potential to introduce innovation in network development, marketing, commercial strategy and work practices, which could rub off on other airlines

India has not seen a serious new entrant to the airline market in eight years. Much of this period has been characterised by huge losses and a challenging operating environment and these difficult conditions appear to have curtailed innovation rather than stimulating it.

AirAsia has the potential to reinvigorate the sector provided that it is willing to experiment as it has in other markets with new routes, products, pricing, distribution channels and revenue streams. However to realise value from such initiatives may take some time in India.

AirAsia could lead the way in tapping into ancillary revenue streams and show the other carriers how it's done

Ancillaries remain at a nascent stage in India. Other carriers have tread relatively softly in transitioning to unbundling, afraid perhaps to make the first move. They would be keen to see AirAsia remove the free baggage allowance on the cheapest fares (LCCs currently offer 15kg) so that they can follow suit. Establishing zero baggage allowance as the norm will re-set the ancillary potential in India to a new level.

Strong ancillary revenues will be necessary to support a low base fare pricing strategy. CAPA estimates that there is potential for carriers to generate an additional USD500 million per annum through this channel to be developed over the next two years. However it may take some time to grow these given that it will involve driving behavioural change amongst passengers.

Yield management, distribution and work practices will be areas where AirAsia could differentiate itself so that is not just yet another airline in India

Indian carriers have not been successful with yield management. Fares often decline as the day of departure approaches. Airlines have inadvertently encouraged passengers to adopt a late booking profile. AirAsia will need to bring a new dynamism to advance purchase fares to encourage early booking.

Online travel agents have become the dominant channel in the domestic market, accounting for more than 50% of LCC sales. While AirAsia will need to work selectively with online and offline agents, CAPA expects that it will seek to retain greater power over its distribution by placing a strong emphasis on direct sales via its website rather than being captive to third parties. This will require strategic use of traditional and social media to develop effective marketing and promotional campaigns.

Work practices may also come under review, including multi-skilling of staff to improve efficiencies and the questioning of perquisites such as chauffeur-driven transfers for pilots and crew which other airlines tend to offer.

AirAsia's characteristic approach of pushing the envelope may encounter some resistance at first, but is ultimately likely to benefit the entire industry

Another, less tangible but extremely important characteristic which AirAsia can bring is that of intellectual honesty in dealings with government. In a heavily regulated market such as India, where the government has an active role in the industry, airlines have often been reluctant to speak out against regulatory distortions to avoid any impact on their own business.

In other markets across the region AirAsia has not shied away from highlighting pointless or discriminatory regulations. And often, through persistence, it has succeeded in having them overturned. Such an approach does not always go down well in India and at first AirAsia may be a lone voice. But over time it may give other stakeholders the courage to voice their opinions and if that happens it will benefit the entire industry.

India undeniably represents a huge opportunity for AirAsia, but it may also be its greatest test

India has been both a field of dreams and a long night of nightmares for many. The Indian market may yet provide AirAsia with its greatest test, but the opportunities are probably also the greatest of any.

The sector is subject to numerous policy, regulatory, fiscal and operational constraints that hinder its viability. This is compounded by the fact that market actors include a national carrier whose commercial decisions are not limited by a bottom line, and several private carriers that seem unusually willing to bear losses. To compete effectively AirAsia India may need to increase its war chest and strengthen its management ranks.

AirAsia Group is currently reviewing its growth rate amid intense competition across the ASEAN region; this has led to a decision to defer some aircraft deliveries for the next 4-5 years. Their financial performance has been challenged in all of their markets. In 1Q2014 it reported a sharp drop in profits at its Malaysian and Thai subsidiaries, a swing to a loss in Indonesia and at AirAsiaX, and widening losses in the Philippines. With issues to attend to across the region the challenges associated with starting up in India have the potential to become a distraction.

Recent statements that AirAsia only intends to ‘dip its toes’ in India to begin with may be an acknowledgement of the difficulties in the market. A slower ramp up may be sensible to preserve cash, although it is difficult to make much impact with the proposed two aircraft operation. If the government does abolish the 5 year/20 aircraft rule, the urge to ramp up operations will be strong.

With a new government now in place, AirAsia is entering India at a time of renewed confidence in the prospects for a resurgence in economic growth. A market of 1.25 billion people with increasing aspirations and ability to travel is one that cannot be ignored. In this context the carrier’s entry is an exciting development which will be welcomed by passengers in particular.

If AirAsia India can meet its targets for 16 hours utilisation and 20 minute turnarounds, combined with aggressive performance on ancillaries and yield management, and the introduction of more efficient work practices, it will set a new paradigm for airline operations in India.

At the very least, the act of striving for these ambitious targets, even if not met, will push the sector to perform better. This has the potential to deliver wide-reaching benefits not only for its own bottom line but for consumers and the industry overall.

CAPA's India Aviation Outlook Report will include a review of the business models and strategic plans of all Indian airlines; comprehensive financial and operating analysis: assessment of network strategies; fleet plans and orders; sources of capital; and risk assessments. Please contact Vishal Bhadola on capaindia@centreforaviation.com to order or for more information.

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