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Corporate Feb 22, 2013

Fare wars are here to stay: AirAsia arrival will shake up LCC mkt

By Sindhu Bhattacharya

New Delhi: Why is Tony Fernandes sounding so optimistic about the Indian market, where passenger traffic is falling amid a bruising fare war which has already seen legacy carriers and low-cost carriers (LCCs) compete for the same passenger?

From the looks of it, Fernandes who is the CEO of AirAsia, could well unleash a another fierce price war when he enters. Is he looking to bring back the days of Re 1 tickets, which Captain GR Gopinath of Deccan Aviation used to expand the domestic aviation market, but which led to his airline's demise?

Reuters

AirAsia has announced a three-way partnership to launch a new, low-cost airline in India . Reuters

In an interaction with media today, Fernandes said ticket pricing by his airline would be the crucial differentiator in the Indian market but also assured everyone that he's here to provide "fair competition ... I think irrational competition has gone out of the (Indian) market. Now there are sensible businessmen running their (aviation) business sensibly."

AirAsia has announced a three-way partnership to launch a new, low-cost airline in India where it will hold the largest equity of 49 percent, the highest permitted under Indian law. His other two partners are Tata Sons (30 percent) and Telstra Tradeplace (21 percent) and the airline will have an initial investment of $50 million.

The airline, which would be based on the low-cost, no- frills model, would launch its operations with three to four Airbus A-320 aircraft and scale up (the fleet) quickly thereafter. The airline would be based in Chennai and in the initial phase concentrate on destinations in South India, where AirAsia already operates, he said.

So how will the arrival of the newest kid on the low-cost carriers (LCC) block impact the existing airlines? LCCs operating in India - which means IndiGo, SpiceJet and GoAir - between them service 70 percent of the domestic market besides some overseas routes which are done by the first two airlines. Air India does not have a well-defined LCC strategy whereas Jet Airways moves between JetLite and what was earlier called JetKonnect, with a rather confused model.

But the might of the full-fledged LCCs is such that both Jet and Air India end up competing on fares with them. The arrival of AirAsia is sure to shake up the LCCs and they could also cede market share to the new airline if ticket prices by AirAsia indeed become a differentiator.
Top official sources said today that it was still unclear what Fernandes' strategy will be. They pointed out that AirAsia is able to offer low fares ex-Malaysia because it gets to do low-cost operations - Kuala Lumpur has a low-cost airport - and gets aviation fuel much cheaper than it would get in India.

"But in India, operations have an inherent cost structure which cannot be avoided. Like any other airline, AirAsia will have to pay landing and parking charges, other airport charges and buy costlier fuel. So costs are high in India. We are not planning to give the new airline any concession on this front. So how then will AirAsia compete on ticket prices vis-a-vis IndiGo or other LCCs? This remains to be seen," the sources said.

They said it is difficult to say if the three-way JV which AirAsia is planning would get all necessary clearances from the Ministry of Civil Aviation unless the airline makes an application for consideration of the ministry.

Besides costs, even dynamics of the Indian aviation market are expected to change significantly in the next few months if Jet's proposed equity deal with Abu Dhabi-based Etihad Airways goes through. If this happens, the combined might of Jet and Etihad could make life difficult on international routes to begin with. The impact of this alliance could also be felt on the domestic market and the biggest impact may actually be seen on operations of Air India, but other domestic carriers would not be insulated either.

The biggest impact of AirAsia's arrival could well be felt on IndiGo and SpiceJet, the two largest LCCs operating in India. IndiGo's guiding principle is lowest fares on each flight, something AirAsia is sure to compete against. Asked whether AirAsia's entry will lead to the demise of some existing airlines, Fernandes said "businesses put themselves out of business and it is not competition which puts them out. If an airline is rightly capitalised, follows the right business model and the right people are running it, there should be no problem.''

He also said the airline should become operational by the last quarter of this year after all clearances are obtained from the Indian government.

by Sindhu Bhattacharya

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