Entry of AirAsia

India & You

July-August 2014

For consumers, entry of AirAsia with low fares is a victory, which has made air travel better than train affordable once again

AirAsia, which has entered the Indian skies with an aim to become the cheapest airline in the subcontinent, has induced a fresh dose of competition into the domestic aviation market at a time when the industry is reeling under severe financial pressure, thanks to the low fares. Leading low-cost carriers IndiGo and SpiceJet reacted immediately by cutting prices, leading to another price war in the Indian skies.

We still remember, a decade ago return flights from Delhi to Mumbai were available for less than Rs 4,000 (50 euros) on budget carriers such as Indigo; these are now thrice as much. The budget carriers were really good options as the fares were very competitive compared to full service carriers like Kingfisher, Jet Airways and Air India. However, the distinction between a budget and a full service carrier has almost disappeared over the years. Another reason why the budget players flourished is because some airlines including Kingfisher shut down due to huge losses. This enabled the budget airlines to occupy the space.

Now, the budget airlines themselves face a challenge – the entry of AirAsia, the largest budget airline in Asia. Tony Fernandes, CEO, AirAsia said, “We have carefully evaluated developments in India over the past few years and strongly believe that the current environment is perfect to introduce AirAsia’s low fares which stimulate travel and grow the market.”

AirAsia has started operation in a few cities in southern India, including Goa, Bangalore and Chennai and at very low prices, in many cases much cheaper than the Indian budget airlines. This has forced the others to follow suite and lower their prices as well. For the consumers, it is a victory as the ticket prices have reached unprecedented levels, making a Delhi-Mumbai ticket as expensive as a Delhi-Singapore one, for instance. “This will make air travel a little better. Getting a ticket on trains is becoming harder by the day, flights become an easy way to travel,” said Siddharth, an entrepreneur from Delhi.

When dogfight intensifies….

The entry of AirAsia India has brought back the memories of the earlier price war which had happened more than a decade ago. Just a few hours before Air Deccan, India’s first low-fare carrier, was to launch its Mumbai-Ahmedabad flights with a fare of Rs 1,500, national carrier Air India slashed its own fare on that route to Rs 1,400, down from Rs 4,000. A few months later, both Air India and Jet Airways, then the market leader, dropped fares by a third after Air Deccan introduced Rs 4,000 round fares on its new Delhi-Srinagar flight.

Both Jet and Air India were selling at a huge discount: thousands of rupees below their per seat cost. But the strategy was simple: slash prices to keep your share of passengers. Market share first, margins and bottomlines later. Not much has changed since then.

Just a day before AirAsia India launched its services, SpiceJet offered fares of Rs 1,499 on Bangalore-Goa and Bangalore- Chennai, the Malaysian carrier’s planned maiden India sectors. AirAsia pulled out all stops. It offered one-way prices of Rs 990 all inclusive on its routes and later topped it with a Rs 5 base fare promotional tickets. IndiGo followed AirAsia with a Re 1 base fare on flights on the Bangalore-Chennai and Bangalore-Goa sectors. These fares could impact margins. SpiceJet posted record losses of Rs 10.03 billion in the year ended March 31. Air India has quietly been following the fare cuts. Jet, which hasn’t been as aggressive has steadily lost market share this year, declining from 19.9 per cent in January to 17.1 per cent in May.

AirAsia v/s IndiGo

The biggest competitor for the Malaysian carrier is market leader, IndiGo, which holds 30 per cent share in the domestic aviation market. The simmering tension between AirAsia and IndiGo was out in the open when Tony Fernandes tweeted: “Whatever IndiGo tries to do to stop us, it just makes us stronger and smarter.”

Market leader IndiGo is also the biggest competitor of AirAsia in India

“IndiGo is the biggest airline in India; AirAsia is one of the most successful low-cost carriers in the world. The former is the only airline to have cracked the code to profits in India’s tough operating environment; the latter has made a global habit of taking on carriers twice its size on their home turfs,” Amber Dubey, partner and head (aerospace and defence), KPMG India said. Both are genuine low-cost operators, with a track record of keeping their planes almost continuously in the air and their point-to-point network. Yet, there is a key difference that might hurt IndiGo’s dominance in the Indian skies. AirAsia is renowned for its cut-price fares, whereas IndiGo’s fares have been anything but low in recent months: it charges more than even a full-service airlines such as Jet Airways on many routes.

SpiceJet too in the battlefield

Another airline in the war field is SpiceJet, which has cut ticket prices for the peak travel season – from September to December – to induce travellers to book tickets in advance. “However the period between October and December is the holiday period which sees a spurt in travel and loads for airlines. Cutting fares for that season shows airlines are expecting unutilised capacity,” said an aviation expert from Bangalore.

After AirAsia, budget airlines such as Tiger Airways and a few gulf carriers are also looking at India as a lucrative market to expand business. The challenge and way ahead for Indian players seems slightly tough. They need to wake up and smell the reality. They are not alone anymore and with relaxed norms in India for multi-nationals they can lose a lot of business if they are not ready.