Tony Fernandes, AirAsia’s media-savvy boss, knows how to market his airline.
Last week, when Fernandes, 49, came for a five-day tour of India, he gave quotable bytes at press conferences in various cities, paraded his handsome India CEO, Mittu Chandilya, and even tweeted a picture of his low-profile Indian partner, Ratan Tata, on the pilot’s seat to fly him to Delhi!
Serious business was conducted too.
While in Delhi, Fernandes and friends met top government functionaries, including Civil Aviation Minister Ajit Singh.
He also, for the first time, articulated his strategy in India which involves a frontal attack on rivals.
Fernandes said that Indian low-cost carriers aren’t really offering low-cost fares and he’ll do all it takes to get those people to fly who can’t afford to buy an air ticket now.
A price war, clearly, is on the cards.
Fernandes made it clear that he is upset with the Mumbai and Delhi airport operators because their fees are very high, and because of that AirAsia will not fly to these two destinations -- India’s biggest cities.
In fact, he wants the government to set up low-cost airports. Instead of flying to Delhi and Mumbai, Fernandes says he will prise open new, hitherto unexplored, routes.
He plans to make in India as much as he does in Malaysia from ancillary revenues: charging extra for preferred seats, extra baggage and other frills.
So much so, he is convinced that AirAsia would be able to make money even at mere 57 to 58 per cent occupancy, once he has seven to eight planes.
Indian low-cost carriers require 80 per cent occupancy, called plane load factor in the industry, to break even at an average ticket price of Rs 4,000 (exclusive of all taxes and fees).
Fliers will be the biggest beneficiaries of AirAsia’s arrival.
But the key question is if Fernandes will be able to deliver on his promises, or are they exaggerated?
Can he replicate his profitable low-cost model in India, while others are struggling to make money?
Air Deccan, in the past, offered rock bottom fares but went belly up in no time; how will Fernandes avoid such a fate?
A close look at AirAsia’s costs in Malaysia shows that they are undoubtedly lower than those of Indian low-cost carriers.
Its cost per available seat kilometer, which is the accepted measure of efficiency in the industry, is Rs 2.64 -- almost 30 per cent lower than Indian low-cost carriers’ CASK of Rs 3.60 to Rs 3.70.
Of course, AirAsia’s costs in Indonesia and Thailand are higher.
Rivals say that India is a different ball game altogether -- there will be no substantial difference in AirAsia’s costs vis-a-vis theirs because they do virtually the same things to cut those costs over which they have control.
So if Fernandes introduces low fares, as he threatens to, there is no way that he can make money.
They say that like any other domestic airline, AirAsia has to fork out 40 per cent more for jet fuel in India than in Malaysia.
In spite of this, fuel accounts for almost half of AirAsia’s cost of operation in Malaysia, which is not very different from 45-50 per cent in the case of Indian low-cost carriers.
Apart from higher jet fuel, AirAsia will have to contend with other high operations costs; for instance, unlike in Malaysia where airport costs come to Rs 150 a passenger, in India it will have to fork out five times more.
Fernandes’s fleet utilisation is considered very good which, some analysts say, could give him an advantage over local carriers in India.
Thus, AirAsia’s aircraft fly 12 hours a day, each plane doing six flights a day with a turnaround time of 25 minutes.
That’s surely good but that won’t give Fernandes any edge as these are the precise numbers also for IndiGo, India’s largest low-cost carrier.
Can Fernandes trim employee costs?
After all, for Indian low-cost carriers they constitute for 7 to 8 per cent of total costs. Even that looks difficult, at least for the time being.
If competing airlines are to be believed, Fernandes is offering pilots a pay package (Rs 4 lakh and above per month) which is in line with what Indian carriers pay and surely not lower.
Theoretically, he can push his staff to work more and improve productivity.
But work hours of pilots and cabin crew in India are governed by rules laid down by the government.
So, pilots and cabin crew cannot work more than 11 hours a day, out of which eight are flying hours.
The same rules will apply to him too.
Fernandes has one big advantage: unlike Indian low-cost carriers which take aircraft on lease, he buys them outright.
But Indian carriers say the advantage is minimal when it comes to overall costs.
“The savings would not be more than 2 to 3 per cent compared to us as he has to account for interest and depreciation.
“But those who choose to buy aircraft have to pay a huge amount upfront for ‘D’ checks (major overhaul and maintenance) after a certain number of years (four to six years) which are as high as $1.5 to 2 million.
“For us, the cost is spread over the entire lease period,” says a top functionary of an Indian airline.
Fernandes is hopeful that he will make about 18 per cent of his revenues (like he does in Malaysia) from ancillary income like baggage, preferred seats et cetera.
That could be a clincher considering that Indian carriers get less than 1 per cent of their revenues from ancillary income.
What will help Fernandes is that the government recently allowed airlines to unbundle fares and charge separately for these frills.
Yet, the boss of AirAsia surprised everyone by announcing that he will offer free luggage up to 15 kg for each passenger -- the same as his rivals.
This is a substantial dilution of his business model in which he offers zero baggage and passengers have to pay for their luggage.
Analysts say that this is one of his largest ancillary revenue sources, which he has closed in India.
Of course, AirAsia has made it clear that it will not fly to Delhi and Mumbai because of high airport charges imposed by private operators, even though the two cities constitute for 50 per cent of the business.
That is why Fernandes has made Chennai, an airport run by the Airport Authority of India, his key base.
Fernandes’s logic is sound.
Real estate at the Chennai airport, for instance, is a sixth of what is charged in Mumbai, the user development fee in Chennai is lower than in Delhi as is parking.
Yet, many analysts say that this strategy might not hold for long.
“The government has decided to privatise the Chennai airport now.
“So, the airport charges after privatisation could go up in line with other airports, and Fernandes could lose the advantage,” says an analyst.
Also, experts argue that while not going to the two key markets could be a sound entry strategy, he won’t be able to ignore there indefinitely.
“It’s like saying I am going to London, but I won’t go to Trafalgar Square,” says an aviation analyst.
Also, it isn’t that the smaller cities are being ignored by his competitors.
For instance, there are over 50 airports where a Boeing jet can land; IndiGo connects 28 of these and plans to go to all as it expands, while Air India already flies to most of them.
Also, even if Fernandes is able to fly to new destinations, the first mover advantage may not last more than a few months, so it is not a big deal.
Competing airlines say that with IndiGo, SpieJet and GoAir increasing their aircraft fleet rapidly, it will take them not more than two to three months to fly a new route if it looks attractive.
Not for nothing did IndiGo President Aditya Ghosh recently told Business Standard that he isn’t losing any sleep over AirAsia’s entry.
But can AirAsia change the rules of the distribution game?
It has already said that it will tie up with Tata retail outlets so that it can bring in consumers without credit or debit cards to pay in cash to fly.
Whether that will stir up things is anyone’s guess.
After all, it is not new. Air Deccan tied up with Reliance Communication’s cyber cafes earlier and even SpiceJet had got into a similar agreement with public-sector oil retailer Bharat Petroleum, but that did not lead to any substantial increase in volumes.
A key element of AirAsia’s distribution strategy in Malaysia has been to sell online tickets exclusively through its joint venture with Expedia so that it gets a share of the commission and improves its profit margins.
On the international routes, AirAsia withdrew from Indian travel portals only to come back to them later.
That is because, say travel experts, it realised that desi online travel portals dominate the Indian market and cannot be ignored.
So it is back on sites like makemytrip.com, for instance.
Travel experts say that there is no reason to believe that AirAsia can ignore them for the domestic market too where, in fact, they have a larger stranglehold.
All the indications are that AirAsia would be on these sites for the domestic business too. In an interaction with the media recently, Fernandes, taking a cue from his partner, the Tatas, said that he wants to go for ‘Nano’ pricing in aviation.
But he must be aware that the much-hyped people’s car has exceeded its promised price tag of Rs 100,000 as raw material costs went up and the car has not set the market on fire.
It’s a similar challenge which Fenandes needs to surmount in aviation.
Image: Tony Fernandes; Photograph: Daniel Munoz/Reuters