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Can Tata Sons steer AirAsia India out of turbulence?

By Aneesh Phadnis
March 30, 2016 12:41 IST
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Most airlines have fattened their profits, turned the corner, or cut their losses, except AirAsia India.

On Monday, Tata Sons announced that it will raise its stake in AirAsia India to 49 per cent from 41.06 per cent by buying out co-promoter Arun Bhatia's stake in the airline.

This makes it an equal partner with AirAsia, the Malaysia-headquartered low-cost airline founded by Tony Fernandes, but what has tipped the scales in favour of the Indian company is that the remaining 2 per cent is held by Tata loyalists S Ramadorai (0.5 per cent) and R Venkatramanan (1.5 per cent).

The writing on the wall is clear: Tata Sons will now pilot AirAsia India.

There is no official word on what caused this change to happen.

What is for sure is that this will silence the campaign mounted by the Federation of Indian Airlines, a lobby group of older airlines including IndiGo and Jet Airways, that questioned AirAsia India's commitment to the domestic market because its largest shareholder, AirAsia, was an overseas company. 

The charge stung and had to be rebutted by none other than Tata Sons Chairman Emeritus Ratan Tata who said in a tweet on February 14 that the new airlines have been "formed in full compliance with the prevailing government policy."

Rivals have accused Fernandes of remote-controlling the airline from Malaysia in violation of the government's norms for the sector.

Indeed, it was Fernandes who announced the appointment of AirAsia India's first CEO, Mittu Chandilya, as well as his successor, Amar Abrol, at the Hyderabad Air Show earlier this month.

With Tata Sons in the cockpit, this could change.

What also could have precipitated the change is that AirAsia India's performance has not been according to the script: it has missed its expansion and breakeven targets, and the promised fund infusion has not happened because of differences between shareholders.

It has seen several high-level exits: before the flamboyant Chandilya, the airline's CFO, Vijay Gopalan, and commercial head, Gaurav Rathore, had quit a few months earlier.

Slacking off

At the time of its launch in June 2014, AirAsia India's management had boldly said it will break even in four months (the deadline was later extended to 12 months).

The airline is yet to make a quarterly net profit. For the December-ended quarter, it made a loss of Rs 32.7crore.

The accumulated losses have eroded AirAsia India's equity capital of $30 million (about Rs 190 crore).

What makes it starker is that the business climate is at its peak: jet fuel prices are at a record low and traffic growth is strong.

Most airlines have fattened their profits, turned the corner, or cut their losses, except AirAsia India.

In the beginning, AirAsia India had said that it will induct six to eight aircraft in a year.

Its current fleet, after a quarter short of two years, comprises just six Airbus A320s. According to Directorate General of Civil Aviation data, AirAsia India had market share of 2.3 per cent in the first two months of 2016.

One reason for its low share is that the airline flies to just 12 destinations, compared to IndiGo's 35 and Jet Airways' 48.

A bigger fleet is a must if it wants to expand its share of the pie.

That's what AirAsia India had in mind but its plans got thwarted by the squabbles among the shareholders.

Relations between the shareholders have not exactly been cordial and Bhatia, who has sold his 9.94 per cent in the airline to Tata Sons in two tranches, had last year threatened to drag the airline to the courts after accusing Fernandes of controlling the airline in violation of government rules.

After the acrimony, the AirAsia India broad gave its nod to a rights issue in December to raise funds but it has not taken place so far.

With Bhatia no longer in the picture, the rights issue could sail through smoothly, which will give the airline funds to press more aircraft into service.

The urgency cannot be overemphasised as AirAsia India's rivals have upped the ante. Market leader IndiGo has said it will induct 24 Airbus A320 aircraft by next March.

GoAir and SpiceJet too have indicated sizeable capacity expansion plans, while Jet Airways has sharpened its focus on the domestic network.

In comparison, AirAsia India's expansion plans look modest - at least, for now. It will add two aircraft which will take its fleet to eight over the next few months.

There are indications that the airline is still hopeful. At Hyderabad, Fernandes brought along chief executives of group airlines from Indonesia and Thailand and also put an Airbus A330 aircraft for display on the inaugural day.

It was a rare sight as AirAsia had never displayed an aircraft at an air show in India. 

AirAsia was making a statement and responding to its critics too.

"Our commitment here is strong," Fernandes told reporters.

A day later, AirAsia India announced a new management team that included new CEO Abrol and finance and commercial department heads, Ankur Khanna and Kiran Jain, respectively.

Abrol, an AirAsia group insider, was leading the financial services firm, Tune Money, and like his predecessor, Chandilya, hasn't worked for an airline before.

Overseas restrictions

Another spanner in the works for the airline has been the 5/20 rule, which forbids new airlines to fly overseas unless they have completed five years on domestic routes and have a fleet size of 20 aircraft.

The older private airlines, which all fly overseas, do not want the rule to be relaxed. Their logic is that the rules of the game cannot be changed midway.

Though Union Civil Aviation Minister Ashok Gajapathi Raju has questioned the rationale of the 5/20 policy and his junior minister, Mahesh Sharma, has said the government is considering a partial abolition of the rule, it is not sure which way the scales will tilt.

"The lobbying for discriminating policies between old and new airlines is reminiscent of the protectionist and monopolistic pressures by vested interests' entities which seem to fear competition, as in a variety of other sectors over the years," Tata said in his tweet in February.

Fernandes at Hyderabad downplayed the criticality of this rule for AirAsia India.

"We are looking to see how we can grow and reach a reasonable market size in India," he said.

"I am bullish about the Indian economy and the market irrespective of the 5/20 rule."

He also indicated that the airline could have made mistakes which will now be corrected.

"In a strange way our competitors have made us excited about the domestic market. We did not know much about it but when you are forced to do it you learn."

The airline did not respond to queries, sent on email, on its growth plans, funding and focus on the Indian market.

Experts feel that the airline should change its sales and distribution policies.

Also it should rely more on its staff in India for insights in revenue management and network planning. Key decisions with regard to these vital functions are said to be finalised at AirAsia's headquarters in Malaysia.

"Malaysia is a different market. In India you cannot ignore the travel agents. The airline is unfriendly towards agents," says Madhav Oza, director of Blue Star Travels.

AirAsia India has discontinued productivity-linked bonus payment to agents it had introduced last year, though it has begun paying a transaction fee to agents for normal ticket sales.

AirAsia in Malaysia receives over 80 per cent bookings through its own website. In India, 70-80 per cent of all air tickets are sold by agents, which makes them an important channel.

Still others feel the airline can position itself better. "AirAsia India has been positioned as a low-fare airline in India and there has not been enough focus on facilities like meals or on-board comfort," says an aviation expert.

"There is freshness in the product but that has not been adequately publicised."

The problem with cheap fare marketing is that when consumers do not get the lowest fares they switch to other rival airlines, the expert adds.


Feb 2013: AirAsia Malaysia announces tie-up with Tata Sons and Telestra Tradeplace to set up a domestic airline in India

May 2013: Group CEO Tony Fernandes tweets about Mittu Chandilya's appointment as the CEO of the airline

Aug 2015: Tata Sons increases stake in the airline to 41 per cent after Bhatia refuses to participate in fund raising. Chandilya elevated to managing director’s post. The airline's chief financial officer, Vijay Gopalan, quits

Dec 2015: Bhatia accuses Fernandes of remote-controlling the airline and threatens to approach the court, alleging violation of foreign direct investment rules. Both Tatas and Fernandes deny the charges

Mar 2016: AirAsia India announces Amar Abrol as its new CEO to replace Chandilya. The airline also announces a new CFO, Ankur Khanna, and new commercial head, Kiran Jain

Mar 2016: Arun Bhatia exits the airline. Tata Sons announces increasing its stake in the airline to 49 per cent after purchasing Bhatia’s 7.94 per cent stake



AirAsia India began its operations in June 2014 with Bengaluru-Goa flight


Six Airbus A320s. Expected to add two planes in the next few months


Bengaluru, Delhi




2.3 per cent

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Aneesh Phadnis in Mumbai
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