Saturday, March 16, 2013

AirAsia India to launch by year-end from Chennai

Malaysian LCC giant AirAsia has secured an approval from the Indian government to set up a subsidiary in the country. The new airline, already named AirAsia India, will be structured as a joint venture with two other Indian companies. It currently plans to launch by the end of the year, although it has still not received an Air Operator's Certificate.

Tata Group and Arun Bhatia will be AirAsia's partners in the joint venture. AirAsia will own 49% of the new airline, followed by conglomerate Tata Group with 30% and Arun Bhatia of Telestra Tradeplace, an investment firm, with a 21% stake. AirAsia, however, will almost completely manage the airline, as Tata and Telestra will not have an operating role.

AirAsia - Taxi-ingFor AirAsia's standards, the new airline will launch rather conservatively with no more than four Airbus A320s, and will remain low-profile during the first year. AirAsia will initially invest only around $15 million into its new subsidiary, while its partners will contribute with another $15 million. The parties will inject more capital when needed, and sums of up to $60 million have been mentioned. The start-up will operate out of Chennai in Southern India, and its network will consist of smaller Tier 2 and Tier 3 cities. Due to Indian laws, it will have to remain solely on domestic routes before it is allowed to launch international operations. The start-up will remain in the south, where the cities of Bangalore, Chennai, Hyderabad and Kochi offer "a vibrant passenger traffic".

Firm launch date of AirAsia India has not been announced, nor the name of its CEO, although he has been chosen. Indian policies require that the CEO is Indian, together with the majority of directors. The airline is working on getting past the certification process as soon as possible. It will initially employ 300, which is much more than AirAsia India's target of 20 employees per aircraft, but the ratio is expected to normalize as the company grows.

When launched, AirAsia India's main competitors in the market will be LCCs IndiGo and SpiceJet. IndiGo earned a lot of attention by being the only Indian major airline to post profits last year, and is now the country's largest carrier. SpiceJet, on the other hand, has an interest in serving smaller destinations.

Interestingly, a recent change in Indian policy which allowed foreign carriers to take minority stakes in domestic airlines was of little use for AirAsia. The policy was unclear on whether foreign carriers can invest in completely new Indian airlines. However, the representatives of the Indian government were quick in reassuring that the rules will be clarified, and that AirAsia would be allowed to launch the new airline if it adheres to all requirements. Foreign Investment Promotion Board already gave AirAsia a go-ahead, as far as foreign investment policy is concerned.

Although the CEO of AirAsia is confident about the launch of the Indian subsidiary saying that the largest challenges are already behind, there are still a lot of potential issues ahead. He is right in saying that the country's air travel market has an immense potential, but it is one that has not been realized so far. Almost all Indian major airlines are consistently unprofitable, and there are good reasons: Indian carriers are subject to very high airport fees, governmental taxes, regulations and fuel prices, on top of which also comes fierce competition.

But AirAsia remains optimistic and cautious. The airline will try to eliminate excess competition and expensive airports (such as Mumbai and Delhi) exactly by operating to smaller cities. It sees a lot of potential from people currently traveling by trains and under-developed city-pairs, not to mention India's huge population and growing middle-class. AirAsia aims to capitalize on this potential by being a first mover, so it accepts the risks.

AirAsia might have to make some changes to its own business model in order to attract customers. Its history with routes to India has not been a very bright one, and one of the reasons was the airline's emphasis on sales through its own website, rather than through travel agents which are preferred in India. Reportedly, the airline is working on ensuring that it is well-represented in the market.

Even if it fails, AirAsia's decision to invest into an Indian subsidiary is a great one. The existence of challenges is unquestionable, but the risks appear quite small when compared to potential long-term upsides. AirAsia India will become the seventh AirAsia branded carrier, as it joins the "core" AirAsia of Malaysia, its long-haul arm, and subsidiaries in Indonesia, Japan, the Philippines and Thailand.

Etihad Airways is still in talks over the planned acquisition of a smaller minority stake in Jet Airways, and the two remain quiet about their progress. They are reportedly only weeks away from a decision. This is the only other firm plan directly related to the Indian government's September decision to allow minority foreign ownership.