AirAsia Faces Bureaucracy Costs With Venture in India Market
AirAsia Bhd. (AIRA), Southeast Asia’s biggest discount carrier, reported profits in all but one year in the past decade. It’s now entering a market where the industry has lost more than $6.6 billion in five years.
The airline may struggle to post profits in India as high fuel taxes, airport costs and cut-rate competition erode gains from rising travel demand, said Harsh Vardhan, the chairman of Starair Consulting that advises airlines. AirAsia will also have to contend with the nation’s bureaucracy that interferes with pricing of tickets.
“AirAsia can’t overnight change the economies of operations in India,” said New Delhi-based Vardhan. “Fuel prices are common, the bureaucracy is the same for everyone and the environment is very competitive. That will make it difficult for them to make money.”
The airline aims to start Indian operations in the fourth quarter after winning approval yesterday for the nation’s first foreign aviation investment since rules were eased in September. Carriers in the country may lose $1.4 billion this fiscal year, CAPA Centre for Aviation has forecast, as high fuel costs and a price war forced liquor tycoon Vijay Mallya’s Kingfisher Airlines Ltd. (KAIR) to halt flights since October.
Tony Fernandes, the group chief executive of AirAsia, has said price will be the ‘No.1’ differentiator in India as he aims to lure passengers from the nation’s 23 million train travelers a day. The Indian market is “fantastic” and the nation is now “ready for a true low cost carrier,” he said last month.
Fernandes has expanded AirAsia into the region’s biggest discount carrier by setting up ventures in the Philippines, Japan, Thailand and Indonesia. In December, the airline ordered 100 Airbus SAS A320s valued at $9.4 billion, in addition to the 200 it had agreed in 2011 to purchase.
AirAsia’s profit more than tripled in 2012 to 1.9 billion ringgit ($612 million), according to data compiled by Bloomberg. Indonesia AirAsia’s profit jumped 54 percent, while Thai AirAsia also posted a profit for the period, the company said in a statement last month. Ventures in the Philippines and Japan reported losses.
Airlines in India have been losing money even after passenger traffic more than doubled in the past seven years. Jet Airways (India) Ltd. (JETIN), the nation’s biggest listed carrier, hasn’t made an annual consolidated profit in five years, according to data compiled by Bloomberg. The Mumbai-based company is in talks with Etihad Airways PJSC to sell a stake as it seeks funds to pare debt.
Jet fuel, which accounts for about half of a carrier’s expenses, costs as much as 60 percent more in India compared with Singapore. Carriers’ airport costs are also rising in the nation as the airports regulator last year approved a 346 percent increase in charges at New Delhi airport.
Aziz Laikar, a spokesman at AirAsia, didn’t immediately respond to e-mailed questions about the challenges of doing business in India.
SpiceJet Ltd. (SJET), the nation’s only publicly traded budget airline, may post its second straight annual loss in the year ending March 31, according to nine analysts’ estimates compiled by Bloomberg. Kingfisher Air, the only Indian carrier to order Airbus A380s, has been in talks with investors to revive operations since grounding planes in October. Paramount Airways also stopped flights in 2010.
Domestic carriers had a combined debt of as much as $20 billion last year, with half that amount owing to working capital needs, payments to airport operators and fuel companies, according to the civil aviation ministry. India’s airlines have lost more than 360 billion rupees ($6.6 billion) since the year ended March 2007, according to government data.
Companies also have to contend with competition from Air India Ltd. that gets government funds to help mitigate losses. The government last year pledged 300 billion rupees worth of bailout for the state-owned carrier over eight years.
Still, AirAsia’s expertise and its Indian partners’ resources may help the new airline overcome the challenges of Indian market, said Arun Kejriwal, director at Mumbai-based Kejriwal Research & Investment Services Pvt.
Tata Sons Ltd. will own 30 percent in the venture while Arun Bhatia of Telestra Tradeplace Pvt., whose son is married to the daughter of billionaire Lakshmi Mittal, will hold 21 percent.
“Those who are joining together are the people who know the industry the best,” said Kejriwal. “They’ve seen good and bad of all and they are aware of what’s happened in India.”
Fernandes and partner Kamarudin Meranun bought AirAsia from DRB-Hicom Bhd. (DRB) with two aging Boeing Co. (BA) 737 jets and 40 million ringgit of debt, for a token 1 ringgit, or 32 cents -- three days before the Sept. 11 terror attacks. Air India had its roots in an airline that former Tata Chairman J.R.D. Tata had started in 1932.
AirAsia, which will own 49 percent of the Indian venture, will initially invest about 800 million rupees. The airline plans to operate from Chennai in south India to smaller cities in the country. A carrier must complete five years of domestic operations before it can fly overseas, according to the nation’s aviation rules. Budget airlines, led by IndiGo, account for about 60 percent of India’s airline market.
“If an airline is going to be viable, its fares have to reflect its cost of operations,” said Binit Somaia, a Sydney- based director at CAPA. “The costs of operation in India are high. It’ll be challenging.”
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