Indians Get $8 Fares as AirAsia Debuts Amid Price War

Asia’s biggest budget carrier has set a target for its India venture to break even in four months. Some of its local rivals haven’t achieved that in three years.

The Indian venture of AirAsia Bhd. started operations today as airlines in the world’s second-most populous nation offer base fares lower than 2 U.S. cents as they woo 61 million domestic fliers. Jet Airways (India) Ltd. and SpiceJet Ltd. have posted annual losses, while Kingfisher Airlines Ltd., saddled with $1.4 billion of debt, has been grounded since 2012.

AirAsia’s entry heightens competition in India, where over the last seven years airlines are estimated to have lost $22 every time a passenger has stepped on board. That’s added up to a $10 billion loss in a market where the number of domestic travelers is projected to triple in the decade to 159 million by 2021. The challenge is how to make money while fares continue to drop even as costs increase.

“The war in the Indian skies has just become more intense,” said Amber Dubey, partner and India head of aerospace and defense at KPMG. “If an unbridled fare war continues, including, God forbid, peak hour seats, we may see financial distress increasing and probable exit of one or two airlines in the next 12 to 18 months.”

AirAsia (India) Pvt. is a joint venture between AirAsia, Tata Sons Ltd. and Telestra Tradeplace Pvt. Its maiden flight today was an Airbus Group NV A320 plane that went from the southern city of Bengaluru, formerly known as Bangalore, to the beachside destination Goa.

‘Right Time’

No Tata representatives were on board the inaugural flight, AirAsia (India) Chief Executive Officer Mittu Chandilya said in an interview during the flight.

“We’ve taken a long, long time, and we feel good that the timing is right to enter the Indian market,” AirAsia’s Group Chief Executive Tony Fernandes said in an interview with Bloomberg Television today.

AirAsia closed unchanged at 2.44 ringgit in Kuala Lumpur trading. SpiceJet dropped 2.9 percent to 19.90 rupees while Jet Airways declined 0.1 percent to 264.65 rupees in Mumbai trading.

Budget airlines had already been cutting rates to entice Indian fliers before AirAsia’s venture announced details about the start of its operations.

SpiceJet in January sold tickets at a 50 percent discount. In April, it offered basic fares starting at 1 rupee that don’t include taxes and other charges. In this case, the average comes to about 800 rupees all inclusive, Sanjiv Kapoor, SpiceJet’s chief operating officer, wrote on his Twitter account on May 30.

‘Cheaper Than the Bus’

Just before AirAsia India opened its bookings on May 30, the carrier offered a fare of 490 rupees ($8) that included all taxes but excluded baggage fees, Chandilya wrote on his Twitter account.

“People are telling me my fares are even cheaper than bus fares,” Chandilya said today in the interview on the maiden flight. “I was planning to compete with trains. Now, I think I should compete with buses too.”

Closely-held IndiGo last month started giving discounts of up to 25 percent for a family of four or more. Then on May 30 it also offered 1-rupee base fares on the Bengaluru-Goa route. Indigo had net income of 7.87 billion rupees for the 12 months ended March 2013 and operations were profitable for a fifth straight year, according to President Aditya Ghosh.

‘Comparable’ Services

Arun Benjamin, a Bengaluru-based retired air force pilot planning a holiday in Goa with his family, found IndiGo and Go Air offered cheaper fares than AirAsia on the same route.

“I will go for the cheaper option, because the services are comparable anyway,” Benjamin, who has previously flown AirAsia to and from Malaysia, said by telephone.

During the weekend in which AirAsia India opened bookings, geo-location based searches for Bengaluru surged 93 percent, while those for Goa jumped 84 percent compared with the previous week, according to Rajesh Magow, CEO of MakeMyTrip Ltd., which operates an online travel portal.

The 1-rupee fares are for a few seats and prices typically rise after a certain number of tickets are sold. The high costs of operation mean more seats need to be sold at higher rates.

“It is very difficult to operate in a market in which your competitors seem to have an almost insatiable appetite to lose money,” Kapil Kaul, the South Asia CEO for CAPA Center for Aviation, said in a report dated May 29. “The incumbents have shown a regular tendency to discount heavily to generate cash, gain market share, fill excess capacity or simply to respond to competition.”

Taxes, Jet Fuel

Airlines in India have lost a combined 594 billion rupees over the past seven years, CAPA estimates.

A decade ago, Air Deccan sold tickets starting at 1 rupee. It ended up being acquired by liquor tycoon Vijay Mallya’s UB Group, operator of Kingfisher. Mallya’s carrier lost its airline license in 2013 amid losses.

India is one of the most expensive aviation markets to operate in the world. State taxes of as much as 30 percent make jet fuel, which contributes to about half an airline’s costs, the costliest in the region.

That’s meant making money is a struggle. Jet Airways, in which Etihad Airways PJSC owns a 24 percent stake, said last month it won’t be profitable until the second half of 2016 after posting six consecutive annual losses. SpiceJet is estimated to post a loss for a fourth successive annual period in the year ending March, according to analysts’ estimates compiled by Bloomberg.

Cutting Costs

Spokesmen at Jet Airways, SpiceJet and IndiGo didn’t respond to phone calls and e-mailed questions.

By contrast, AirAsia, based in Sepang, Malaysia, has posted a profit for the last five consecutive annual periods. The India venture, which got its operating license in May, can lean on AirAsia’s experience to keep costs low and gain revenue from services such as carrying baggage.

The airline aims to break even in the next four months, Chandilya told reporters in Chennai May 30. It will do this by cutting non-fixed costs, such as those for vendors and maintenance, and capping salaries, he said today.

To make money, it will probably reduce check-in counters, baggage handlers, ferry buses and loading ramps, KPMG’s Dubey said. Passengers also may be ushered on and off planes more quickly to shorten turnaround times, he said.

AirAsia is also pushing to charge for checked-in luggage.

Fees for Luggage?

“Strong ancillary revenues will be necessary to support a low base fare pricing strategy,” said CAPA’s Kaul, who projects carriers in India may generate an additional $500 million annually from such services. “However, it may take some time to grow these given it will involve driving behavioral change among passengers.”

Carriers may also benefit as Indian travelers try to save on baggage charges, said Mark D. Martin, CEO of Dubai-based Martin Consulting LLC. Corporate travelers are also increasingly turning to low-cost carriers, he said.

“Overall it will lead to a sensible reduction in fares,” said Rajan Mehra, India managing director for Universal Weather and Aviation, a U.S.-based private jet operator, and who formerly headed Qatar Airways Ltd.’s India operations. “After all, IndiGo is making profits with the same fare structures.”

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