Impact of AirAsia on India’s Economy

Summary:

AirAsia is the world’s best low cost airline which is Malaysian based. This group operates scheduled international & domestic flights in 22 countries and around 100 destinations.

AirAsia expanded its operations in India in 2012, in joint venture with TataSons. Since Indian government allow an FDI (Foreign Direct Investment) of 49% in Airlines, the company hold 49% stake with TataSons having 30% and Telstra Tradeplace’s Arun Bhatia acquiring 21% stake. AirAsia has decided to invest 30 million dollars to 50 million dollars to start up the airline in India.

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The company in 2013, as a promotional tool to penetrate into the Indian market, has announced booking of 2 million seats from some of south Indian cities (like Chennai, Bangalore, Kolkata and Tiruchirapalli) to south east destination like Bangkok, Kuala Lumpur etc with a very low coat ranging from Rs 3300 to Rs5500. The company has a standard practice to open booking of seats a few months in advance at nominal price and then increasing them as the day passes to come up to ten times near the flight day. This is to assure filling of certain percentage of seats with low fare and then going to highest level. This practice reduces the gap between demand and supply as only little number of seats go vacant. The offer of the company is quite different from Tiger Airways, which provided 10 seats on every flight for Rs 2700 to Singapore from Banglore, Hydrabad, Kochi, Chennai, Tiruchirapalli and Thiruvananthapuram. Fares offered by the company on different routes are shown below: .

(Source: Economic Times, 2013)

The company is specially targeting the upper middle class customers, travelling by train, & competing in budget carrier space which is dominated by SpiceJet and IndiGo. However, gaining a profitable position would be quite challenging for the company in the Indian market which is already incurring huge losses in spite of recent discount on fares offers of existing Airline Company. It has incurred a combined loss of $400 million to $450 million in the quarter of July to September. Another challenges are high fuel prices in the international market, stiff competition, high operating cost and political opposition, regulatory pressure and uncertainty in India as Indian Aviation Industry was opened to foreign investors recently.

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Competition:

The company will face strict competition on route of Kolkata from SpiceJet, Jet Airways, IndiGo and Air India which combines offer 56 flights on weekly basis (Rai, 2013). The competition will get fiercer on Bangalore where 101 weekly services are offered by the stated four.

Structure of Indian Aviation market:

Since the Airline industry is an oligopolistic market structure with few big players, the fare cutting move of AirAsia company will definitely copied by other firms to remain in the competition, as it is one of the basic feature of oligopolistic market that fare cutting or increasing move by one is followed by other sooner or later. This will create a fare war among the companies, benefit of which can be reaped by customers.

The company has taken this step as low cost airline companies have predicted to have greater potential in Asian countries like India whose population is above one million and the population of middle class is growing day by day which proves to be a huge market potential for the company to grow. (Upadhyay, 2013)

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According to the regulation of Indian Government, a foreign company can enter to Indian Airline sector with 49% stake only in the form of FDI, the regulation normally need a carrier to have domestically operated for at least 5 years with twenty aircraft fleets before starting its operations internationally (Singhal, 2013). Therefore on this basis international market opportunities for the company will concentrate on those routes where highest traffic volume already exists.

Company’s step to reduce operating cost and gaining economies of scale:

1. The company will focus on South India which is a tourist attracting area and an unaltered and underserviced market by other airline companies.
2. The company will not operate to Mumbai and Delhi airports as these airports charges high Airport Development charge. Also Mumbai has extremely high air congestion leading to time consuming landing of aircrafts. In this way company would be able to avoid high navigation & landing charge and aircraft parking charge
3. The company has benchmarked its base fare against Indian Railways tickets and prices only Rs 1000 more than rail fare which will attract rail consumers to switch over to airlines, increasing company’s revenue.
4. For keeping low operating cost, the company have planned to have a lean staff structure initially targeting up to 80- 100 employees per aircraft. Whereas competitors of the company presently have a ratio ranging from 102 to 185 employees per aircraft. Company also offer point to point service and uniform fleet for operational savings and provide internet sales of tickets for overhead savings.

Upcoming opportunity for the company:

On the basis of macroeconomic metric based on the population of city, Surat (Gujrat), Patna (Bihar) and Bhopal (Madhya Pradesh), which are largest Tier 2 cities of India, are not connected to Chennai. Surat has a population of around 4 million, Patna has 1.6 million populations & Bhopal has 1.8 people living there. (Balasubramanyam, 2013)

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Therefore AirAsia India can also plan to consider its services to these cities to meet up the potential demand.

Benefit to Indian Economy:

India will get benefit in the following ways:

• Increased revenue for government in the form of taxes.
• Since it is a Foreign Direct Investment, Indian economy will get benefitted through infrastructural development by the company, increased employment opportunities for Indian people as company will hire people to provide its services.
• Since the company is offering low fare tickets to customers, other firms will also follow the move, offering better opportunities for customers to avail airline services at low cost.
• AirAsia’s move will break the status quo in pricing policy, commercial and marketing strategy of Airline companies in India as presently Indian Airline companies lack innovation in pricing their services due to which about twenty percent of the seats go on empty in most of the flights.

Overall this move of the company is good for economy as well as customers as it will allow maximum customer to avail airline services and create ripple effect. Also Indian market has potential as its size is expected to grow in next 10 years from sixty million passengers to around 450 million passengers which is also a good news for the company

References

Balasubramanyam, K., (2013), Sky wars, [Article], Available: http://businesstoday.intoday.in/story/airasia-tieup-with-tatas-impact-india-aviation-sector/1/192745.html [Accessed 1 May 2014]

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Rai, S., (2013), Why AirAsia’s Entry Is Good For India’s Aviation Sector, [Article], Available: http://www.forbes.com/sites/saritharai/2013/07/11/why-airasias-entry-is-good-for-indias-aviation-sector/ [Accessed 1 May 2014]

Singhal, M., (2013), An airline for the people, [Article], Available: http://businesstoday.intoday.in/story/air-asia-to-enter-india-aviation-sector/1/197970.html [Accessed 30 April 2014]

Upadhyay, A., (2013), AirAsia offers two million cheap tickets to South East Asian cities, [Article], Available: http://articles.economictimes.indiatimes.com/2013-04-02/news/38218326_1_siegtraund-teh-airasia-group-chief-commercial-officer[Accessed 1 May 2013]

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