Tata AirAsia: Waiting for a Smooth Take-off

Tue, Oct 1, 2013

In Focus

15th October 1932 was a historic day in the history of Indian Aviation. That day J.R.D. Tata flew a single-engine De Havilland Puss Moth carrying air mail (postal mail of Imperial Airways) from Karachi’s Drigh Road Aerodrome to Bombay’s Juhu Airstrip via Ahmadabad. In 1938, the airline was named as Tata Air Services and later that same year it was renamed as Tata Airlines. On 25th August 1953, Government of India got control over Tata Airlines (then Indian Airlines) by acquiring the 51% stake.
In 1995 the Tata group, for the first time, applied to the FIPB for a full service airline. The proposal was cleared a year later but the venture never saw the day of light due to a change in the civil aviation policy in 1997 that didn’t allowed foreign carriers from holding a stake in domestic airlines. In 2000, Tata’s and Singapore Airlines had jointly bid for the 40 per cent disinvestment of Air India but withdrew from it in December 2001. The disinvestment of Air India never happened due to political opposition. In 2013, the new Civil Aviation reform allowed for 49% FDI in airlines sector, which cleared the deck for the brand new Tata AirAsia airlines. AirAsia announced its Indian low cost subsidiary on 19th February 2013.
Air Asia which has changed the dynamics of the Aviation industry in South East Asia is known as one of the best low cost airlines in the world with a fleet size of over 134 A320s operating from Kuala Lumpur, Malaysia. They operate with the world’s lowest unit cost of USD 0.023/ASK and have a surprisingly low passenger break-even load factor of only 52%. They have even contracted 100% of their fuel requirements for the next three years. Because of the exceptional management, they have achieved an aircraft turnaround time of 25 minutes. Their crew productivity level triples that of Malaysia Airlines, and every aircraft flies in average of 13 hours a day.
Indian Aviation sector is shedding blood with accumulated losses of 46,000 crores in the last five years. All of the carriers are making continuous losses for consecutive quarters except Indigo. The fuel cost accounting for 40% of the operating cost is among the highest in the world. At the time of writing the article the price of ATF is standing at 77632.43 Rupees/KL at Mumbai. In spite of a market size of 60 million domestic passengers and a CAGR of 18% over the last ten years the performance of big players is quite disappointing. Kingfisher and Paramount have already stopped their operation and lost licences. The rise in the flight fare is further pushing away the passengers with a little help from a GDP growth rate of only 4.4%. In the last couple of years under the government’s policy of fueling Indian Aviation sector, India got several world class airports and many more are in row. Enhanced capacity has helped the sector to grow with but with a continuous pain of increased airport cost.
Indigo which has the highest PLF of 89% and is operating with an all A320 fleet is quite successful in running their operations. The continuous price war again has taken out the pie from the profit of airlines. Tata AirAsia will operate with the same A320 fleet like AirAsia and Indigo, and their reluctance to operate from Delhi and Mumbai will help to keep the costs low. The sudden sinking of Kingfisher has brought a windfall gain to all the airlines. Even after this the capacity of airlines, which is more than the present demand, will be a problem in determining the price of tickets in the coming days. The rising man-power cost and globally comparable pi- lot’s cost is giving a blow to the Indian civil aviation industry which has one of the lowest flight fares in the world. With the unique model of AirAsia, Tata AirAsia can expect a break-even at 60% PLF. If they can maintain a PLF of 80% it will be a bonanza for the airline, keeping in mind the rising fuel cost and scarcity of pilots. Rising airport charges will be a pitfall to look out for. As the economy is reviving, we can expect a better GDP growth rate in the coming months which will increase the size of the target market as consumers seek to spend more. In tier 2 airports where the airfare ferries are at a range of 7000 and above, Tata AirAsia is expected to operate with much lower fares.
With Tata-SIA in pipeline, the Tatas have started to portray themselves as a premium player in the air- lines industry with a reputation that is a class apart, just like any other Tata brand. The share holding pattern reveals that Tata is more concerned about Tata-SIA where Tata is sitting in the driver’s seat with a 51% share, whereas in the case of Tata AirAsia they are behaving like a minority stakeholder with a 30% share. The complete liberty in operations will help AirAsia to operate in their no frill model. In India most of the airlines are operating at a range of 75-90% PLF, so I am quite optimistic about AirAsia’s sustainable operation in India. They will enjoy the benefit of being associated with Tata to grab the market share early. It is not clear what exactly the outcome will be but consumers are eagerly waiting to see a Micromax in the Indian Airlines sector, when air travel will not be a distant dream for middle class people of India.

- Sanjoy Saha MBA 2013-14

1. www.businessstandard.com
2. www.nationalspotexchange.com

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