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An interview with an Aviation Expert regarding AirAsia's entry into Indian market
AirAsia India is set to start their operations from June 12. But, various airlines in the Indian aviation industry, who have been undergoing several losses in the past many years, are not delighted with their arrival. They are going to face a stiff competition from AirAsia, especially with the low tickets cost, which might lead passengers shifting over to AirAsia.

AirAsia had to clear a lot of hurdles before getting the final nod, as the airlines was granted flying license by DGCA after a wait of around nine months. The airlines is not going to have it easy in India, as a number of obstacles might still come up due to unpredictability and lack of transparency in India’s regulatory framework.

To understand more about the issue, got in touch with Satyendra Pandey, Manager Research & Consulting, CAPA (Centre For Aviation).

Excerpts from the interview.

Ashim Sunam (AS): Will the introduction of AirAsia India help the Indian aviation industry or sink it further?

Satyendra Pandey (SP): In the short term, due to a very price sensitive market, low fares will likely stimulate demand. However, for the industry in the long term - fundamentals must be sound, which is to say that the cost inputs must be covered by fare inputs for a sustainable business model.

The long term potential for India’s aviation sector remains very positive with a growing middle class coupled with increasing income levels and improving infrastructure. CAPA forecasts that in the next 10 years, growth will continue with domestic airport passengers likely to be around 356million, while international passengers likely to be 96million. 

AS: Will it kill other players in the industry like Indigo, SpiceJet etc?

SP: Other players have reacted by announcing their own fare sales to counter Air Asia. CAPA expects that competition from other players will be aggressive; Indian carriers have a track record of engaging in unsustainable fare discounting and an unusual willingness to bear losses.

The intense competition will increase financial challenges for all operators and place great pressure on some of the incumbent carriers, which are struggling, and whose holding power may be tested. Jet Airways and SpiceJet posted record losses in FY2014 and the industry as a whole is expected to report a full year loss for FY14 of approximately USD1.5 billion. Some carriers are in a precarious state, with cash balances equivalent to less than one day’s revenue and a fare sale may exacerbate these challenges.

AS: Do you think so that the airlines would be able to provide cheap fares in the long run as well?

SP: For the industry in the long term - fundamentals must be sound, which is to say that the cost inputs must be covered by fare inputs for a sustainable business model. There are fundamental structural challenges that also must be addressed which may help sustain lower fares in the long run – most importantly, rationalization of ATF taxes, airport charges and addressing policy and regulatory distortions.

AS: Why did various airlines oppose the granting of license to AirAsia India?

SP: Delays to the award of airline licences due to questions about ownership and control issues are however not unique to India, and in that sense, it is not surprising that legal challenges were raised. Virgin America’s licence was held up for a couple of years for similar reasons in the USA while Jetstar is currently facing similar challenges for its Hong Kong franchise with Cathay Pacific raising concerns.

AS: India's system of working may be different from other countries, which may be more due to the regulatory and fiscal policies. Will India prove to be AirAsia's toughest test?

SP: India has been both a field of dreams and a long night of nightmares for many. The Indian market may yet provide AirAsia with its greatest test, but the opportunities are probably also the greatest of any. The regulatory challenges faced by AirAsia India were in line with CAPA’s expectations; and reminiscent of the obstacles faced by Tata-SIA in 1996. The extended delays in the award of a licence to AirAsia India are reflective of the unpredictability and lack of transparency in India’s regulatory framework, which continues to be the greatest strategic challenge in the market.

AS: Who could prove to be AirAsia's biggest rival in India and why?

SP: India is a market in which full service carriers offer fares similar to LCCs, and sometimes lower. Airlines continue to price below cost despite their huge accumulated losses and weak balance sheets. It is very difficult to operate in a market where competitors seem to have an almost insatiable appetite to lose money and thus Air Asia is likely to see competition from across the board.

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