The five main players in Indian domestic aviation braced for a strong challenge last week after the thriving low-cost airline AirAsia Bhd. announced that it was entering the market. AirAsia hopes to start operations later this year in a joint venture with two Indian partners, including the behemoth Tata Group.
In September 2012, in a bid to attract investment, the Indian government relaxed restrictions on the entry of foreign capital. Aviation was one of the sectors opened up, with the government allowing foreign airlines to invest up to 49 percent in domestic carriers. But it took five months before the first move was made by Tony Fernandes, the chief executive officer of AirAsia.
Bloomberg News reported last week:
Southeast Asia’s biggest low-cost airline will own 49 percent of the venture. Tata Sons Ltd., the holding company of India’s biggest business group, will control 30 percent, while the balance will be owned by Arun Bhatia, whose son is married to the daughter of billionaire Lakshmi Mittal....
Partnering with the $100 billion conglomerate, which controls Corus Plc and Jaguar Land Rover, will help AirAsia gain a foothold in a market that’s set to triple to 159 million passengers annually by 2021...
AirAsia plans to invest as much as $60 million initially in the venture, Fernandes said.
India is the world's fastest-growing aviation market. Domestic traffic increased fivefold in the last decade -- after decades of stagnation in the quagmire of the near-monopoly enjoyed by the state-owned national airline, Air India Ltd.
But high fuel prices and operating costs have also made it one of the most challenging aviation markets. Last year, Indian airlines posted combined losses of $2 billion. One company, Kingfisher Airlines Ltd., more or less went under in the last quarter of 2012, leading to a steep rise in domestic airfares as demand increased relative to supply. Air India survives by leaching billions of rupees from taxpayers, thereby eating into the business of the more tightly run private operations.
Nevertheless, forecasts for the industry remain upbeat. Airbus SAS expects traffic to rise at a compounded annual growth rate of almost 10 percent for the next two decades.
Fernandes, a Malaysian of Indian origin, took over AirAsia in 2001, and in just over a decade, he's turned it into Asia's largest budget airline and one of its most profitable. AirAsia began with just two aircraft; it now has 118 and more than 350 on order. The airline began international operations out of India in 2008 with flights from nine cities to other Asian destinations, but it has since scaled back and operates mostly out of the south.
The new joint venture would allow AirAsia to re-enter the Indian market in a much more ambitious way, backed by Indian capital and business know-how. Further, the Tata brand enjoys great goodwill among Indian consumers, and has a link to Indian aviation that predates that of any other operation. The group founded Air India in the 1930s, but then lost control of the airline when it was nationalized in 1953, after independence.
The arrival of a powerful new competitor in India's domestic sector was seen in some quarters as a sign that the industry would remain depressed in the short-term, with airlines forced into fare wars to hold on to market share. There were also debates about whether the new airline would aim to increase the size of the pie by starting new routes linking smaller towns and cities. G.R. Gopinath, the founder of India's first budget carrier, Air Deccan, welcomed the development, saying that the existing players in the market had failed to expand the consumer base sufficiently.
In an interview with the business newspaper Mint, Fernandes said that he had been watching the Indian aviation market for a while:
Obviously, I am of Indian origin so it makes it that much more special. My father, Stephen Fernandes, was an Indian from Goa and mother Ena Fernandes was a Malaysian from south India. I think we couldn’t have found better partners, which is the most exciting thing of this venture... We have studied this market for a long, long time so this is not something we have jumped into and I feel we can produce a product at the right cost structure which will then give the right fare to really stimulate the Indian market and create some real economic growth in the Indian market.
First-time visitors to India are often amused by the scenes that unfold in front of them in airport lounges and on planes. Passengers jostle to get on and off before anyone else, just as if they were on a crowded local train; airline crew have to instruct flyers repeatedly to switch off their mobile phones; and people don't seem to understand why they can't take large pieces of luggage with them instead of checking them in.
What these scenes symbolize, however, is the collective experience of a society taking to the skies for the first time with both wonder and puzzlement. To an entire generation of middle-class Indians born before 1985 (including myself), taking a flight was synonymous with prosperity, even excess. Why would anybody fly when one could take a train for less than a fifth of the price? Only rich people flew.
The arrival of new players in the market since the turn of the century has allowed millions of people to experience the pleasures of flying for the first time, often at prices matching train fares. In the marvelous opening scene of Ashutosh Gowariker's 2004 film "Swades," the protagonist, played by the film star Shah Rukh Khan, is seen flying home from America after many years. After a long night, he lifts open the window shades and is transfixed with wonder as sees the contours of the landscape of India far below.
With the arrival of a capable new budget airline in the Indian domestic aviation market and the prospect of it opening up new markets within that market, it seems probable that many more millions of Indians in the next decade will have access to the spectacle of their own country seen from the skies.
To contact the author of this blog post: Chandrahas Choudhury at Chandrahas.firstname.lastname@example.org
To contact the editor responsible for this post: Max Berley at email@example.com