 "Why being the Roger Federer of Indian aviation may not work for IndiGo")
India’s biggest airline, IndiGo, wants to be like Roger Federer - boringly consistent.
Foolhardy or a clever ploy to catch the competition napping? Because competition is not only watching every step IndiGo takes but will also get more aggressive in the near future when AirAsia gains muscle in its proposed Indian venture. AirAsia is known for its ultra cheap fares across Asia.
In an interview to Business Standard newspaper this morning, IndiGo President Aditya Ghosh has shrugged off any sleepless nights because of AirAsia’s impending arrival, saying his airline’s strategy will not change because of changing market dynamic.
“We will continue to play like we have played before. We did not change plans with giant airlines in out own backyard….we will continue to do two things: chase growth, which is there; and compete against what we were yesterday. I hope we are like Roger Federer - boringly consistent”.
Two things will define the future for IndiGo and indeed for all low cost carriers in India - 1) how much of their profit (only IndiGo claims to be profitable till now) comes from actual operations versus money in the bank from sale and leaseback of aircraft 2) how many seats can they fill through lowest priced tickets.
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IndiGo and other LCCs use the sale and leaseback model but AirAsia owns each of its aircraft. Which means any profits it may make in the Indian market will be purely through operations. And lowest fares certainly happen on AirAsia because that airline offers free one way tickets and has promised tooffer Re 1 tickets in India. IndiGo is competitive on fares now but then there is no compulsion for it to distribute free tickets in the current market scenario.
Impact Shorts
More ShortsLast week, at his first press interaction in Delhi, AirAsia’s Tony gave away a free return ticket to a journalist and his spouse - for a flimsy reason to be sure - but obviously with an eye to promoting his brand even before it has become operational in India. Ghosh and chiefs of other LCCs will have to innovate to counter such promotional gimmicks.
Throughout the day today, AirAsia has put up 2 million seats at jaw-dropping fares starting at Rs 522 (inclusive of taxes & fees) from Kuala Lumpur to all of AirAsia’s route network. All-in-fares inclusive of taxes and fees start from all-inclusive-fare as low as Rs 3,300 one way from Kolkata/Chennai to Bangkok and all-inclusive-fare Rs 4,000 from Bangalore/Chennai/Kochi/Kolkata/Tiruchirappalli to Kuala Lumpur.
The promotion is valid for travel from 10 February up to 5 August 2014.
How will IndiGo, SpiceJet or others counter such offers without bleeding themselves dry? IndiGo, SpiceJet, Air India have already suffered through similarly large promotional offers earlier this calendar year which increased aircraft loads but bled their respective balance sheets.
Though airlines like IndiGo and SpiceJet have relentlessly worked to slash operational costs, AirAsia may still have several aces up its sleeve to slash costs further. One factor is no lease rentals on aircraft; secondly it has already begun lobbying for low cost airports in India.
It may use a lot of technical knowhow and equipment from joint venture partner, the Tatas, further deriving cost benefits. Which ever way it manages to trim costs, AirAsia is sure to shake up the domestic aviation market.
Till now, IndiGo’s has been a fairy tale rise through the ranks of Indian aviation to become the largest domestic carrier. With Kingfisher Airlines dead and others struggling with overleveraged balance sheets, today IndiGo manages to fill the maximum seats on its aircraft with every fourth Indian flyer preferring this airline. It also claims to be the only profitable airline in India.
In the past, Neil Mills of SpiceJet (another LCC) has also made similar comments about AirAsia’s arrival and slow rampup not impacting his airlinebut SpiecJet’s stock price has reflected market’s fears about increasing competition and arrival of AirAsia. Is Ghosh also worried but putting up a brave front?
[caption id=“attachment_937979” align=“alignleft” width=“380”] Ghosh is right in dismissing competition for now. This question should be put to him three years down the line, when AirAsia has gained scale, has a large enough aircraft fleet to change the Indian domestic aviation market. Reuters[/caption]
It is surprising how both IndiGo President Aditya Ghosh and AirAsia boss Tony Fernandes dismiss competition with the wave of their hands, as if in doing so they are wishing it away.
Ghosh says IndiGo’s plans won’t change because of competition; Tony said in Delhi last week he almost never studies what competition is doing in any market where Air Asia operates because he’d rather do things that take his own airline’s philosophy forward.
A senior official at a legacy airline points out that Ghosh is correct when he dismisses competition from AirAsia “just yet”. “AirAsia will begin operations by year end and gain scale only in 3-5 years. So Ghosh is right in dismissing competition for now. This question should be put to him three years down the line, when AirAsia has gained scale, has a large enough aircraft fleet to change the Indian domestic aviation market”.
Operating in the Indian aviation market is tough enough even now. According to a report by aviation consultancy CAPA, India’s airlines sunk deeper into debt last fiscal at combined $14.5 billion, an increase of 8-9% over FY12.
Except IndiGo, every other airline in India has negative networth.
CAPA says AI’s networth is a negative $3 billion, Jet Konnect at $311 million, GoAir at $107 million and SpiceJet at $41 million. Jet Airways is at negative $62 million while IndiGo is a positive $69 million.
It would surely want to stay in the positive territory in the future too.
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