Rot in AirAsia India runs deep; to survive it needs funds, focus

New Delhi: AirAsia India is again in the news, with reports now suggesting its CEO and MD Mittu Chandilya has resigned. Just a few days back, the airline made headlines for a different reason - when Tata Sons picked up additional equity stake to finally own about 41% share in the airline. Though both these developments are significant, what needs to be highlighted is the deeper rot within the airline.

Rot in AirAsia India runs deep; to survive it needs funds, focus


AirAsia India needs renewed commitment from its shareholders, an urgent funds' infusion and a clear operational strategy to survive in a tough-as-nails Indian aviation market. India is unlike most other markets where airlines pile up losses but rarely folds up, making life quite tough for new entrants.

Vijay Mallya finally ended his airline dream after sinking millions of dollars in the business in Kingfisher Airlines, Air India continues on government dole despite massive accumulated losses, SpiceJet was very close to shutting down before former promoter Ajay Singh rescued it last January and Jet Airways is only now starting to make a turnaround.

What AirAsia India needs the most is commitment from its shareholders towards recapitalization and then a capable management team to steer it. Besides, the airline must be run from India, by a strong management team aware of market realities and clued into the dynamics here instead of being driven from the Malaysian parent's headquarters.

Sources close to the developments at AirAsia India said AirAsia BhD had in the past expressed its inability to bring funds for recapitalization and the entire onus of bringing in fresh capital rested virtually with the Tatas. This may change soon, as the Malaysian parent may finally be infusing some cash. AA BhD boss Tony Fernandes is scheduled to be in Mumbai over this weekend. These sources said the discussions between the shareholders have been about infusing $100 million into AirAsia India even as analysts have said the airline needs about half that amount in the near term.

AirAsia BhD (49%) and Tata Sons (41%) are the two major stakeholders in this startup airline who have not been united in purpose as far as key decisions about the airline are concerned. Telestra Tradeplace, which owns the remaining 10% stake, has obviously been keen to exit after alleging mismanagement, micro management by the Malaysian parent and inactive participation by the Indian partners. It is time shareholder issues, changes in shareholding pattern and top level management rejigs are resolved swiftly so that the airline can begin focusing on the business of flying, Or else, it may just have to struggle to survive in one of the world's fastest growing markets. Worse, it may have to shut shop.

AirAsia India was started as three way partnership, with AirAsia BhD owning 49% equity, Tata Sons was at 30% and Telestra Tradeplace at 21%, This shareholding structure in itself has caused some pain to the airline since Telestra seems to have been unhappy with the way things worked. So why did Tata Sons not take active part in making key decisions? It has been said in the past that AirAsia India is a board driven company and all decisions are being taken by the board. Still, sources insist decisions related to network planning, fleet and commercial strategy aret being first vetted by the Malaysian parent.

AirAsia India started operations in June 2014. The LCC saw an initial investment of $30 million but no more funds have been invested in it till date. It signalled the re-entry of the Tatas into the aviation business after previous unsuccessful attempts. Why was Telestra Tradeplace at all asked to be part of an airline when it had no prior experience in the segment? Many industry experts believed at the time that the Tatas were hesitant in picking up majority 51% in the airline, wanted to test the waters. And then, the Tatas went ahead and invested in another full service airline Vistara (in partnership with Singapore Airlines) which lead many to doubt if the group will retain required focus and support to two airlines operating in the same market albeit with different business models.

Also, if the Tatas do want to eventually take majority control in the LCC, they should take the decision soon and end the uncertainty on shareholder issues. Already, after the Tatas hiked stake to 41%, Telestra representatives seem to have lessened their interest in the proceedings with sources saying Bhatia has not attended the last two board meetings of the airline.

Kapil Kaul, CEO and Director of CAPA South Asia pointed out Chandilya's exit and issues raised earlier by Bhatia of Telstra are not significant nor will they change Air Asia’s dynamics and market profile. "This JV had strategic fault lines from the beginning. Underestimating the fierce competitive dynamics in India and its aviation ecosystem led to two critical mistakes: Serious under-capitalization of the project. More importantly, management depth and quality required for this complex market were compromised. India is a very difficult market and cannot be driven from the head office".

He said AirAsia's challenges and lack of performance cannot be attributed to the CEO alone. "I strongly believe responsibilities lie with board and promoters. Tatas are so big as a group and this JV to me was non strategic and too small to receive the attention it deserved. The AirAsia group is facing structural challenges in most of their markets for last couple of years and this resulted in lack of focus on Air Asia India."

AirAsia India claims to have one of the lowest cost structures among all Indian airlines but cash is urgently needed for network and fleet expansion to stay relevant in a highly competitive market like India where at least 3 in 4 flyers already fly an LCC. Its crying need is a substantial investment from the shareholders.

Speaking to Firstpost earlier, Chandilya had said operationally, the airline has been doing well. He had cited aircraft utilisation of 13.5 hours on a fleet of six aircraft, low cost base and increased overall operational efficiencies to say the airline was on the right path operationally. The manpower to aircraft ratio of the company was at a 110, he had claimed.

Incremental improvements in operations are also happening, with a new CFO and a Commercial Director expected to join soon. Both could be nominees of the Malaysian parent. In the December quarter of this fiscal, the airline claims to have made its first gross profit and in the month of January too, it claims to be making gross profit. This is a vast improvement over he Rs 65 crore loss it posted in the September quarter of this fiscal and Rs 24.71 crore loss in the year-ago period.

Originally, the airline had planned to add 10 aircraft to its fleet each year but market realities and the government dragging its feet over the 5/20 rule have forced AirAsia India to halt such ambitious plans. It now has just six aircraft in its fleet compared to 15 it would have had if the original blueprint were to be followed. There is yet no clarity on when the next two aircraft will arrive since AirAsia India is awaiting the decision on 5/20.

This is a rule which bars Indian airlines from flying overseas unless they have completed five years of Indian operations and have a fleet of 20 aircraft. Chandilya had said fleet expansion is awaiting clarity on the Civil Aviation Policy (which will determine whether the 5/20 restriction stays or goes). If 5/20 is scrapped, then tier I towns may become more important than tier II (which are currently the airline’s focus) for overseas flights – basically, the entire network will undergo a change.

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Updated Date: Feb 12, 2016 14:25:48 IST

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