Pan-India spread a test for AirAsia's strategy

Nearly two months after its maiden flight from Bangalore to Goa, AirAsia India has set about to become a pan-India player.

Come September, it will fly on relatively uncharted routes like Bangalore-Chandigarh and Bangalore-Jaipur, where it will have competition from only one carrier: IndiGo.

In October, AirAsia hopes to connect Bangalore with the Northeast. It could be either Bagdogra or Guwahati.

Again, its rival will be IndiGo, which operates a daily flight from Bangalore to Guwahati.

The route selection may appear queer to many but Mittu Chandilya, the CEO of AirAsia India, feels this is the way to go.

"I believe in network strategies that don't involve existing heavy-flying traffic or a lot of historical trend. I rather study the latent potential and long-term growth opportunity," says he.

He wants to tap the traffic emanating from smaller cities like Srinagar, Indore and Raipur. By December, AirAsia will have a fleet of six aircraft (it has one now) and will operate over 50 flights a day (from eight at present). By that time, it hopes to have a second hub apart from Bangalore.

That could be either Goa or Chennai.

And it wants to replicate its successful low-cost model, which has fetched it handsome returns in Southeast Asia. This requires Chandilya to keep costs on a tight leash, go for innovative route planning, offer attractive fares to first-time travellers and tap ancillary revenues.

Chandilya says AirAsia is very much on course to achieve its efficiency targets.

Thus, it has been able to achieve a turnaround time of below 25 minutes and on some routes it is even down to 18 minutes, in line with its global average. The most efficient Indian carriers manage to do it in a little below 30 minutes.

However, Chandilya is unhappy that the aircraft are used for only around 10.5 hours a day.

He hopes that with the addition of new routes he will be able to push it to 14, or even 15 hours in a day, which is substantially higher than the Indian average of 11 hours.

AirAsia has 100 employees per aircraft, and Chandilya wants to trim the number to 80.

That he says is much lower again than the industry average of 125 to 150. Chandilya is also keeping a close tab on jet fuel and aircraft leases which together constitute 70 per cent of operational costs.

Chandilya admits that the only way to contain fuel prices is to bring in new technology. For instance, sharklets on Airbus aircraft reduce fuel costs by about 3 per cent.

He hopes large savings on fuel will happen once AirAsia is able to bring in Airbus's A-320 Neo aircraft next year.

Some analysts say that AirAsia, if it wants, can leverage its global network to import inexpensive fuel into India. But Chandilya says that import of fuel makes sense only when the airline has at least 10 aircraft in its fleet.

However, he feels AirAsia can reach that critical mass next year.

On leases, Chandilya admits that he saves about 3 per cent vis-à-vis rivals because of the large number of planes the group buys across its global network. However, he concedes it is not a critical advantage because at least one competitor (IndiGo) has ordered a huge number of planes and is likely to get the same terms as AirAsia.

Mittu ChandilyaRoute plan The cost-consciousness is reflected in the route plan too. For instance, the company chose to kick off operations in Bangalore, Chennai and Kochi because it already has a presence in these markets through its international flights and, therefore, it did not have to spend much on creating brand awareness. The new routes in the North would require some investments in promotion.

But Chandilya hopes to benefit from the limited competition and the huge growth potential of the region. Analysts say people won't mind paying a little extra for a direct flight.

The flier from Jaipur, for instance, currently comes to Delhi if he has to go to Bangalore. With AirAsia's direct flight, he will be saved the expense of travelling to Delhi.

To tap these markets, Chandilya is ready to tweak the AirAsia model. For instance, though it sells tickets only online, here it could sell through offline agents for the benefit of first-time travellers. Chandilya hopes that he will be able to operationally break even by December.

Many, including his competitors, doubt if this is achievable, considering its costs are no different from others. They say that in most of the routes that AirAsia is flying, it is losing money.

"On a route like Bangalore-Chennai, you can break even only when you reach Rs 3,300 to Rs 3,500 per seat. But all of us are selling below this fare," says a senior executive of a rival carrier.

Chandilya says AirAsia fixes the price on a route based on what it thinks is affordable and then works backwards to ensure that the cost of operations is below that number.

The thumb rule he follows is that the cheapest fare should be 30 per cent lower than what is prevailing on the route before AirAsia's entry. On the Bangalore-Chennai route where the average fare is around Rs 2,200, Chandilya says AirAsia has kept 25 to 40 seats in the lowest bucket to woo first-time travellers. He argues that while he can break even at the existing fare, he would be more comfortable if the average fare was over Rs 3,000. What perhaps makes Chandilya confident of hitting breakeven by December is the success he has been able to achieve with ancillary revenues (extra money for special seats, luggage charges beyond 15 kg and so on).

Chandilya says that ancillary revenue is already about 18 to 20 per cent of the total, though he admits that it is also because promotional fares are low.

But he hopes to maintain this level as the network expands and fares stabilise.

These numbers, of course, are far higher, analysts say, than that of its chief rival, IndiGo, which gets about 10 per cent of its total revenue from ancillary sources (the industry average is below 5 per cent). He also hopes to sell premium flexi-fare seats which are targeted at corporate travellers.

The passengers get free luggage, priority boarding and choice of seats but fares are twice of what they normally are.

Chandilya says that currently there are 20 seats on offer on each flight in this segment, and it is able to sell about half the seats. That is because it has still not put together a strategy to market these seats to corporations - something it will do once its network expands.

The question is whether or not companies will fork out a premium for marginal benefits? IndiGo is also wooing such travellers with free meals but it only charges a small premium.

Will Chandilya's strategy succeed? With at least one carrier in serious financial trouble, and Jet Airways slowly reducing its domestic flights in order to focus on moving passengers to Abu Dhabi after its alliance with Etihad, many say AirAsia has a fair chance of success.

Chandilya says there is enough opportunity for at least two more players because of the untapped potential in India.

He says that in 2015, AirAsia plans to add another 10 to 12 aircraft to its fleet.

Some of the aircraft could be used for international operations, in case the government allows new carriers to fly abroad before five years.

He is also hoping to have a hub in Delhi where, AirAsia had earlier said it would not operate because of high airport costs.

Chandilya says that unlike others for whom Delhi and Mumbai were the starting points of their operations, AirAsia will go to these cities only when it has a large enough network.