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| AirAsia Faces Red Tape and Tough Competition in India | AirAsia Faces Red Tape and Tough Competition in India |
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| DELHI — When the fast-growing Malaysian carrier AirAsia wanted to expand, India looked like the ideal frontier. | DELHI — When the fast-growing Malaysian carrier AirAsia wanted to expand, India looked like the ideal frontier. |
| The country had hundreds of millions of potential first-time fliers, many in second- and third-tier cities that have just a few flights a day. With one-way airfares as low as $20, AirAsia aimed to capture huge chunks of tourism and holiday traffic from India’s iconic but achingly slow trains. | The country had hundreds of millions of potential first-time fliers, many in second- and third-tier cities that have just a few flights a day. With one-way airfares as low as $20, AirAsia aimed to capture huge chunks of tourism and holiday traffic from India’s iconic but achingly slow trains. |
| Then, AirAsia discovered the difficulties of doing business in India. | Then, AirAsia discovered the difficulties of doing business in India. |
| While it benefited from a recent loosening of restrictions on foreign investment in airlines, AirAsia India has contended with a web of red tape and regulations for new entrants that have added significant cost and complexity to its operations. Competition has also proved fierce, and persistent price wars cut deeply into profits. | While it benefited from a recent loosening of restrictions on foreign investment in airlines, AirAsia India has contended with a web of red tape and regulations for new entrants that have added significant cost and complexity to its operations. Competition has also proved fierce, and persistent price wars cut deeply into profits. |
| After its first year in operation, AirAsia India has just 1 percent of the country’s domestic passenger market, and the carrier is retooling its strategy. While initially focusing mainly on smaller, underserved cities in south India, the airline has now started flying routes from the country’s largest, Delhi. | After its first year in operation, AirAsia India has just 1 percent of the country’s domestic passenger market, and the carrier is retooling its strategy. While initially focusing mainly on smaller, underserved cities in south India, the airline has now started flying routes from the country’s largest, Delhi. |
| “We realized that we need to be more visible, both to fliers and to policy makers,” said Mittu Chandilya, chief executive of AirAsia India. “Flying to Delhi will simply give more people a chance to experience our product.” | “We realized that we need to be more visible, both to fliers and to policy makers,” said Mittu Chandilya, chief executive of AirAsia India. “Flying to Delhi will simply give more people a chance to experience our product.” |
| AirAsia India is following the path set by the carrier in other countries. | AirAsia India is following the path set by the carrier in other countries. |
| Since an overhaul in 2001, AirAsia has largely focused on keeping costs low and wringing out extra revenues by selling ancillary services like in-flight meals and entertainment, as well as charging fees for checked bags or seats with extra legroom. | Since an overhaul in 2001, AirAsia has largely focused on keeping costs low and wringing out extra revenues by selling ancillary services like in-flight meals and entertainment, as well as charging fees for checked bags or seats with extra legroom. |
| AirAsia exported the model from its home in Malaysia to the Philippines, Thailand and Indonesia, trying to capitalize on the fast-growing economies in the region. Among Southeast Asia’s budget carriers, it accounts for more than a third of all seat capacity, according to an analysis by the Centre for Asia Pacific Aviation. | |
| “To continue their rapid growth, they have been trying to diversify their portfolio,” said Brendan Sobie, an analyst in Singapore for Centre for Asia Pacific Aviation. “These new joint ventures are in significantly more challenging markets, because AirAsia won’t have the first-mover advantage it had elsewhere.” | “To continue their rapid growth, they have been trying to diversify their portfolio,” said Brendan Sobie, an analyst in Singapore for Centre for Asia Pacific Aviation. “These new joint ventures are in significantly more challenging markets, because AirAsia won’t have the first-mover advantage it had elsewhere.” |
| The expansion has faced setbacks. AirAsia left Japan in 2013 after hitting an impasse over strategy with its joint venture partner All Nippon Airways. Late last year, the carrier faced its first major crisis, when a plane carrying 162 people crashed into the ocean off the Indonesian shore. | The expansion has faced setbacks. AirAsia left Japan in 2013 after hitting an impasse over strategy with its joint venture partner All Nippon Airways. Late last year, the carrier faced its first major crisis, when a plane carrying 162 people crashed into the ocean off the Indonesian shore. |
| Most recently, the carrier’s struggling offshoots have been prompting concerns. In June, GMT Research, a firm based in Hong Kong, raised questions about AirAsia’s accounting, accusing the carrier of “flattering its cash flow by abusing its associates.” The report set off a sharp drop in the carrier’s stock. | Most recently, the carrier’s struggling offshoots have been prompting concerns. In June, GMT Research, a firm based in Hong Kong, raised questions about AirAsia’s accounting, accusing the carrier of “flattering its cash flow by abusing its associates.” The report set off a sharp drop in the carrier’s stock. |
| Shortly after, the company laid out plans to raise capital, and inject money into its associated airlines in Indonesia and the Philippines. In a statement to the stock market, the company denied the GMT accusations and said it had a “solid footing, strong balance sheet, rich in assets and a good business outlook.” | Shortly after, the company laid out plans to raise capital, and inject money into its associated airlines in Indonesia and the Philippines. In a statement to the stock market, the company denied the GMT accusations and said it had a “solid footing, strong balance sheet, rich in assets and a good business outlook.” |
| The plan for the Indian subsidiary was hatched in 2013, when Mr. Chandilya was working as an airline consultant in Malaysia. While there, he met Tony Fernandes, the founder of AirAsia, whose father was from India. | The plan for the Indian subsidiary was hatched in 2013, when Mr. Chandilya was working as an airline consultant in Malaysia. While there, he met Tony Fernandes, the founder of AirAsia, whose father was from India. |
| Both have a pronounced passion for turning around failing ventures, and both came to the airline industry late in their careers; Mr. Fernandes is an accountant by training, and Mr. Chandilya spent almost a decade with Ingersoll-Rand, working on mergers and acquisitions. | Both have a pronounced passion for turning around failing ventures, and both came to the airline industry late in their careers; Mr. Fernandes is an accountant by training, and Mr. Chandilya spent almost a decade with Ingersoll-Rand, working on mergers and acquisitions. |
| “Tony and I had what couldn’t have been more than a 20-minute meeting, but we hit it off immediately,” said Mr. Chandilya, 34. “He said, ‘Look, I think we can make the best and the biggest airline in India. I need you to create the vision.’” | “Tony and I had what couldn’t have been more than a 20-minute meeting, but we hit it off immediately,” said Mr. Chandilya, 34. “He said, ‘Look, I think we can make the best and the biggest airline in India. I need you to create the vision.’” |
| Drawing on some of Mr. Fernandes’s management habits, Mr. Chandilya spent time in Malaysia observing AirAsia’s ramp workers, engineers and other employees to “get a flavor” of the company. “I took my stopwatch with me and timed everything. It was amazing. They’d turn a jet around in 19 minutes without compromising anything on safety,” he said. “That kind of focus and discipline doesn’t exist in India, but we felt it could be brought there.” | Drawing on some of Mr. Fernandes’s management habits, Mr. Chandilya spent time in Malaysia observing AirAsia’s ramp workers, engineers and other employees to “get a flavor” of the company. “I took my stopwatch with me and timed everything. It was amazing. They’d turn a jet around in 19 minutes without compromising anything on safety,” he said. “That kind of focus and discipline doesn’t exist in India, but we felt it could be brought there.” |
| Avoiding professional consultants, Mr. Chandilya studied a dozen Indian airlines, some that had failed, and others he would be competing against. “I wanted to understand the industry myself,” he said. “I wanted to grasp the prices and regulatory schemes through and through.” | Avoiding professional consultants, Mr. Chandilya studied a dozen Indian airlines, some that had failed, and others he would be competing against. “I wanted to understand the industry myself,” he said. “I wanted to grasp the prices and regulatory schemes through and through.” |
| Mr. Chandilya settled on a bare-bones model, similar to that of its parent, that keeps fares as low as possible. He also decided to avoid the two biggest metro areas, Delhi and Mumbai. Both places charge high landing fees and the route between the two is heavily saturated. | Mr. Chandilya settled on a bare-bones model, similar to that of its parent, that keeps fares as low as possible. He also decided to avoid the two biggest metro areas, Delhi and Mumbai. Both places charge high landing fees and the route between the two is heavily saturated. |
| But Mr. Chandilya acknowledges that he misjudged India’s regulatory environment, which is uniquely stringent for airlines. | But Mr. Chandilya acknowledges that he misjudged India’s regulatory environment, which is uniquely stringent for airlines. |
| Taxes on aviation turbines are higher than almost anywhere else in the world. Every airline, even those with just a few planes, is also required to fly regularly to remote regions, where flights often run half full. And new entrants like AirAsia India are prohibited from flying lucrative international routes until they are five years old and have at least 20 aircraft, the so-called 5/20 rule. | Taxes on aviation turbines are higher than almost anywhere else in the world. Every airline, even those with just a few planes, is also required to fly regularly to remote regions, where flights often run half full. And new entrants like AirAsia India are prohibited from flying lucrative international routes until they are five years old and have at least 20 aircraft, the so-called 5/20 rule. |
| “I believe in free markets and open skies, but if you look at the policies we have in place, I don’t think we have that at all,” Mr. Chandilya said. | “I believe in free markets and open skies, but if you look at the policies we have in place, I don’t think we have that at all,” Mr. Chandilya said. |
| AirAsia has also had to go head-to-head with IndiGo. One of the first budget carriers to start in the country, IndiGo, with a solid reputation for punctuality and comfort, now commands almost 40 percent of the market, according to government statistics. It’s one of the few Indian airlines that has been consistently profitable. On each new route opened by AirAsia India, IndiGo has followed, setting off a price war. | AirAsia has also had to go head-to-head with IndiGo. One of the first budget carriers to start in the country, IndiGo, with a solid reputation for punctuality and comfort, now commands almost 40 percent of the market, according to government statistics. It’s one of the few Indian airlines that has been consistently profitable. On each new route opened by AirAsia India, IndiGo has followed, setting off a price war. |
| With price wars taking their toll, Mr. Chandilya has been making the rounds in India’s government ministries, pushing for reforms that would help him cut costs, like lowering the tax on aviation turbine fuel. | With price wars taking their toll, Mr. Chandilya has been making the rounds in India’s government ministries, pushing for reforms that would help him cut costs, like lowering the tax on aviation turbine fuel. |
| Each Indian state controls its own taxes on aviation turbine fuel, and in many places it is kept as high as 30 percent. More than half of AirAsia India’s operating costs are fuel-related. | Each Indian state controls its own taxes on aviation turbine fuel, and in many places it is kept as high as 30 percent. More than half of AirAsia India’s operating costs are fuel-related. |
| High taxes also extend to maintenance and Indian airlines often choose to take their aircraft to nearby countries for that work. AirAsia India plans to send its planes to Malaysia or Singapore for servicing once they’ve been operational for two years. | High taxes also extend to maintenance and Indian airlines often choose to take their aircraft to nearby countries for that work. AirAsia India plans to send its planes to Malaysia or Singapore for servicing once they’ve been operational for two years. |
| “I talk to ministers and policy makers about how they can help the industry and promote growth, but it is very difficult to get them to understand that reducing these taxes will probably boost their states’ economies,” Mr. Chandilya said. “The ministries aren’t coordinating with each other — they only have their own interests in mind.” | “I talk to ministers and policy makers about how they can help the industry and promote growth, but it is very difficult to get them to understand that reducing these taxes will probably boost their states’ economies,” Mr. Chandilya said. “The ministries aren’t coordinating with each other — they only have their own interests in mind.” |
| The Ministry of Civil Aviation has put forward a proposal to ease the 5/20 rule. Under the proposed revision, new airlines would earn “domestic flight credits” by flying to underserved regions that could then be spent on rights to fly internationally, or even sold to other airlines that are hoping to make that move more quickly. | The Ministry of Civil Aviation has put forward a proposal to ease the 5/20 rule. Under the proposed revision, new airlines would earn “domestic flight credits” by flying to underserved regions that could then be spent on rights to fly internationally, or even sold to other airlines that are hoping to make that move more quickly. |
| While it is a step in the right direction, Mr. Chandilya figures it would still take his airline at least three years and 15 aircraft to garner enough credits. | While it is a step in the right direction, Mr. Chandilya figures it would still take his airline at least three years and 15 aircraft to garner enough credits. |
| “It’s antiquated, oligopolistic laws like these that make India’s ‘ease of doing business’ ranking a lowly 142 out of 189 countries,” said Amber Dubey, who oversees India’s airline industry for KPMG. | “It’s antiquated, oligopolistic laws like these that make India’s ‘ease of doing business’ ranking a lowly 142 out of 189 countries,” said Amber Dubey, who oversees India’s airline industry for KPMG. |
| In the meantime, AirAsia India is trying to make itself more visible. Advertisements for the airline now cover dozens of billboards across Delhi, and smaller ones line the city’s traffic-choked ring road. | In the meantime, AirAsia India is trying to make itself more visible. Advertisements for the airline now cover dozens of billboards across Delhi, and smaller ones line the city’s traffic-choked ring road. |
| Aboard a special flight to inaugurate the Delhi hub in May, government officials and investors were flown over the hazy, village-dotted plains of northern India before circling over the Taj Mahal, and then returning to Delhi. The flight also represented the entry of AirAsia India’s fourth plane into its fleet. | Aboard a special flight to inaugurate the Delhi hub in May, government officials and investors were flown over the hazy, village-dotted plains of northern India before circling over the Taj Mahal, and then returning to Delhi. The flight also represented the entry of AirAsia India’s fourth plane into its fleet. |
| “When our first plane landed there, I made sure we could park it right between two of IndiGo’s planes,” Mr. Chandilya said. “I wanted their passengers to see us. We’re taking on the big dog. We’re now inside IndiGo’s fort.” | “When our first plane landed there, I made sure we could park it right between two of IndiGo’s planes,” Mr. Chandilya said. “I wanted their passengers to see us. We’re taking on the big dog. We’re now inside IndiGo’s fort.” |