AirAsia entry unlikely to change fare situation

Rohit Joshi and Siddharth Tak/Zee Research Group

Get set to loosen your wallet if you wish to fly anytime soon on key metro routes!

While the clearance to the induction of the low cost carrier (LCC) AirAsia to fly within India has fueled hopes of sustained discounted fares, the results of the recent fare cuts by some airlines have not been too encouraging.

January air traffic this year fell by five per cent in face of some bold cuts announced by airline companies facing sustained demand slump. Domestic passenger traffic has declined by around 5 per cent in 2012 when compared to 2011. The decline began May 2012.

SpiceJet and Jet Airways announced early this year select ticket auctions raising hopes that the worst was perhaps over. Go ahead to AirAsia’s proposal lend credence to the hope that discounted fares were here to stay forever. The LCC announcement preceded Dubai based Ethiad’s decision to partner Jet Airways in India.

Can AirAsia redefine India’s aviation sector by aggressive pricing or it will follow the Indian low cost carriers (LCC) model? Barring Air Deccan (now defunct), Indian LCCs such as Indigo, SpiceJet, Go Air, JetLite have not been able to sustain competitive pricing.

Ajay Singh, founder of SpiceJet, asserted, “In the short run, AirAsia will try to stimulate the market by reducing fares. The introductory fares will be low and that might result in some price cutting in the domestic market.”

Will the effort endure? Singh opined, “AirAsia would certainly be a medium to long term story.” There are doubts though whether AirAsia can even achieve this much on its low fare strategy. Sharan Lillaney, aviation watcher at Angel Broking, averred, “AirAsia will likely be starting its operations on regional routes where a lot of capacity is required hence price cut by it is unlikely in the short term.” However, he added that if it started on metro routes low fares might be the trend.

Are we reading too much in the LCC capability in India? “It can be possible that introductory fares may be lower for a month but that doesn’t give a whole year picture. A limited capacity of 4-5 planes is negligible and will not create competition in the market,” argued Lillaney.

This is not to suggest that the advent of AirAsia and Ethiad in India does not augur well for the aviation sector. While their entry will certainly help in expanding the aviation market as they will target new areas, AirAsia’s entry is certainly beneficial for the consumers as it will fill in the capacity gaps and provide them one more option to fly.

AirAsia has an established efficiency tag as a LCC. A J P Morgan Report said, “AirAsia has a good cost management track record. AirAsia and its JV airlines Thai AirAsia and Indonesia AirAsia’s unit cost ex-fuel are nearly 21- 42 per cent lower than existing Indian carriers”. This is going to help them in India, said Singh (formerly with Spice Jet).

Jitendra Bhargava, former ED, Air India, is confident that AirAsia would bring “real” low cost fares to India. “LCC business is successful in India but only disadvantage is that the benefit is not passed on to the passengers,” he lamented. Bhargava said traffic would grow only if fares were moderated.

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