)
CAPA welcomed the decision to allow foreign airlines to invest up to 49 per cent in Indian carriers in September 2012 and expects it to be a game-changer that will positively impact the entire value chain. Foreign airlines will bring in strategic capital and expertise. Other forms of institutional funding will follow, further strengthening the sector.
Deep structural issues
Allowing in foreign airlines, though, will not solve the deep structural problems of the Indian aviation sector. We need a comprehensive policy and regulatory framework which is transparent and aligned to the needs of the sector. Moreover, this framework should not be at the discretion of a few people, which, unfortunately, has been the case since the early 90s. We need to quickly remove the negative fiscal regime which makes the Indian airlines largely uncompetitive and also have a robust long-term infrastructure development plan . Overall, a focus on core and fundamental issues is most critical, which has not been addressed for almost two decades.
The decision of AirAsia to start a low-cost carrier (LCC) in India is on expected lines. The combination of AirAsia with partners such as Tatas make it a very formidable entity. I was surprised with Tatas playing the role of a junior partner in this JV and having a limited role. The FIPB approval is a significant step, as I was expecting some hurdles, especially with respect to the structuring of this JV but welcome the quick decision from FIPB. CAPA also welcomes the clarification by DIPP that FDI by foreign airlines is not limited to existing carriers but is applicable for new start-ups; this is a strategic decision. Limiting FDI by foreign airlines only to existing airlines is fundamentally flawed, as India needs strong new airlines which are well capitalised and have strategic partners.
FIPB approval just the beginning
For the AirAsia-TATA JV, the approval from FIPB is just the beginning of the regulatory process. Getting past the ministry of civil aviation might not be easy and challenges are likely. The ministry is not in favour of issuing new national licences and usually recommends a regional licence as the first step. It will be interesting to see how the ministry deals with the AirAsia application for a national licence. There will many other challenges, especially the board representation, management control and use of the AirAsia brand name.
The civil aviation ministry needs to come up with a transparent framework with respect to granting new licences for national operations and not be driven by ad hoc and a case-by-case approach. There may be other similar applications with strategic partners and how the ministry deals with AirAsia will set a precedent.
AirAsia is creating a pan-Asean LCC with multiple cross-border JVs and is aggressively pursuing this strategy. The group has very successful and profitable airlines in Malaysia and Thailand with 23 per cent and 11 per cent operating margins but is struggling in Indonesia. JVs in Philippines and Japan are still in the red and are likely to face losses in the near term. AirAsia group has 120 aircraft and will touch 150 by end of 2013. It has 460 A320s on outstanding order. It brings to India proven expertise and credentials.
What AirAsia will bring
Expect AirAsia to bring an ultra low-cost airline model to India, with 14-15 hours of aircraft utilisation, high-labour productivity and low-distribution costs. The JV will be big on ancillaries and will make strategic use of IT. Expect AirAsia to have already chosen its route network and initially focus on less competitive routes, with potential to stimulate the market with aggressive low fares. The challenges to achieve high aircraft utilisation, low distribution costs and scale in ancillaries remain though. I expect a ruthless focus on costs to achieve a higher level of productivity than existing industry levels. We might see many innovations and a different approach to marketing. I also see existing carriers increasing services out of Chennai before AirAsia starts. Overall, I don't see any near-term impact on Indian carriers till AirAsia reaches a significant scale.
CAPA welcomes AirAsia's entry to India and sincerely hopes the ministry of civil aviation plays a progressive role in clearing all impediments to entry of foreign airlines in existing airlines, as well as new start-ups like AirAsia. All such decisions should be driven by the national interest and the desire to make Indian aviation more competitive, sustainable and profitable. Ajit Singh has been instrumental in changing the FDI regime and allowing foreign airlines to invest in India. He must now take the crucial steps to ensure the benefits of this decision become visible to the sector and the Indian economy.
The writer is CEO, South Asia, Centre for Asia Pacific Aviation
