 "AirAsia's business model may face challenge in India")
AirAsia's unit costs are significantly lower than Indian carriers due to use of low cost terminals, lower distribution costs, single aircraft type operation and higher aircraft utilisation amongst others. Unit costs or cost per available seat kilometre (CASK) refers to expenses incurred on flying a seat (filled or empty) over a kilometre.
A J P Morgan report shows AirAsia's CASK is (4.4 cents) is lower than SpiceJet (6.4 cents), JetLite (7.5 cents) and Jet Airways (9 cents). AirAsia claims that its CASK (along with Ryan Air) is the lowest amongst all airlines. One of the reasons for low operating costs is that aviation fuel is not taxed in Malaysia.
So how does the airline keeps its cost under control? About 85% of AirAsia tickets are sold through its website limiting agents' commission (In India about 70-80% of tickets are sold through offline agents and portals). In Kuala Lumpur and Bangkok AirAsia flies to low cost terminals (there are none in India). "We get rebate in landing and parking charges at Bangkok,'' explains Benyamin Ismail who handles the investor relations in AirAsia. Other aspects of cost optimisation include higher aircraft utilisation (12-14 hours daily), lower turn around time (25-30 minutes), use of dedicated kiosks for passenger check-in reducing the manpower requirement.
In its latest investor presentation AirAsia has said it will maintain "cost leadership'' investing in fuel efficient planes like airbus A320neos, further use of low cost terminals and securing attractive deals in aircraft financing. Also AirAsia in Malaysia (and its subsidiaries in Thailand, Indonesia, Philippines and Japan) enter into common contracts with vendors and airports securing discounts.
An another aspect where AirAsia differs from airlines in India is its stress on ancillary revenue. It sells tickets at rock bottom prices but charges for virtually all services - onboard meals, entertainment, preferred seats, pillows, baggage and so on. Full service airlines give a preferential treatment to their executive class passengers whereas AirAsia does the same at a charge. Known as AirAsia Red Carpet it offers passengers special check in counters, priority baggage delivery and use of lounge for a fee. In 2011, 18% of AirAsia's revenue came from ancillary sources (In Jet Airways the share is about 5-7%).
"When full service airlines are struggling to make money despite their higher fares they it becomes very difficult for a budget airline to make money as their costs are almost the same as a full device carrier but they have to be price sensitive. From a budget airline's perspective india is a high cost low income mark,'' said Richa Goyal Sikri, director of STIC travel group.
"We have a fare war even without AirAsia. AirAsia pricing will be totally dependent on their cost structure. I expect AirAsia to try its level best to focus on the fundamentals of their business model like closer to 14 hours plus utilisation, high labour productivity,very low distribution cost and big on ancillaries. All these are challenging at present. Plus, Indian domestic market is very competitive and often not rational which will test AirAsia but expect sharp focus on fundamentals of their model. I do not think Air Asia is in India to loose money and expect very serious intent from the start,'' said Kapil Kaul of Centre for Asia Pacific Aviation.
He added that other Indian carriers will further strengthen their network from Chennai before launch of AirAsia's domestic service. "It will be interesting to see how AirAsia deals with the regulatory framework and excessive government intervention especially on key commercial issues like fares and ancillaries,'' he added.