Entry into metros may delay AirAsia's break-even

Low-cost carrier AirAsia India's proposed plans to enter the country's metro segment may delay the break-even of the company, say industry experts.

The airline that recently started its domestic operations in India has been denying any interest in entering the metros, especially Mumbai and Delhi, owing to higher operational costs and high airport taxes. Industry experts said that AirAsia chief Tony Fernandes's announcement did not come as a surprise. However, the airline may take longer to achieve break-even, given the higher costs.

According to Kapil Kaul, CEO, South Asia for Center of Asia Pacific of Aviation (Capa), "Change of plans are on expected lines as Capa had indicated in our April industry report that Delhi/ Mumbai will be on AirAsia India's plans. So, not surprised. Don't see the airline break-even in FY15 and possibly in FY16."

AirAsia chief on Thursday announced on a micro-blogging website that the airline is looking to enter Mumbai very soon. "In Incredible India, Bombay is changing by the day. AirAsia India will be starting in this metro soon. We are coming," he tweeted.

He has also made it clear that the airline is changing its strategy for India in order to take on the existing competition.

SpiceJet COO, Sanjiv Kapoor tweeted on Friday saying, "Interesting to see the new entrant foreign airline change strategy every month and claim full planes when loads (are) in the low 70s. But then again back in July, they claimed they were "sold out" for next two months, when a simple web check could prove that was false."

In order to maintain its costs, AirAsia India had said that it would concentrate on tier I and tier II cities. Fernandes had said earlier that the airline is looking to break even by the end of its first year of operations.

Ever since the entry of AirAsia India, Indian airlines have introduced a fare-war on a regular basis in order to increase their advance bookings. Industry experts expect the competition to further intensify with entry of AirAsia India in the metros. "Expect a very intense fight on each and every route operated by AirAsia India and this will increase challenges for the airline and other operators," said Kaul.

Aggressive scaling-up of operations will mean a more direct fight and possibly a stronger fare war among current operators. More players joining by next year will further hurt the financials of the incumbent airlines. Capa estimates FY15 losses at $1.3-$1.4 billion, he added.

A lot will depend on the abolishment of 5 year and 20 aircraft policy, which is critical for AirAsia India's plan in the country, said an expert.

Kaul feels that the airline is under-capitalised and it may need significantly more cash than it estimated.

AirAsia India incurred a loss of Rs 26 crore in the first month of its operations, it had said in a statement in August.