AirAsia India: Why did the pioneer of global low-cost aviation not live up to its potential in India?

Headquartered in Bengaluru, AirAsia India has a market share of 5.9 percent, the lowest among all the low-cost carriers in the country, as of September this year. Even Vistara, which began operations around the same time as AirAsia India, albeit as a full service carrier, has a market share of nearly 10 percent. That, despite two of the country’s best-known low-cost carriers facing disruptions due to various reasons in recent times.

“The brand will end in the next few months with the Tatas buying out the remaining equity stake and as the brand agreement runs out,” Satyendra Pandey, the managing partner at aviation services firm, AT-TV says. “AirAsia India has been a story that highlights the complexities and challenges of the India market. Arguably AirAsia India started with a hypothesis that didn’t quite fit which was to base itself in Chennai and only serve Tier 2 and Tier 3 cities. On both counts—namely the base selection and the network—the decisions were revisited.”

AirAsia India today operates 28 aircraft across 17 destinations in the country. The airline has been steadily bleeding money and on last count, has raked up losses of Rs 2,179 crore on revenues of Rs 1,914 crore. “It isn’t clear how the Tatas plan to integrate AirAsia India into its stable of airlines,” Shukor Yusof, head of Malaysia-based aviation consultancy Endau Analytics says. “It would be best for them to completely ditch the brand name as it’s more a distraction than an advantage.”

What went wrong?

AirAsia India began operations in the country in 2014 with its base in Chennai.

Back then, Tony Fernandes, the flamboyant head of AirAsia, had predicted that the airline will make profits from the first year of its operations. Originally, AirAsia India had AirAsia as the largest shareholder with a 49 percent stake, while the Tata Group had 30 percent and the remaining 21 percent was with Telstra Teleservices, promoted by Arun Bhatia.

Tony Fernandes had then hired Mittu Chandilya, a former model and the head of services practices for Asia Pacific at Egon Zehnder International, to lead the Indian operation.

Chandilya, then all of 32 and amongst the youngest CEOs in the aviation sector, had promised that the airline will grow on to become bigger than the AirAsia Group, comprising some 400 aircraft. “I gave Tony a commitment before he hired me that we will be bigger than the rest of AirAsia combined,” Chandilya had said in an interview with Forbes India. “With 400-plus aircraft, the fleet size of all the airlines in India put together is roughly the same as the AirAsia group’s. The market here is huge. So just give me a few years and we will be bigger.”

But that wasn’t to be. Since its launch in India, the airline has been plagued by troubles one after the other including a corruption case levelled against Fernandes and the team and even an alleged discord between the partners. To begin with, there were murmurs that Bhatia of Telestra was unhappy with the Tata Group for joining hands with Singapore Airlines to set up Vistara even as the AirAsia India venture was being finalised.

AirAsia India’s first flight took to the skies in June 2014, six months before Vistara began flying in India.

Then, a year into operations, Fernandes was getting increasingly frustrated with the Indian partners for not doing enough to help remove a 5/20 rule of the Indian government that required an airline to operate for five years and have a fleet of 20 aircraft before it could fly internationally. The removal of that rule was necessary for AirAsia India to kickstart its international operations. The government amended the 5/20 rule only in 2016, but that move also had severe consequences for the airline later on.

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“Just because AirAsia had done very well in Southeast Asia [it] doesn’t follow [that] it could replicate its success in India,” adds Yusof. “Partly because the likes of Indigo, SpiceJet, GoAir, etc. were always able to undercut whatever fares AirAsia was offering and they did all they could to make life miserable for AirAsia India. AirAsia just didn’t do enough homework before entering the market or it would have discovered how cut-throat India’s aviation landscape is--marked by fierce competition, rigid regulations, and jet fuel costs that are among the highest in the world. Most Indian carriers were losing money before AirAsia’s entrance.”

Then, within three years of setting up operations, Chandilya resigned from his job reportedly after being frustrated with the micro-management by the parent company based in Malaysia. Chandilya was replaced by Amar Abrol. It also did not help that the market share growth was only on par with Vistara, even though low-cost carriers held sway in the Indian market. Meanwhile, in 2016, Arun Bhatia also left the partnership, handing over his share to the Tata Group.

“There was also the complex inter-corporate structure between AirAsia Berhad and AirAsia India with several systems, processes and contracts already pre-determined,” adds Pandey.

“Overall this led to cost-escalation and misalignment. And in an intensely competitive market like India where each cent makes a difference, this did not bode well.”

In 2016, the company came under a cloud when a forensic report by Deloitte revealed alleged irregular transactions worth some Rs 22 crore at the company with fictitious companies in India and Singapore. “AirAsia India is a very good example of what Tony Fernandes touches don’t always turn to gold,” says Yusof of Endau. “He underestimated the degree of difficulty of the Indian market which neither he nor his choice of CEO (Chandilya) fully understood or had experience in. And so even with the Tatas as partners, the airline struggled. It is possible too that Fernandes’ way of doing business is different from the Tatas, resulting in a culture clash. ‘The good always wins,’ Fernandes had proudly proclaimed. A bit brash sounding, but that’s him.”

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Fernandes had pioneered low-cost travel in Asia after buying his airline in 2001 for just 1 Malaysian ringgit. The former music executive then went on to transform air travel in Southeast Asia by introducing the no-frills airline concept.

By 2018, two years after Chandilya had resigned, AirAsia India was caught up in some severe turbulence when the Central Bureau of Investigation (CBI) registered a first information report (FIR) against Tony Fernandes and others for alleged bribery to obtain flying licences and changing the regulations concerning the 5/20 rule. The CBI had also said that the AirAsia Group has violated rules set by the then Foreign Investment Promotion Board as well as foreign direct investment (FDI) norms by giving management control to a foreign entity, making AirAsia India a de-facto subsidiary of AirAsia Group.

The agency also filed a case against R Venkataramanan, managing trustee of Tata Trusts, and Tharumalingam Kanagalingam, the deputy group CEO (operations), of AirAsia, among others.

“Hindsight is 20-20 so a post-facto analysis tends to over-determine several aspects,” adds Pandey. “But certainly a more critical reading of the market would have helped. As would a more well-defined strategy on why customers would choose AirAsia India over the competition. For instance, AirAsia India pushed for digital innovation in which they were market leaders. That assumed a travel base of tech-savvy and frequent travelers. For Bangalore this held true but in cities other than Bangalore, the pricing levels targeted first-time flyers thus there was a clear disconnect. Choices on distribution and distribution platforms also required a rethink. There were several such examples.”

In 2018 the company then appointed Sunil Bhaskaran, a group veteran, as the airline’s CEO, and by 2020, when Covid-19 hit, AirAsia India was in neck-deep trouble as was the case with many other domestic players. Even the wider AirAsia group had to rely on government-backed lending to sustain itself, during which time the group sold its remaining stake in the India arm to the Tatas. AirAsia had also shut its operations in Japan, largely due to challenging conditions amid the pandemic in 2020.

Then this year, in June, the Competition Commission of India (CCI) approved the acquisition of the entire shareholding in AirAsia India by Air India, now a wholly-owned subsidiary of Tata Sons, paving the way for a merger later. “AirAsia India could have redrawn the discount flying landscape at a time when the local competitors weren’t quite as strong,” adds Yusof. “But then again, what worked elsewhere need not necessarily work in India—is just a different beast when it comes to the airline business and requires a hard-nosed approach as well as being politically savvy.”

Turning around the crown jewel

The possible end of AirAsia India’s dream run in India comes at a time when the Tata Group is throwing its weight behind turning around Air India. In September this year, Air India unveiled a new plan titled Vihaan.ai, which translates to the dawn of a new era in Sanskrit, as part of its turnaround plan for the airline, which was once owned by the group before it was taken over by the Indian government.

According to the plan, Air India says it has set itself clear milestones focused on growing its network and fleet, developing a completely revamped customer proposition, improving reliability and on-time performance, and taking a leadership position in technology, sustainability, and innovation, while aggressively hiring industry talent. Over the next five years, the airline will also look to increase its market share to at least 30 percent in the domestic market while significantly growing the international routes.

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That’s where AirAsia India could come to play a significant role for the Tatas with a significant customer base, airport slots, revenue and fleet, which in turn will help when negotiating with aircraft makers, lessors and engine manufacturers. Besides, AirAsia India’s relatively young workforce, improved systems and technology will also play a critical role in turning around the wider Air India group, which has been struggling for decades with under investments in key technical areas and workforce.

“We’ve been very clear that it’s a five-year programme,” Wilson had told Forbes India.

“The first six months are about addressing the accumulated grievances and issues that have historically been holding the airline back, address them at war scale, and then move on to an 18-month programme of investing in systems, people, aircraft, training, internal products to make a clear statement of intent. Then the subsequent couple of years is the climb phase which is where we do all those million and one little things that are necessary to go from very good to world-class.”

The Indian aviation market needs over 1,900 aircraft in the next 20 years to keep up with the growing demand for air travel. Aircraft manufacturer Airbus projects the 20-year traffic growth of India’s civil aviation sector at 7.7 percent, almost twice the world average of 4.3 percent. Domestic traffic growth is expected at 8.2 percent, one of the world’s highest.

India’s domestic aviation market is currently led by low-cost carriers that control as much as 80 percent of the market, led by market leader IndiGo which corners nearly 60 percent of the market share. “There are some markets and some routes that are more disposed to a full-service proposition. Some are more disposed to a low-cost proposition. Somewhere they can accommodate both,” Wilson had said. “I think domestically the evidence is quite clear that it’s largely a low-cost market, although there is a place for full service. Internationally, it’s largely a full-service market, although there is a place for a low-cost [service]. How we deploy those two models is a function of how the market shape not just currently is, but also how it evolves.”

That means, there is a strong possibility that Air India and Vistara could emerge as one big full-service carrier while AirAsia India and Air India Express could emerge as the low-cost arm with both domestic and international operations. “I think we need to cross that bridge when we come to it,” Wilson had said about possible mergers. “We have an airline to turn around and we have an aspiration to reach for Air India and we’re 100 percent focused on that task. Life does throw a googly every so often and if that comes, then we’ll play it as it comes.”

One thing, however, is becoming clear. It’s quite unlikely that the Tata Group, which now considers Air India a jewel in its crown, will likely be interested in holding on to a brand that hasn’t quite lived up to its potential over the years.