Editorial: On a wing and a prayer

May 10 2014, 04:07 IST
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SummaryRelaxing of the 5/20 rule may give Air Asia an edge

Given the current patterns in passenger traffic in India, where the top six metros account for 65-70% of the throughput, it is hard to understand how Air Asia India’s low-cost carrier will make money without Mumbai on its route map. The management has said it proposes to stay away from Mumbai and instead operate flights to smaller cities; that would appear to be a brave decision since the most profitable routes are those between the metros, especially the ones between Mumbai and Delhi. As it is, it is not as if airlines in India are overloaded—analysts estimate excess capacity, even after Kingfisher was grounded at levels of 15-20%—which is why fare wars break out every now and then with carriers discounting prices heavily.

Indeed, domestic passenger traffic grew at a paltry 5% in FY14 to 122 million, which in effect means some 60 million tickets were sold. What’s more the average passenger load factor was close to 75%; assuming the load factor was 90-95% on the metro routes, the average for the Tier II cities would have been closer to 50%. While there is no doubt that volumes could go up sharply once the economy recovers—aviation is very closely correlated with GDP growth with analysts putting the multiple at 1.5 times—it’s unlikely that traffic to the Tier II cities like a Bhopal or a Bhubaneswar, will grow as fast at least for the next few years.

Also, given that 80% of costs in the aviation business are fixed costs —fuel, crew, engineers, leases, airport charges and maintenance—it would be very difficult for Air Asia to break even in four months—as it claims it will— if it’s going to be selling tickets at a discount of 30% to current prices. Where the carrier may have an advantage over its rivals is in the lower cost of leases, since it runs a larger operation, but there too the cost wouldn’t be much lower. Indigo too operates a fairly large fleet of close to 80 aircraft and, therefore, must enjoy a concession on the lease rentals that it pays but has nevertheless taken a long time to break even. Air Asia believes it will be more efficient in the air, flying more than the average of 11-12 hours a day that other airlines are doing right now but much of that will depend on how efficiently the airports work, the congestion at

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