AirAsia India: Q2 FY15 Performance and Outlook

AirAsia India recorded a loss of INR 28.8 crore for the second quarter of financial year 2014-15, covering July, August and September 2014. This was the airline's first full quarter of operations.

During the quarter the airline added one aircraft, which started flying on 5 September 2014. It served only the southern and northern parts of the country. In the south it flew from Bangalore to Goa, Chennai and Kochi. In the north it flew to Jaipur and Chandigarh, with those services beginning on 5 September.

As of 30 September 2014

• Two aircraft in the fleet.
• Average daily aircraft utilisation of 11 hours 50 minutes (11.83 hours).
• Five destinations served by 16 daily flights: one Chandigarh, one Jaipur, two Goa, two Kochi and two Chennai services, all to and from Bangalore.
• No three way routes; the airline stayed a true point to point carrier.
• About 2,880 seats a day and roughly 2.2 million available seat kilometres (ASK) a day.
• Only Tier II cities served, apart from Chennai, a Tier I city.

Airline operations

Destinations were added in stages across the three months. The airline was scheduled to offer 171,000 seats in Q2 but offered 170,280, because four flights were cancelled or not operated.

Capacity for the quarter came to about 97 million ASK. Half of that was flown in the last 22 days of the quarter. Of 950 scheduled flights, 946 operated, and half of those were flown in the last 32 days. In other words, the second aircraft and the month of September carried much of the quarter's capacity.

The two aircraft were VT-ATF, delivered new from Toulouse, and VT-ATB, a used aircraft from AirAsia Berhad. Both were around six months old at the end of September. Together they made up 1.2% of the AirAsia Group fleet and were leased to AirAsia India at INR 2.3 crore per aircraft per month.

Utilisation of 11 hours 50 minutes was modest because 12 of the 16 daily flights (75%) were short regional sectors with an average block time of one hour. The average turnaround was 29 minutes, ranging from 25 to 35 minutes in the schedule as of 30 September 2014.

Airline performance

The airline said it carried 128,089 passengers in Q2 FY15, about 13,000 more than DGCA published data showed. AirAsia India reported an average load factor of 75%, while calculations from DGCA data gave 70%. The gap could lie in the airline's reporting or in errors at the DGCA.

DGCA data showed 0% cancellations for the three months. Among pan India private airlines, AirAsia India had the lowest share of affected passengers in July but the highest in August and September. Given the airline's small size, every single cancellation or delay moved these figures a lot, and that should be kept in mind.

AirAsia is known for stimulating markets, yet it could not do so in September despite promotional fares on the new Jaipur and Chandigarh routes. September is traditionally the weakest month for domestic travel. Other airlines stimulated the market better with low fares, which showed in average domestic load factors rising unusually in September. AirAsia India's September load factor was the lowest among domestic carriers. In its defence, the airline avoided dense Tier I routes and most Tier II routes, and most of its routes served leisure travellers. Those two factors explained the low loads, though the stimulation effort did not seem to have the vigour of the parent company.

On average AirAsia India lost about INR 2,250 per passenger flown. SpiceJet, in the same quarter, lost about INR 1,000 per passenger.

Looking ahead

The airline, based at Bangalore, planned to open Goa as its next hub. From 17 December 2014 it would start flying to Pune. Regulatory hurdles remained a challenge and could keep slowing expansion.

Two more aircraft were expected in December, taking the fleet to four by the end of calendar year 2014. Both would be used aircraft from the AirAsia Berhad group. AirAsia Malaysia had 82 aircraft on its books, up from 66 a year earlier, yet its Q2 FY15 capacity had not risen, pointing to spare aircraft. Some of those 15 could come to India. Two further aircraft were expected in Q4 FY15, making six.

Four new destinations were expected to be announced after Pune, and an extra Jaipur frequency from Bangalore had been announced. The winter schedule approved by the DGCA had envisaged three daily Kochi flights, two Jaipur, two Chandigarh and a new destination, Visakhapatnam, twice daily from 17 November. That fitted the group's focus on building scale through frequencies out of Bangalore, but plans appeared to have slipped. The airline also hoped to fly to Delhi soon, with Guwahati and Hyderabad among likely future destinations.

Chief executive Mittu Chandilya hoped to break even with the sixth aircraft in Q4 FY15.

Deviations from forward looking statements

The airline's words and actions had not always matched. Purely as a study of a very dynamic strategy, perhaps the most dynamic in India at the time, the following were noted. The airline had:

• Hoped to break even in the fourth month of operations, even though the board had targeted one year. Four months would have ended by mid October. The target had moved to the arrival of the sixth aircraft, perhaps in February, the ninth month. This matched what Benyamin Ismail of AirAsia investor relations had said during a visit to India in July.
• Said it would stay away from mature Tier I routes. It now planned Tier I flying to and from Bangalore, Mumbai and Delhi.
• Targeted a 20 minute turnaround. The average was 29 minutes.
• Targeted six aircraft by the end of 2014 and 14 by the end of FY2014-15. It would have four by the end of 2014 and perhaps 8 to 10 by the end of the financial year.
• Targeted 8 to 9 destinations by the end of 2014 and 15 to 16 by the end of the financial year. With five served and one announced it had six, and could still meet the destination targets.
• Mentioned a utilisation target of 16 hours. The three full patterns in the winter schedule had utilisations of 12:05, 13:20 and 14:00 hours. Reaching 16 hours on domestic flying alone looked unlikely.

Conclusion

AirAsia India was still a young airline, and foreign investment and three shareholders may have slowed decisions. Growth was also held back by a crew shortage, as pilots were poached or lured by offers from Middle East carriers, which disrupted many flights for much of November. DGCA regulations also contributed to the pilot shortage. India may have come as a shock, reflecting either the depth of the market study or unpreparedness for the regulator's volatility and the opposition from competitors.

Forward bookings reportedly looked good, and the airline seemed focused on building its footprint through new routes and more frequencies. With a large share of its costs sourced outside India at attractive rates, it could become profitable once it reached critical mass in fleet, destinations and frequencies. Growing fast enough, with the AirAsia group behind it, it could reach a scale that threatened the established low cost carriers. The key was whether local management had the depth to handle that growth.