AirAsia's Rs 990 ticket: 1-time gimmick or sustainable bet?

Sagar Salvi
moneycontrol.com

Staying true to its image, AirAsia wowed travelers, while making competitors sweat under the collar, with a Rs 990 introductory price tag (including taxes) for its maiden flight on Bangalore-Goa route on June 12.

The price is about 35 per cent lower than the current market rates, AirAsia India CEO Mittu Chandilya told CNBC-TV18 in an exclusive interview .

"June 12 would be the first flight. It will be A320 (aircraft). The timing of the flight will be around 3pm from Bangalore to Goa, and then back from there (Goa) around 6'0 clock," Chandilya said, adding that the airline is not looking at operating from Delhi and Mumbai for now.

AirAsia India, a joint venture between Malaysian carrier AirAsia, Tata Sons, and Arun Bhatia's Telestra Tradeplace, was granted flying licence by aviation regulator DGCA earlier this month after 9-month-long wait and various legal hurdles.

AirAsia India's offer of Rs 990 including taxes is likely to now force other carriers to review fares on this sector on the same day, which now cost around Rs 5,000 one-way.

According to media reports, Spicejet has already cut air fares in the southern routes. The airline has cut fares in the Bangalore-Goa, Bangalore Chennai routes. The new fares are effective from June 12, which is the date that AirAsia India will fly its first flight. Indigo and Jet are also likely to cut fares in the southern routes.

Chandilya told CNBC-TV18 the low-cost airliner is aiming for a 10 percent domestic market share in the next one-year. He expects AirAsia to breakeven in the next few months.

AirAsia believes disruptive pricing is the only way to penetrate market. And unlike, Mahalingam Shivkumar, former senior VP (finance) of Jet Airways and Ajay Singh, former director, Spicejet who see AirAsia's Rs 990 price tag as an "introductory offer only", Chandilya is confident of sustaining the 30-35 percent lower fares.

"Assuming that Bangalore-Goa is going to be a one-hour flight, normally it would cost around Rs 2500 for an airline. So, you're talking about Rs 2500 versus Rs 900," Shivkumar said. However, he does believe this is a good way for AirAsia to gain market share.

BAGGAGE TRAP

AirAsia's Rs 900 ticket does not include baggage charges. Travelers will have to pay extra for every bag they carry, which according to Kapil Kaul of Centre for Asia-Pacific Aviation is very good strategy by the carrier.

"It is a strategy adopted by most low-cost carriers. I believe if you get a zero kg baggage for just the LCC itself it could create a stimulus of about Rs 900-1000 crore in terms of excess baggage revenues, which could be used to subsidize lower fares," he told CNBC-TV18's Menaka Doshi.

Even though skeptical of whether AirAsia can sustain its lower fare, Singh feels the Malaysia-based carrier will bring down prices through innovative ideas, which will be good for the aviation industry.

SpiceJet stock price

On May 16, 2014, SpiceJet closed at Rs 15.05, down Rs 0.1, or 0.66 percent. The 52-week high of the share was Rs 40.90 and the 52-week low was Rs 12.50.

The latest book value of the company is Rs -22.24 per share. At current value, the price-to-book value of the company was -0.68.