Air India Express-AIX Connect merger: Less fireworks expected

All marriages are fundamentally alike and yet no two marriages are identical. Each has its own characteristics, dynamics and problems. As AIX Connect (formerly AirAsia India) and Air India Express head towards a merger, it might be worthwhile for all stakeholders to understand what to expect and what the main challenges of this marriage might be.

As things stand, AirAsia India, renamed AIX Connect in December 2022, is currently flying with a fleet of 28 A320 planes (of which 5 are Neos), connecting 18 destinations in India since its launch in 2014 and commands a market share of 6-7% as per DGCA. The airline has surprisingly low on-time performance, especially at metro airports, hovering at 60-65% as compared to most rivals. It remains loss making. It has also been in the news for pilot training and safety violations and DGCA has more recently taken action to bring it in line with the industry standards.

Air India Express, currently subsumed in Air India, operates with a 26 B737NG and primarily acts like a shuttle service between a clutch of Indian states and the Gulf or the Middle East including the U.A.E., Oman, Qatar, Doha among others catering to Indian unskilled and skilled labour that heads to these countries in search for work.

Although cultural challenges among the 5000-odd combined staff shall remain, the network of the two is likely to be quite complementary as it has no overlaps as of now. "AIX Connect is focussed on India domestic and AIX on short haul regional routes and as such, the two do not compete," pointed out an airline insider. He argued that this merger is likely to be far smoother than the two biggies — Vistara-Air India combination — which many are dreading and apprehensive about, not just on account of scale and size but also widely differing cultures.

According to source, the combined entity that emerges from this marriage will be a low fare airline operating with 54 aircraft (A320s and B737NGs) primarily in the Indian domestic and short haul regional routes, and competing with the giant in this segment, IndiGo. The total capacity is divided half and half and while there may be minor adjustments, the capacity deployment post merger is likely to remain largely the same.

The difference, however, is likely to be in the capacity deployed on metro to metro connections, which in the case of IndiGo is almost 20% whereas the new merged entity will focus more intensely on metro to non-metro and non-metro to non-metro sectors. By keeping its metro to metro capacity low, the new entity will ensure it is not pitched in direct competition with IndiGo and others. In due course, the fleet will also be upgraded since barring five A320Neos, almost all the aircraft are pretty old. Whether the airline will opt for A321XLR as IndiGo has is not yet decided. These decisions will be taken at a group level as and when the need arises.

The revenue of the merged entity will come almost half and half from the two carriers although the losses of the combined entity will be lower than AIX Connect since Air India Express has been profit making. In 2018-19, the airline made a profit of ₹169 crore which grew the following year to ₹412 crore, its highest ever. The pandemic took its toll on the airline like it did globally and it is only now emerging from the shadows. Like all other carriers, Air India Express made a loss of around ₹150 crore in FY 2021 and then recovered. It is expected to break even this year (April 2022-March 2023). Former Air India COO Gustav Baldauf argues that Air India Express has a "strong business case" and has been reasonably well run, offering exactly what its passenger base requires and one where any competitor may find it harder to break in.

However, the business case is much weaker in the case of erstwhile AirAsia India and the carrier has muddled along since inception with no remarkable milestones to speak of. It has in fact mostly been in the news for the wrong reasons over the years. Since the Tatas took charge, the ship has been stabilised to some extent although the macro environment has been far more volatile.

But no matter how one looks at it, the aviation sector in India counts the Tata-AirAsia alliance as a failure: the brand will soon disappear and the business led to only losses over the years, the weight of which will be borne by Tata Sons. According to reports, total accumulated losses of ₹2,600 crore may have to be written off by the Tatas before the merger. Today after ending its marriage with AirAsia Berhad and Tony Fernandes, the airline is surrendering the brand, shedding its AirAsia roots and DNA gradually. A first move in this direction has been the rechristening to AIX Connect.

Profitability of the new entity will be entirely dependent on how well and how far the combined entity manages its India domestic operations. Although the economics of short haul regional international operations (the routes Air India Express serves) would only improve especially once newer aircraft are deployed, the India domestic market remains a gray area since operating costs remain high and uncertain. Pooling some resources and combining certain back office and other functions will allow the merged airline to save some costs. It will also gain some heft in negotiating contracts with vendors and suppliers since it will fall under the wider Air India umbrella.

What then perhaps may be one of the bigger challenges besides merging two cultures is establishing itself in the minds of fliers as a brand new LCC brand without losing grip over its existing and established client base of workers that move from Indian states to the Middle East. Airline sources say that a brand refresh will be undertaken after all the procedural requirements for merger are completed. What emerges will be a direct competitor to SpiceJet, Go First and the market leader IndiGo. How it carves out its own space by nudging and wrestling will depend on how the rivals shape up as well as its own abilities. A lot rests on the shoulders of its new CEO Aloke Singh, who has been carefully picked for his success with handling Air India Express in the last few years. Interested readers should watch this space.