X marks the spot

Although established as a separate company to AirAsia, AirAsia X still has a number of common directors, including the dynamic Tony Fernandes, while it also has attracted some major investors, including the Virgin Group, Japanese financecompany Orix, former Air Canada CEO Robert Milton, as well as AirAsia.

After months of intense planning, the airline’s first flight took off on November 2 2007, commencing a four times weekly service to the Gold Coast. This was operated by a single 314-seat Airbus A330-300 leased from AWAS. The airline then added Hangzhou in China as its second destination in February 2008.

With the arrival of its own first two A330-300s direct from Airbus in October 2008, AirAsia X was able to add Perth and Melbourne to its network in November 2008, with both cities initially served four times a week and later rising to dailies in March this year. At the same time it took the low cost model to a truly long haul sector with the launch of flights from Kuala Lumpur to London/Stansted Airport after taking delivery of its first A340-300. While the carrier has its genesis in the success of AirAsia, CEO Azran Osman- Rani told Australian Aviation that there were a number of adaptations required to take it into the long haul arena, where other carriers in a similar mould had failed.

“When we started AirAsia X, we had to be different from the legacy carriers but we also had to be different from AirAsia which is why we looked at everything with a fresh piece of paper,” he said. “And many things that are against the bible of low cost.

For example, we know with long haul its not point to point traffic, so you have to figure out how you address connectivity. ” Many customers have been addressing connectivity on their own, with the majority of passengers choosing to book onward connections from Kuala Lumpur, predominately on other services with AirAsia X or AirAsia. This is despite the carriers not offering any form of baggage transfer or even booking multiple sectors on one itinerary.

However, Osman-Rani says that the carrier is planning to offer this soon. “We’re finalising a new baggage sorting system so some time in the third quarter this year or the start of the fourth quarter, we’ll be able to offer an optional service for a reasonable fee where we can get your bag from your first flight to your next flight and when you arrive you can go through a special lane to the departure lounge. ” In this way, Osman-Rani agrees his airline operates somewhat like a legacy airline rather than the AirAsia model, albeit with some important differences. “It is the network hub and spoke model but you can do it in a much different way without any of the legacy cost base – systems, codesharing, alliances and all that just adds complexity – but if you can figure out how you deliver a reasonable product at a price point, then there’s a lot of demand from people who are price sensitive. ” The key to meeting those price sensitive customers is controlling cost. During the first quarter of the year, the carrier recorded its cost per ASK (available seat kilometre) including fuel as only US 2. 4 cents, much lower than most competitors. This has allowed it to be able to offer lower fares than most competitors at a more sustainable level and also saw it achieve a profit of RM17. 8m (A$6m) during the first quarter of this year.

As with Jetstar’s long haul services, AirAsia X’s A330s feature two seating classes, which it refers to as premium and economy, with both seats featuring innovative fixed shell backs and gliding cushions to provide recline. With the exception of its leased aircraft, the A330-300s have 35 premium seats which feature a 38in (96cm) pitch in a 2+3+2 layout. Economy seats have a pitch of 31in (79cm), in a 10 abreast layout. All seats feature in-seat personal TVs which are available on a pay-for-use basis, while meals and all amenities are also paid for individually.

However, the airline is already planning to make some major changes to the seats from next year. This will see the premium seats replaced by lie-flat seats in pods, making it similar to other airlines’ business class seats. Osman-Rani says that while it will be a major change, it should not add significantly to the carrier’s cost. “We feel that we can still keep the cost similar to a full fare economy for a legacy carrier, so the comparison is still relevant. Because we fly more sectors, you amortise the additional cost of the seat on a per passenger and per flight basis, it’s not much more,” he said.

Similarly, the airline is investing in new economy seats after receiving feedbackon the current seats. The new ones will do away with the fixed shell concept, in favour of seats more similar to other long haul carriers, and will retain the same pitch.

The seating upgrades are likely to bring it into more competition with existing carriers, such as Malaysia Airlines which has been repositioning itself as a “five star value carrier”. As such, that carrier has been discounting some fares on routes such as Perth, Melbourne and Brisbane where it competes directly with AirAsia X.

“It’s definitely put yield pressures on us, but it’s put yield pressures on them as well,” said Osman-Rani. “It’s not easy but I think the thing that keeps us going is that even with crazy low fares, we can still be competitive because our cost is 2. 4 cents,” he said.

Network

Since its launch, Australia and China have been the two key markets for AirAsia X. It currently operates flights to Perth, Melbourne, the Gold Coast, Hangzhou and Tianjin, with flights to Taipei added in July this year.

Despite growing its operations into Australia significantly over time, Osman- Rani admits that conditions have been tough recently. “Look, it’s certainly not an easy market but that’s more a function of the global aviation market. It’s not as high as we’ve seen in the corresponding year on Gold Coast, but we’ve had some economic slowdown then H1N1 kicking in. Nevertheless, I think most of the routes are about 70 per cent load,” he said.

That hasn’t stopped the carrier from adding more frequencies to Australia, with it announcing two additional flights to the Gold Coast and four additional frequencies to Melbourne in July, while Perth is also likely to see some increase in frequency as more aircraft come into the fleet.

Osman-Rani explains that the additional frequencies are intended to improve its yields through better timing for connecting flights. “For example, to Australia we fly one flight a day and we’re going to try and see how fast we can build it up to two flights a day. The benefit of that is your connectivity works better in terms of your transit time to the UK or other places, and there’s probably a yield premium to be gained in that. ” Osman-Rani also says a priority is launching services to Sydney, although the Malaysian government has recently delayed the airline’s application for rights to fly there due to a dispute with AirAsia over landing fees. Nevertheless, planning to launch flights to Sydney is continuing.

When launching AirAsia X in 2007, Fernandes had talked about using Newcastle to serve the Sydney market, but Osman- Rani says that option is now off the table. “The boys at Macquarie have come back with a more compelling proposal for Kingsford Smith,” he said. “The advantage of Kingsford Smith for widebody operations, frankly, is cargo and that’s not something you get at a smaller airport. There’s connectivity as well, given the likes of Tiger are flying into Sydney. ” In March, the airline also made its first foray into a new market outside the Asia Pacific region, launching services to London/ Stansted after taking delivery of two A340-300s. At up to 14 hours, this is by far the world’s longest sector operated by a low cost airline.

Osman-Rani says that the flights to London are more a strategic move than a cash cow. “As long as we don’t lose money on the route, it provides a lot of strategic benefits to fly to London, and so far it’s been doing well. In July we’re now at 87 per cent load and August is at 84 per cent load. ” Operating the flights to Stansted has some major benefits in terms of connectivity.

“Stansted has a lot of low cost connecting flights to all parts of Europe. In fact almost 20 per cent of our passengers get to Stansted and fly on other carriers elsewhere. ” Over the next year, AirAsia X is looking to expand its network reach to Japan and Korea (although flights to Seoul have also recently been delayed), which will allow it to connect passengers well through to destinations around Southeast Asia.

Osman-Rani says that the airline is also planning to make some major pushes into India and the Middle East in the near term. “We are looking at India, riding on AirAsia’s upcoming expansion into India. They’re focusing on southern India, we’ll be looking at northern India, cities like Delhi, Mumbai, Amritsar which will help our Australian routes as well because there’ll be more feed.

“We’re also looking at opening up a base in the Middle East and Gulf area. Again it will be bringing that traffic from Southeast Asia, but there is probably quite a big demand to get to places like the Gold Coast and Perth. ” A key issue with the expansion of AirAsia X’s widebody operations will be terminal access at Kuala Lumpur International Airport, where it operates alongside AirAsia from the low cost carrier terminal.

As it has been built for narrowbody operations, AirAsia X usually parks its aircraft in the adjacent freight area, making it a longer trek for passengers to the terminal building.

Osman-Rani says that the current terminal will be at capacity by 2011 with no further room for expansion. Recently, AirAsia blamed a lack of space at the terminal for a decision to delay delivery of eight A320s, while Fernandes has gone so far as to launch a proposal to build a new airport called ‘KLIA East’ which the Malaysian government has blocked.

Instead, Malaysia Airports and AirAsia are currently in discussions over the design of a new LCC terminal which will be closer to the main terminal building andhas a tentative opening date of 2011, by which time the carrier is expected to have a fleet of 15 aircraft. However, with ground not having been broken on the project, Osman- Rani said it seemed unlikely that the new terminal will be delivered on time.

All Airbus

Given AirAsia already had pinned its fleet plans on the narrowbody A320, the widebody Airbus range was the logical choice for AirAsia X’s fleet, and the carrier now operates three A330-300s and two A340-300s.

Although launching with its leased A330, the company placed an order for 15 A330-300s and 10 options (subsequently converted to firm orders) with Airbus in 2007, and took delivery of its first new aircraft in 2008. The new aircraft feature a higher density configuration of 384 seats, which immediately helped bring the airline’s costs down dramatically.

Gaining finance for those aircraft was an achievement in itself, according to Osman- Rani, particularly after the collapse of other long haul low cost carriers such as Zoom Airlines and Oasis. “That was a time when fuel prices were crazy, other low cost long haul airlines were falling out of the sky and there was a lot of doubt we could raise funds to secure those planes,” he said.

“We are today I think still the only airline to get European Export Credit guarantee backing for our commercial loans with less than a three year track record, which is an accomplishment. ” In February, the airline added two 286- seat A340-300s to allow it to start services to Stansted. Osman-Rani says there are no plans to add to that fleet in the short term.

“The board’s basically said let’s run those out for a year and let’s get comfortable with the A340 economics before we try to get more. Maybe one day when the 787s are delivered, the price for an A340 might fall,” he said.

Most recently, the carrier brought some sunshine to a gloomy Paris Airshow, announcing an order for 10 A350-900s and five options. Osman-Rani says that the aircraft will play a role in expanding the airline’s reach when deliveries start in 2016. “We now look at the A350 as complementary to the A330s rather than replacing them, because the economics of an eight hour flight with the A350 is (only) marginally better. The A330-300 is really good for Asia Pacific so we’ll keep that and we’ll only use the A350 for Europe, North America and perhaps direct to New Zealand. ” Interestingly, with the all-Airbus fleet between AirAsia and AirAsia X, the airlines are among the few operators to take advantage of Airbus’s Cross-Crew Qualification between the A320s and A330/ A340s, allowing AirAsia X to draw its pilots from a common pool with AirAsia’s A320 pilots.

“Traditionally a legacy airline wouldn’t adopt this because it is a promotion, coming up from the narrowbodies to the long haul,” said AirAsia X’s chief pilot Captain Azhanudin Shah Azman. “In AirAsia and AirAsia X, what we preach is everyone’s equal so we give everyone the same experience. If you fly the A320s, you have a chance to fly the long hauls and vice versa. ” “It takes out the monotony of just flying short haul for a whole month,” he added.

Looking Ahead

With a growing fleet and network and a maiden profit under its belt, AirAsia X appears to have proven that the low cost long haul model can work in an Asian context, even on 13 hour flights to London.

In recent months, there has been some speculation that AirAsia X could merge with AirAsia, with both Osman-Rani and Fernandes have talked up the benefits of such a deal. However, no formal proposals had been made at the time of writing, and Osman-Rani said that it would be unlikely to take place in the short term.

That issue aside, he is focused on seeking out the best growth opportunities within the Asia Pacific to grow what he sees as a niche product. “I think the key is to still be disciplined and to resist the temptation to try and be too big of an airline because I think this model works in a specific set of circumstances,” said Osman-Rani. “I think we’ve got to keep focused on the Asia Pacific markets – the six core markets in around Southeast Asia that are the bread and butter.

“You won’t see us trying to get to 100 planes like Singapore and Cathay. They’re national carriers trying to fly everywhere.

Rather, we grow markets, like Melbourne, Sydney and Perth. ”