The AirAsia effect

The AirAsia phenomenon is sweeping Asia with competitors scrambling to counter the tide. However it wasn’t entirely blue skies during the GFC for AirAsia with the airline reporting a 2008 net loss of MYR471.7 million ($145 million), as it cleared the books of some “exceptional charges” related to fuel hedging and aircraft financing. AirAsia CEO Tony Fernandes vowed he would leave fuel and currency hedges alone as they were too volatile.

On the 2008 result, Fernandes was upbeat; “Many of our competitors have reported passenger traffic decline. Conversely, we continue to enjoy sustained traffic growth as more passengers switch from the legacy carriers to our premium low-cost services.”

Full-year revenue rose 36.8 per cent to MYR2.64 billion while expenses jumped 46.3 per cent to MYR1.96 billion, producing operating income of MYR684.1 million, up 15.1 per cent from MYR594.1 million in 2007.

And while the airline is making money – or not losing as much in the case of 2008 – by cutting costs Fernandes is no fan of the ultimate cost cutting measure touted by Ryanair – getting passengers to stand. “While it’s not a stupid idea, it’s certainly not for us.”

In fact the opposite is the trend at AirAsia where the airline is targeting even greater passenger comforts – at a price – to drive up ancillary income. Over the past eight years AirAsia has been able to lift that revenue source from MYR2 per passenger to MYR49 in the last quarter of 2010. Fernandes wants more. “I am targeting a MYR60 spend by each passenger,” he said. “I know it’s a lot but we will get there.”

Across the group ancillary revenue now accounts for 18.4 per cent of revenue.

One revenue spend item that has proven popular is the online “Pick a Seat” with an 18 per cent take-up by passengers who spent on average MYR11.8 for assigned seats. This has been a plus with bigger spending corporate accounts which have soared since 2008. Fernandes says that the Pick-a-Seat launched in February was a “huge hit with corporate accounts.”

The airline’s corporate business has soared and Fernandes says the airline now has “a host of well known” corporate accounts on board including Canon, Western Digital and Sime Darby.

He adds that the airline has set up a team to “attract and manage more corporate clients” and is also targeting civil servants to utilize their travel warrants with AirAsia. Flagging its business focus, they recently accepted American Express for all transactions.

AirAsia’s onboard food and drink sales are assisted by its policy of not allowing passengers to bring their own on board, citing the differences between cultures and their widely differing [taste and smell] likes – and dislikes.

And one major likes for the airline has been its success into Singapore. The airline battled for years to gain access and is now the largest LCC airline into Singapore with over 40 flights a day. On the KL-Singapore route AirAsia has nine daily return flights.

AirAsia’s emphasis on Singapore for growth involves adding frequencies for Kuala-Lumpur, Kota Kinabalu, Kuching, Penang, Langkawi, Jakarta, Bandung, Bali, and Yogyakarta.

Pleasing Fernandes and his bankers is the robustness of forward bookings and how quickly “new routes take-off.” One example was the Bali-Perth route which went to double daily before the first flight took off in July 2009. It is now four times daily which has resulted in passengers numbers between Perth and Bali doubling in two years.

Another example is KL-Tiruchirappali in India which started in late 2008. Load factor for the first three months was 90 per cent.

Airport blues

But Fernandes was forced to put the brakes on growth in early 2009 as he had no faith that Malaysia Airports Holdings could deliver the promised new low cost terminal by 2011. “My gut feeling is 2012 or 2013,” Fernandes told Australian Aviation at the time. And that lament resulted in eight A320s in 2010 and 2011 being deferred as he had “nowhere to park them.”

In 2008 out of sheer frustration, AirAsia floated a plan to build its own airport, 30 minutes outside the capital as a solution to the overcrowding at KL’s low cost terminal built in 2006. At the time, Fernandes claimed that if the airline did not move by 2010, it “will lose almost a million passengers and about four million passengers by 2011” because of space constraints.

Malaysian Airports responded and in March 2009 announced plans for a new facility to handle 30 million passengers – double that of the existing terminal. As an interim the current terminal was expended with a new arrival hall which was opened in late 2008. The all new terminal will open in April 2012.

And as 2009 unfolded more and more airlines laid off staff and cut routes but Fernandes said at the Paris Air Show in June that “there is business out there if you go out and find it”. While conceding the situation was “bleak” he was adamant that there was “light.”

One new opportunity was the airline’s new courier service launched in July of that year called RedBox, which delivers a package in 2-3 days at prices “up to 50 per cent” lower than other domestic delivery options.” In conjunction with DHL the service taps into AirAsia’s network throughout Asia and clients can track their package online using Google Maps.

And yet another opportunity was inked in January last year with Jetstar in the form of an alliance to pool expertise and backroom operations.

Key to the agreement, which the airlines said was the first of its kind, is “a joint specification for the next generation of narrow body aircraft,” according to Fernandes. And with combined fleets, orders and options totalling 400 aircraft the two airlines make the pair an extremely powerful voice in shaping the A320 and 737 replacements.

Principal terms of the agreement cover future fleet specification, airport passenger and ramp services, shared aircraft parts and pooling, procurement of engineering and maintenance supplies/services and reciprocal arrangements to mitigate possible operational disruption across both networks.

Jetstar CEO Bruce Buchanan put a number of the value of the alliance when he said: “Jetstar is reducing its controllable costs by up to 5 per cent annually” and the partnership will “enable a further step-change in our cost position and ensure sustainable low fares.”

Fernandes hailed the agreement as another step in “the airline’s strategy to maintain its global leadership as the lowest-cost airline operator. It is key for us to keep our costs as low as possible. This is what enables us to provide the low, low fares that our guests have enjoyed, and will continue to enjoy.”

Centre for Asia Pacific Aviation Chairman Peter Harbison said at the announcement that he felt that the agreement could be the start of something bigger, with code sharing and equity exchanges at a later stage.

“This is all about ‘let’s live together before we get married’,” he mused.
Shorty after the Jetstar JV announcement AirAsia posted a thumping return to profit with earnings of MYR549.1 million built on growing market share “in every market we serve,” according to Fernandes.

Full-year revenue climbed 11.5 per cent to MYR4.81 billion on a 24 per cent surge in passenger numbers to 22.7 million. Operating profit soared 59.2 per cent to MYR462.5 million.

Twelve routes were added in 2009 and bases were established at Penang, Bandung, Phuket and Surabaya.

But as predicted the airline continued its rebound through 2010 and set a new world record of selling over 538,000 seats in one day with its “Mind Blowing Fare” campaign, which offers fares from just MYR1 for both domestic and international flights.

The airline’s previous best record was 390,000 seats sold in a day, achieved when it ran its “Free Seats” campaign across the entire AirAsia Group of AirAsia, Indonesia AirAsia and Thai AirAsia in November 2009.

The airline also achieved its highest number of seat sales in an hour, selling 36,871 seats, a 47.5 per cent increase from the previous record of 25,000.

Those records led to a thumping 2010 with the AirAsia Group posting a stunning MYR1.52 billion profit after tax, almost triple the 2009 result.
Revenue climbed 16.7 per cent to MYR5.61 billion with the airline crediting double-digit passenger growth and increased ancillary revenue for the strong result.

Fernandes hailed the performance as a “phenomenal achievement.” Passenger numbers surged 13.1 per cent to 25.6 million. ASKs were up 14 per cent to 38.7 billion and RPKs jumped 21.5 per cent to 29.6 billion.

All airlines in the group were profitable and all recorded double-digit passenger growth. During the year the group carried its 100th million passenger.

“What a year we’ve had,” Fernandes told media. “Not only did we achieve record profits, but also breached the billion-ringgit mark in net profit.” He added that the company is in the “best position, financially, that it has ever been in—providing a strong foundation for further expansion and growth in 2011.”

Fernandes also emphasized the increased contribution from ancillary income to the bottom line. “Ancillary has been a tremendous revenue stream for us. It’s up in all three of our operations: Malaysia AirAsia at MYR49 per passenger, up 99 per cent; Thai AirAsia, up 109 per cent; and Indonesia AirAsia, up 108 per cent.”

Fernandes added that the performance of the two affiliate airlines “boded well for their potential listing in 2011 on the Bangkok and Jakarta stock exchanges.”

During 2011 the airline will take delivery of eight more A320s and open three new hubs at Kuching, Chiang Mai and Medan.

Shortly after the results announcement AirAsia X ordered three more Airbus A330-200s with an option for two, bringing the airline’s total orders for the A330 to 28.

The aircraft are scheduled for delivery from 2014. The aircraft are the 238-tonne increased take-off weight version of the A330-200, which are capable of flying nonstop from Kuala Lumpur to Europe.

The order took the AirAsia Group commitments to more than 200 aircraft from Airbus, including 175 A320s, 28 A330s and 10 A350 XWBs

The AirAsia affect

The success of AirAsia and its flow on affect is irreversible and it is coming to more and more destinations in the Asia/Pacific region every month. Low-cost carriers, which accounted for just 1.1 per cent of Asia/Pacific air travel in 2001, captured 15.7 per cent of the market in 2009, carrying one of every six travelers. Airbus predicts LCCs will hold a massive 20 per cent of the market by 2012.

In early August last year, one of the final barriers to their spread across Asia was swept away when Thai International Airways and Singapore-based Tiger Airways teamed up to create Thai Tiger Airways in an effort to combat AirAsia.

That development was followed quickly by Malaysia Airlines announcing plans to equip its Penang-based low-cost subsidiary Firefly with 737-400s – also to take on AirAsia.

In the past, the Thai and Malaysian governments were reluctant to embrace the LCC phenomenon for fear of damaging their national flag carriers but the moves signaled an end to protectionist policies, according to Harbison.

“This new JV could have a major impact on the pace of airline liberalization in the region,” Harbison told Australian Aviation at the time.

“Until now, the Thai government has been highly protective of its national flag carrier and has been an impediment to the region’s multilateral timetable for moving toward open skies for Southeast Asian airlines. This position should now soften, as high-cost Thai Airways will have the opportunity to meet competition on a more equal footing.”

Thai President Piyasvasti Amranand said as much at the announcement, telling media that the JV will “allow Thai to be more competitive in the region with the anticipated growth in the low-cost market as a result of continued ASEAN air liberalization policies by 2015.” He stressed that Thai Tiger “will offer an entirely different line of products to that offered by Thai.”

The new airline which will be based at Bangkok’s Suvarnabhumi Airport is expected to operate on three domestic trunk routes to Chiang Mai, Phuket and Chiang Rai and five international destinations Kuala Lumpur, Penang, Singapore, Macau and Shenzhen. A fleet of 15 A320s is being acquired and services should start later this year.

Harbison sees the Tiger/Thai JV as a major move in the increasingly three-way LCC competition, “which will have the almost inevitable impact of accelerating the process of liberalizing Asia’s often unbalanced and restrictive entry system.”
“The Thai government should now be able to stop dragging its heels on regulatory reform. That will in turn put more heat on other slow movers in Southeast Asia, such as Indonesia. And so the LCC effect ricochets around the region,” Harbison adds.
With Firefly, Malaysia Airlines is finally reacting by turning its niche regional airline launched in 2007 into an aggressive low cost competitor to AirAsia with what it claims will be the lowest unit costs.

The airline which operates seven ATR72s and three 737s is based at Sultan Abdul Aziz Shah Airport in Subang just 30 minutes from downtown Kuala Lumpur as well as having a series of secondary hubs such as Penang.

However late last year it announced that it would acquire 30 737-800s over five years and concentrate more on operation from KLIA to take on AirAsia. Nonetheless Firefly has used its downtown location well and operates niche flights to Singapore seven times daily with ATR72s and to Penang 11 times daily. In all Firefly operates to 19 destinations in Malaysia, Indonesia, Thailand and Singapore.

Theses legacy carrier moves are being driven by two forces. Firstly by the competition from AirAsia which is not only taking passengers away but also driving down fares and the public’s expectation of what fare levels should be – particularly for short haul flights.

Secondly the looming Southeast Asia’s Open Sky Agreement, which comes into effect by 2015 will allow unlimited flights to all 10 ASEAN members—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

And many of these legacy airlines are keenly eyeing the success of Jetstar which in tough times has kept its parent in the black. Over the two years to June 2010, Jetstar has contributed EBIT of $268 million while Qantas and Qantaslink had negative EBIT of $10 million for the same period (an operating loss of $77 million in FY2009 and a gain of $67 million in the year to June 30, 2010). “That performance has not been lost on airlines around Asia,” notes Harbison.

The impact of LCC’s led by AirAsia and Jetstar on international travel to Australian has been extraordinary and a serious threat to established carriers.

From just 3 per cent in 2004, they accounted for 18.5 per cent in 2010 with the trend line almost touching 20 per cent.

On the Australian domestic front, the LCC share of the market grew from 30.4 per cent in 2004 to 48.9 per cent in the fiscal year ended June 30, 2010. The share of travelers flying on low fares is actually higher because many of Qantas’s lowest price points are similar to LCCs.

The success of the dual model is attracting interest far beyond Southeast Asia. Indeed, it has spread northward into one of the last bastions of the legacy industry, Japan, where the aviation establishment has been rocked by the embarrassing bankruptcy of Japan Airlines, while AirAsia is now landing at Haneda.

ANA, now Japan’s largest airline, has set up an LCC “Peach” with Hong Kong-based First Eastern Investment, while the “born again” JAL is mulling an LCC operation with Jetstar’s help.

In Korea Harbison notes that Korean Air and Asiana set up LCCs – Jin Air and Air Busan – as more of a “blocking position” to ward off potential competitors and to be ready if they were forced to react. That assessment is backed by the traffic share numbers with the country’s five LCCs having a tiny 4.3% share of the international market.

But that is all changing with AirAsia X starting flights from KL to Inchon last year. Air Busan, which is based in Busan in the south of the country, launched services last year to Guam, Osaka, Fukuoaka and Clark in the Philippines with Taipei in January, followed by Hong Kong in May and Tokyo Narita from June. The additional capacity to support the new services in the form of A321s has been transferred from Asiana.

Jin Air, which is based at Seoul’s Inchon, has a similar expansion story with services to Guam, Clark and Bangkok launched in the past 18 months and flights to Xi’an and Harbin in China early this year with Shijiazhuang and Shanghai in June. To support the services the airline has a fleet of five 737-800s with two more to arrive later this year. And last year Jin Air’s CEO Kim Jae-kun flagged the LCC was awakened when he told the JoongAng Daily that “our goal is to become a major force in Asia by flying more international routes.”
Harbison sees Tiger Airways as the dark horse in the Asian LCC stakes.

“Tiger is no pussycat,” he says. Minority owned by Indigo Partners and Ryan family holdings with Singapore Airlines holding 49 per cent, and now publicly listed, Tiger seeks to be fiercely independent.
While Harbison notes that it is still a tiny operation in comparison to AirAsia and Jetstar, with only 25 A320 family aircraft in service in Singapore and Australia, he says “it has big plans.”
And whereas Singapore Airlines limited Tiger’s growth for fear of diluting its own product and pricing, the success of AirAsia and Jetstar has altered the dynamics of the airline landscape, Harbison says. “There will be many more moves in this regional tapestry of low-cost airline competition before the endgame.”
After the Thai Airways JV, Tiger purchased a 33 per cent stake in SEAir in the Philippines which followed AirAsia’s move into the country in December when it formed, with three local business personalities, AirAsia Philippines to take on Cebu Pacific and Philippine Airlines. With a population of 90 million, 11 million of who work overseas and 7,000 islands the Philippines has significant growth potential.
And another significant growth area is Vietnam and in April last year AirAsia signed a JV with Vietnam’s VietJet Aviation Stock Co. in to form VietJet AirAsia to operate both domestic and international routes. AirAsia took a 30 per cent stake in the new airline, which will operate A320s.
Emphasizing the rising political clout enjoyed by AirAsia and LCCs in the region, the signing ceremony was attended by the Malaysian prime minister and the Vietnamese deputy prime minister.
Indonesia which has a population of 238 million spread over 17,508 islands has the greatest potential of all yet the national airline’s LCC attempt CitiLink has just 8 classic 737s operating a handful of domestic routes.

Again prompted by the runaway success of AirAsia and local airline Lion Air, Garuda is finally getting serious about developing Citilink’s potential with six A320s to be delivered this year and 15 within three years.

However there is no greater example of the power of AirAsia than its operations into Australia where it is significantly altered traffic flows and created downturns in the local tourism industry.

AirAsia’s impact from Perth to KL and Bali has been sobering. The Perth-Kuala Lumpur route, was served exclusively by MAS with 10 weekly 777-200ER services until November 2008 when AirAsia X entered the route with a daily 383-seat A330 that became double-daily from August 2010. Western Australia visitor numbers to KL soared from 355,073 in 2007 to 608,525 in 2010.
AirAsia also launched services from KL to Gold Coast and Melbourne. The affect was identical with the service to GC bringing in 172,000 passengers in 2010 and the Melbourne services almost doubling passengers on that route from 331,986 in 2007 to 608,525 in 2010.
The impact on Bali services is even greater from Perth with Indonesia AirAsia entering the market in 2008 almost tripling the numbers from 220,310 in 2008 to 633,978 last year.
The West Australian tourist industry is reeling from the impact as more and more locals holiday overseas, while local airline’s fare levels are compared unfavorably –and unreasonably – by the travelling public.
AirAsia’s network and fares are irresistible value coupled with extraordinary hotel deals in Asia putting intense pressure on both other airlines to compete and also the Australian tourism industry to match the hotel deals.
Hotels in Asia have always been superb value but fare levels to get to Asia have been a barrier however with rock bottom fares tourist are flying north in droves.
This puts added pressure on Qantas to improve the value proposition but with the airline a laggard in consumer innovation it sees its market share continue to shrink and that trend is likely to accelerate.
Every time an AirAsia flight touches down it brings with it both Asia labour costs and the Asian work ethic – a formidable combination.
And on work ethic Fernandes leads by example spending tine each month on the ramp at KL airport lumping freight and chewing the fat with his front line troops.
In the longer term, Fernandes has the US on his radar and AirAsia X has recently signed a sponsorship deal with the Oakland Raiders, although no services to the US are planned. Fernandes said the airline was looking at New York, Los Angeles, San Francisco and Hawaii.