Red Q’s Malaysian hue?

In June last year Qantas announced it would assist Malaysia Airlines to join oneworld, setting the scene for closer ties including codesharing.

Then in August state-run Malaysian Airlines System (MAS), AirAsia and AirAsia X announced a five-year Comprehensive Collaboration Framework backed by a share swap deal that effectively gave AirAsia CEO Tony Fernandes significant influence in the direction of the nation’s flag carrier, which has been struggling to get off the ropes for the past five years.

At the time MAS Malaysian Airline System said that the deal would “explore opportunities to cooperate on a broad range of areas…and all parties would strive to complement each other’s businesses so as to leverage on their respective core competencies and optimise efficiency for the benefit of consumers.”

In a complex deal, Tune Air and Khazanah Nasional Berhad, the major shareholders of AirAsia and MAS respectively, agreed to acquire from each other existing shares of both companies with the result that Tune now holds 20.5 per cent of shares in MAS and Khazanah holds 10 per cent of shares in AirAsia and is planning to acquire 10 per cent of shares in AirAsia X.

MAS said that “broadly, the Collaboration Agreement enables MAS, AirAsia and AirAsia X to respectively focus on business segments in which they are capable of developing the most value.”

It added that “under the Collaboration Agreement, the parties shall assess and review their network services to enhance their offering of services and customer experience. This will include partial interlining and flights to new destinations currently not served by any of the airlines.”

To oversee that rationalisation a Joint Collaboration Committee was formed and chaired by MAS board member Datuk Mohamed Azman Yahya, with other members including MAS Executive Director Mohammed Rashdan Mohd Yusof, AirAsia Group Chief Executive Officer Tan Sri Tony Fernandes and AirAsia Deputy Group CEO Dato’ Kamarudin Meranun.

“The signing of the collaboration agreement heralds an exciting new era of cooperation whereby the airlines involved will stand to gain significantly by tapping the benefits of working together,” MAS chairman Tan Sri Md Nor Yusof said at the time. “We believe that the joint collaboration will help MAS focus on our strengths in our core markets and work towards deriving higher loads and more efficient resource utilisation. We will also be able to offer services in engineering and other areas to both AirAsia and AirAsia X. [LCC] Firefly’s resources would be refocused to launch a new regional full service airline operation.”

Fernandes said added that “by focusing on core competencies, it will enable both parties to increase product offerings to our respective customers. AirAsia and AirAsia X see growth opportunities in new routes and destinations.”

In essence the deal set in train a major rationalisation that is still being played out.

All that before Qantas formerly announced its Red Q plans for a premium Asian-based airline on August 16.

Alan Joyce framed the announcement stating that as a nation we used to fly over or via Asia, on our way to Europe.

“As Asian economies grow, the future will be about travel both to and within Asia. Our customers want to do business in Asia and so do we.”

Joyce added that Asia “is already the world’s largest, fastest growing and most profitable aviation market and has massive untapped potential.”

Backing up the move – and the announcement of Jetstar Japan – Qantas ordered 110 Airbus A320s and A320neos.

Joyce said the Lowy Institute research had shown that within 20 years 16 per cent of the world’s middle class will be in East Asia.

“China may already have the world’s fourth largest population of millionaires; and India the twelfth largest,” he said.

At the core of the strategy was a move to firmly establish the airline as a regional and international player rather than “a home and away brand” focused on origin and destination traffic.

Restructure ready for takeoff

So by late August the scene was set for the most significant rationalisation and restructure of the airline industry in South East Asia since AirAsia re-launched as an LCC in early 2002 with two 737s and six routes.

Not surprisingly the first to announce major changes, on December 7, was MAS which was also bleeding the most cash with a prediction that profits would return by 2014. Cornerstone of the strategy is a series of measures include shrinking its network, a relentless focus on costs and aggressive efforts to win back customers said MAS chief executive officer Ahmad Jauhari Yahya.

“Malaysia Airlines needs to make hard and unpopular decisions simply to survive in order for it to then have the possibility to thrive and realize the airline’s vision,” said Yahya.

The airline’s business plan has five fundamental recovery plan actions.

The first is to make its network smaller yet profitable and it announced the suspension of loss-making services to Cape Town, Johannesburg and Buenos Aires.

It later added Dubai, Karachi and Rome to the cuts as well as eight routes from its secondary hub of Kota Kinabalu.

The cut backs at Kota Kinabalu directly benefit AirAsia which is already the largest carrier at the city, according to the Sydney based CAPA Centre for Aviation.

“AirAsia has a 52 per cent share of total capacity (seats) at the airport, including a 54 per cent share of domestic capacity and a 43 per cent share of international capacity,” said CAPA in a special report.

“AirAsia’s market share in Kota Kinabalu is expected to increase as MAS reduces its presence. MAS’s reduction in international capacity at Kota Kinabalu makes sense given its new premium-focused business plan because Kota Kinabalu routes tend to have a larger leisure component than the same routes from Kuala Lumpur.”

In all, the announced and planned cuts amount to a reduction of 12 per cent of ASKs.

While there are cut backs there are also increases regional international increases including more flights between KL and Beijing, Manila, Jakarta, Phnom Penh, Bangkok and Medan.

Second part of the plan is to win back passengers and MAS will deploy 23 new aircraft – including five A380s – this year equipped with state-of-the-art passenger amenities, while the third element involves a razor gang approach to fixed costs and procurement combined with productivity improvement programs.

The fourth part of the strategy is a focus on its core premium carrier service and spinning off ancillary businesses including its aerospace engineering, pilot training, cargo and ground services.

A key part of the announcement – and of particular interest to Qantas – was a commitment to launch by the second half of this year, “a new regional premium airline to connect Malaysia to ASEAN destinations and key cities in South Asia and Greater China, using a fleet of Boeing 737-800.”

The airline added that in the longer-term, it will fly all of the domestic and regional routes serviced by MAS.

“We intend to create a separate management structure to focus on the unique customer needs of regional premium travelers. This new airline shall set new standards for product and service quality, cost efficiency, and operational excellence. It will set the template for airline success,” Yahya told media.

The final part of the turnaround plan is the membership of the oneworld alliance.

On November 9 the “mix” became more complex when the Malaysian Sun newspaper announced that Fernandes had his sights set on “new premium regional airline that will compete head-on with Qantas’ upcoming RedQ full-service carrier.”

Named Caterham Jet the airline has apparently acquired Bombardier CRJ aircraft and will operate out of the downtown Subang airport in KL according to the report which in fact would put it into a different category to Qantas’s RedQ.

So by late last year all three “alliance partners” had announced near identical plans for a new premium airline and by this time Qantas had essentially jettisoned plans to base its premium airline in Singapore.

AirAsia X refocuses

Next to announce its intentions under the Comprehensive Collaboration Framework and share swap was AirAsia X, which cut loss making routes to Europe and India in January and changed its focus to building frequency on established routes.

AirAsia X CEO Azran Osman-Rani said that “AirAsia X remains focused on maintaining its global leadership position in the low cost, long-haul segment. We intend to concentrate capacity in our core markets of Australasia, China, Taiwan, Japan, and Korea where we have built up stable, profitable routes within an infrastructure that supports low cost services. We intend to open up new routes within these markets, as well as add frequencies on existing routes. Announcements of our future expansion plans will be made soon.”

Ozman-Rani blamed Europe’s economic woes, jet fuel prices and also took a swipe at the UK’s Passenger Duty Tax and the ETS.

“The continued high jet fuel prices and the weakening demand for air travel from Europe, brought about by the current economic situation together with exorbitant government taxes, have placed cost pressures on operating long-haul low cost flights between Asia and Europe, compromising our ability to offer the low fares AirAsia X is known for,” he said.

“The implementation of the Emissions Trading Scheme and the escalating Air Passenger Duty taxes in UK, which will rise yet again in April 2012, has forced our decision to withdraw our services to Europe.”

On India Mr Osman-Rani blamed “the continued visa restrictions for travel between India and Malaysia, and the increase in airport and handling charges have resulted in a structure not conducive to the low cost model.”

CAPA said that while doomsayers will be quick to look at a series of route cancellations and proclaim the demise of the modern low-cost long-haul model AirAsia X pioneers, the context for the change expands beyond fuel costs, rising taxes in Europe and new visa restrictions in Malaysia to wider issues.

“AirAsia X was already struggling in Europe and particularly in India and the recent cross-ownership deal between MAS and the AirAsia Group was also clearly a big factor,” CAPA said.

“That is not to suggest AirAsia X’s changes are simply a matter of submission to MAS. The biggest advantage, besides brand awareness, of the high profile London and Paris routes was their ability to put passengers on multiple AirAsia short-haul flights as they travelled around south-east Asia. MAS’s deployment of the A380 later this year will lower unit costs to London, narrowing the gap with AirAsia X, currently using more fuel-thirsty A340s. With the AirAsia-MAS partnership, and plans for the two to facilitate passenger transfers, the AirAsia group can still gain feed on its short-haul network while AirAsia X will benefit from redeploying capacity in Asia Pacific and, notably, China.”

CAPA says that Northeast Asia and Australia probably offer more opportunities for AirAsia X in the new era of the AirAsia-MAS collaboration.”

Outlining the airline’s strategy to CAPA, Osman-Rani ruled out plans to enter new markets.

CAPA commented that “despite the high profile network re-alignment the airline’s medium term network development has largely headed in the same broad strategic direction.”

“In 2008 Mr Osman-Rani highlighted the carrier’s growth through 2013 as covering five Australian cities, four to five in China, two to three in Japan, one to two in Korea, two to four in India and “a few” in the Middle East, with many to receive multiple frequencies a day.”

The airline’s two A340s dedicated with the Europe routes will be withdrawn from RPT services but will be available for charters.

Osman-Rani affirmed his intention to serve a fifth Australian city by the end of 2013 after announcing Sydney. The airline currently serves Gold Coast, Perth and Melbourne. Access to Sydney comes after numerous attempts all of which were blocked by the Malaysian government on behalf of MAS the airline’s new best friend which is benefiting from AirAsia X’s withdrawal from London and Paris.

CAPA also says that access to the route was also prompted by “Singapore Airlines’ low cost subsidiary, Scoot, saying in December that Sydney would be its inaugural route. This galvanised a previously unwilling Malaysian government into finally giving AirAsia X the necessary designation, even though flag carrier Malaysia Airlines will also be affected.”

CAPA says that AirAsia X has no plans to cancel its 30 aircraft on order, comprised of 20 A330s and 10 A350s.

“The carrier stated it would make a decision on the deployment and future of its 10 A350s on order, the first of which is scheduled for delivery in 2017, at the time, but Mr Osman-Rani noted that these could possibly be deployed on existing A330 routes.”

The main game

With MAS and AirAsia X restructured it is expected that announcements related to Qantas’s plans will roll out over February and March.
Insiders in Kuala Lumpur suggest that the Qantas premium brand airline could likely be a JV with MAS and there is a possibility of British Airways taking a stake. It is also highly likely that Qantas will codeshare with MAS on the London route once MAS’s A380s are online.

CAPA is bullish on a British Airways link and says “a close partnership could see BA resume services to Kuala Lumpur, which it suspended in 2001 in favour of a Southeast Asia hub in Singapore”.

It cautions, however, that the “AirAsia linkage makes that a little more intricate with Richard Branson’s Virgin Group owning 16 per cent of AirAsia X”. Other key stock holders in AirAsia X says CAPA, include Fernandes’ Aero Venture, with 48 per cent and AirAsia with 16 per cent. Khazanah, the MAS shareholder, is in talks for a 10 per cent stake, to complete a cross-equity transaction.

“KLIA and its government have always been keen to emulate the success of Singapore Changi and the flag carrier hub role of Singapore Airlines. The opportunity now exists to maximise the network potential that a combination of AirAsia, AirAsia X, Malaysia Airlines and IAG could bring – perhaps along with Qantas and its low-cost (long haul and short haul) Jetstar subsidiaries. If the multitude of complexities and airline culture differences could be overcome, the upside for Malaysia’s economy would be enormous. But there is a big gap between what is possible and what is achievable.”

Clearly, however, Qantas is on board.

In a fascinating interview with the Sydney Morning Herald’s Matt O’Sullivan, Conor McCarthy the operations brain behind AirAsia said that “the Asian step is clearly an ambitious one but a pretty understandable one.”

“Qantas seem to be taking a view that they would not be going it alone, that they would look for partners. That makes sense because an Australian airline trying to break into markets in south-east Asia on its own might have some real problems – not just regulatory problems – but just in terms of breaking into the markets that would be strongly protected by the incumbents,” McCarthy told the SMH.

O’Sullivan’s article highlights that McCarthy, who is a co-founder of AirAsia worked alongside Alan Joyce at Aer Lingus and later helped in the blue print for Jetstar, says that the new premium airline wouldn’t work with AirAsia.

”It wouldn’t fit with AirAsia’s market at all. What it would be is something that would work probably between MAS and Qantas, with potentially Tony’s involvement as well and a clear segmentation of the market.”

There is little doubt that Fernandes’ involvement is the key.

Another key is that MAS is taking delivery of 21 new aircraft this year as Qantas mulls deferring more equipment and cutting routes as its share prices bounces along the runway showing no signs of taking off.

Removing capital obligations for Qantas is expected to loom as a major factor this year as international travel growth slows to a crawl on Eurozone woes.

Thus Qantas’s RedQ offering may be quite different than that touted last year of all-premium A320s more likely based out of Singapore.
MAS has 15 A330s, six A380s and 35 737-800s for delivery, all of which are highly appointed for their market segment.It also has 20 Sky Interior 737-800s in service.

The new premium airline may now more likely be based around the MAS regional network restructure, with Qantas also code-sharing on some MAS long-haul and regional flights.

Many comment that Singapore would have been a better hub for a premium airline but the cards that are being dealt have KLIA as centre of Qantas’s plans.

Interestingly, Qantas’s former CEO Geoff Dixon tried to get a merger deal down with MAS in 2008 but it failed to take off.
But Qantas’s interest in MAS has not apparently waned.