AirAsia, Qantas changing long-haul biz

Qantas Airways Ltd and AirAsia Bhd are challenging Singapore Airlines Ltd and other full-service
carriers with a low-fare, long-haul business model that has previously failed. Qantas’s Jetstar unit will
add budget long-haul flights from Singapore later this year. The carrier cuts costs by renting movies
to passengers and using lightweight equipment to pare fuel usage. AirAsia X, which flew more than 1
million passengers in 2009, squeezes 35 per cent more seats onto its planes than full-service carriers
to pare expenses. The two carriers also have support from existing airlines, with AirAsia X able to
access flights to about 70 cities from its Kuala Lumpur hub through cooperation with AirAsia Bhd,
Asia’s largest budget carrier. These ties may help the long-haul carriers avoid the fate of standalones
Oasis Hong Kong Airlines Ltd and London-based Zoom Airlines, which both folded in 2008. “Long
haul, low cost is transforming the whole aviation landscape in Asia,” said K. Ajith, an analyst at UOB-
Kay Hian Research in Singapore. “Budget carriers may be a force to reckon with in the future because
if they have a strong network and are viable, they can potentially lure passengers from established
carriers.”

London, Australia

Long-haul discount airlines differ from Southwest Airlines Co and Ryanair Holdings Plc because they
offer flights of more than five hours and have premium-class seats. AirAsia X, part- owned by AirAsia
Bhd, flies twin-aisle Airbus SAS planes to London and Australia, and it’s planning services to Japan
and South Korea. Jetstar intends to begin Singapore-Melbourne flights in December followed by
services to Auckland in March. It’s also planning flights to European and Asian destinations. “There
seems to be a market for long-haul discount travel if prices are low enough,” said Sean Fenton, who
helps manage US$740 million at Tribeca Investment Partners in Sydney. “It’s a threat to the
incumbent carriers.” AirAsia X charges from about RM1,286 (US$400) for a flight from Kuala Lumpur
to Stansted Airport, 40 miles outside of central London. An economy ticket on Malaysian Airline
System Bhd, the nation’s largest carrier, to Heathrow Airport costs from about RM2,104. Singapore
Airlines charges from about S$1,486 (US$1,067) for a Singapore-Heathrow coach-class ticket.
Singapore Airlines serves “different market segments with different service propositions,” Nicholas
Ionides, a spokesman, said in an e-mail reply to Bloomberg questions. Malaysian Air doesn’t intend to
compete directly with the lowest fares rivals are offering to safeguard margins, chief executive officer
Tengku Azmil Zahruddin said in an e-mail. The airline is targeting customers who don’t make
decisions based on price alone, he said.

‘Real Killer’

AirAsia X, which last year had its first annual profit since starting flights in 2007, has gained from
AirAsia Bhd’s feeder traffic, said chief executive officer Azran Osman Rani. Oasis Hong Kong, which
flew to London and Vancouver, and transatlantic carrier Zoom, didn’t have similar partners.Relying
on a point-to-point market “will be a real killer because there won’t be enough people flying every
day,” Azran said. “That’s why the Oasis of the world really struggled.” Jetstar, which operates
domestic flights within Australia and services to Japan, has code-shares with Qantas and a
partnership with Air France-KLM Group, Europe’s largest carrier.
Low-Cost Flying

AirAsia X cuts costs by using fewer attendants per flight than full-service carriers because it only loads
and serves hot meals that customers have ordered, Azran said. That saves the carrier as much as
US$100 per passenger, he said. Jetstar also formed a venture with AirAsia Bhd in January aimed at
lowering costs for spare parts and ground-handling services. AirAsia X’s costs were 2.8 cents per
available seat kilometer last year, Azran said. Jetstar had costs of 6.8 Australian cents (5.7 US cents)
in the six months ended December, said chief executive officer Bruce Buchanan. The carrier made
twice as much profit as the Qantas mainline business in that period. Costs at Singapore Airlines,
including premium and economy cabins, averaged 8.7 Singapore cents (6.2 US cents) last year,
according to Bloomberg calculations on figures from the carrier. Jetstar plans to boost its fleet to
about 100 aircraft by 2015 from 65 as of June. AirAsia X aims to increase its twin- aisle fleet to 20
planes from eight over the same period, as it strives to more than triple sales.

Market Share

Including short-haul routes, budget carriers may account for 30 per cent of Asia-Pacific capacity by
2015 from 20 per cent now, said Derek Sadubin, chief operating officer at the Sydney- based Centre
for Asia Pacific Aviation. Singapore Airlines may be shielded from budget competition by its reliance
on premium passengers, who account for about 40 per cent of revenue, said Ng Sem Guan, an
analyst at OSK Research Sdn Bhd in Kuala Lumpur. “There’s always demand for luxury things such as
Mercedes Benz,” he said. Singapore Airlines is “a different animal” from low-cost carriers, he said.
Travelers now flying economy-class with full-service airlines may also be reluctant to give up frills just
for a cheaper ticket, said Rohan Suppiah, an analyst at Kim Eng Securities Pte LTd in Singapore. “Do
you really want to sit for hours in a budget configuration?” he said. “This model will probably only
appeal to customers who are very price-sensitive.” Zoom stopped flying in August 2008 about a year
after it began London-New York flights, crippled by competition and rising fuel costs. Oasis Hong
Kong, which halted services after 17 months of flying, entered liquidation in June 2008 with about a
HK$1 billion (US$128 million) of debts. Stephen Miller, who was Oasis’s chief executive officer, said
there is “great potential in Asia” for low-cost long-haul because of the high costs at full-service
carriers.“But it’s a tough business until you get a name, a certain percentage of the market and a
critical mass of aircraft,” he said. – Bloomberg... (^_^)

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