Regionalization is the new strategy in 2012

2012 will not be the year of the budget carrier in spite of the slew of announcements of new names taking to the skies, amongst them AirAsia Japan (a joint-venture between AirAsia and All Nippon Airways), Jetstar Japan (a joint-venture between Qantas and Japan Airlines) and Scoot (which is fully-owned by Singapore Airlines). Almost every major airline has got its finger in the budget pie, and this will not only intensify but also level the competition.

Instead, the year will belong to the regional premium carrier. Ever since Qantas announced setting up RedQ, an Asia-wide premium carrier to be based in either Kuala Lumpur or Singapore, as part of its restructure to stem the loss of its international operations arm, some other airlines have also expressed similar plans.

AirAsia said it would operate Caterham Jet out of Kuala Lumpur to destinations that include Singapore, Jakarta and Bangkok. However, the proposed carrier will fly out of the secondary airport at Subang instead of Kuala Lumpur International Airport (KLIA) at Sepang. Loss-making compatriot Malaysia Airlines has also publicized its restructure plans to include a new premium airline in the region, which is likely to be a collaborative effort with AirAsia although it is not known if it is to be Caterham Jet.

The latest to join the race is Indonesia’s Lion Air, which plans to start Space Jet; however, the new carrier will not take to the skies until 2013.

The focus seems to be shifting from budget to premium, but why a regional premium carrier, especially so in the case of Qantas and Malaysia Airlines? It seems irrational to compete with oneself under another name even for all that is said about treating it independently as a different profit centre in its own rights, or to duplicate an existing product thus risking the loss of the economy of scale and diluting the main brand name. Nevertheless, market segmentation, and product differentiation under the same name or duplication under a different name, all of which legitimizing price tiering, are common business techniques. It is all about strategy.

For Qantas, Asia is aviation’s Holy Grail as the rest of the world stumbles over economic woes. To take full advantage of the opportunities that the region offers, it has decided to situate where the action is. Amidst speculations that the continuing uncertainty of the global economy and Union issues at home may force the Australian flag carrier to shelve its plans, Qantas chief Alan Joyce said he was pushing ahead with the plan but with a hint that it could be a joint-venture. He said at an investor presentation: “We have announced our plans to invest in a premium airline based in Asia.” Beyond the terse statement stating the obvious, there is ambiguity about the form that it will assume.

Is Qantas now looking for partners for RedQ? If so, who are the likely suitors? The flying kangaroo has been courting Malaysia Airlines to join the OneWorld Alliance and Malaysian authorities are keen to have Qantas operate out of KLIA to boost its hub ambition, obviously in direct competition with neighbor Singapore Changi. It would appear a natural outcome – two OneWorld partners joining force to challenge the alliance between arch rivals Singapore Airlines (SIA) and Virgin Australia.

But it is not as simple as it seems. Malaysia Airlines has said it would be setting up its own regional premium carrier in co-operation with AirAsia which is launching Caterham Jet. This was to counter the competition posed by Qantas’ initial plans, especially if it were to operate out of KLIA. Two airlines, each hoping a new regional premium carrier would lift it back into profitability may not make an ideal partnership. Observers are inclined to think that the decision of both Malaysia Airlines and AirAsia has dented Qantas’ expectations somewhat, and this may persuade Qantas to consider a partnership than to go it alone.

According to Malaysia Airlines chief executive Ahmed Jauhari Yahya, the Malaysian flag carrier was in a “very, very deep crisis” and must act quickly. The plan was for the airline company to cut capacity by 12 per cent and focus instead on profitable Asian routes, which would be operated by the new premium carrier to include domestic routes, and leave the long-haul to parent Malaysia Airlines. This may rule out a likely partnership with Qantas – or any other foreign carrier.

But things could change; Mr Yahya said the airline was exploring the possibility of partnerships with other airlines that did not exclude Qantas. That, in spite of the relationship being further complicated by Qantas in a budget joint venture with Japan Airlines to rival AirAsia’s joint venture with All Nippon Airways; both new budget carriers – JetStar Japan and AirAsia Japan respectively – plan to commence operations in 2012, initially domestically within Japan before flying beyond to destinations in China and Korea.

Regionalization is the new game

In the wider context, regionalization is the new game in 2012. The present sluggish global economy has caused the market to shift from the long haul to the short haul; hence airlines that heed the call are turning more attention to regional travel, which is becoming increasingly dominated by low cost operators, In Europe, Air France is mounting a regional “offensive” against low-cost carriers by setting up regional bases such as Toulouse and Nice to reduce cost and increase frequency yet provide the frills that are normally absent in the budget flying experience. By this, Air France hopes to increase its revenue by US$1.24 billion next year.

It is not exactly a new strategy. What Qantas hopes to achieve via RedQ is actually an extension of an existing “complexing” strategy that already allows Qantas to use Singapore as a base to feed and connect regional points. The picture becomes clearer when you note how major airlines such as SIA and Cathay Pacific Airways already have regional arms namely SilkAir and Dragon Air respectively. Under the recently concluded alliance agreement between SIA and Virgin Australia, SilkAir will commence services between Singapore and Darwin to complement Virgin’s operations between Darwin and Sydney. Including budget arms where applicable, as in the case of SIA with Scoot, it is a two- or multi-prong approach to capture the full spectrum of the market – a catch-all strategy that may be the best solution yet in an uncertain market where the line between budget and full-service continues to blur.

In the same way that many major full-service airlines are entering the budget arena to prevent budget carriers from poaching their customers, low-cost operators are beginning to feel the need for a counter-strategy lest the market shifts back upwards. For a hybrid airline like Lion Air which already offers both business and economy classes, the squeeze is even tighter as it faces stiff competition from traditional budget carriers as well as the increasing number of regional premium carriers. The situation will reach critical point for Lion Air when Asean Open Skies comes into force in 2015, if it does not plan ahead to meet the “new” competition. Lion Air’s president-director Rusdi Kirana said its planned premium carrier Space Jet was necessary to ensure that the airline company remained competitive. Too often airlines fail to read the writing on the wall because the obvious truth is not mouthed often enough.

So it looks like an exciting year ahead for civil aviation even as the International Air Transport Association (IATA)’s latest industry forecast for 2012 paints a bleak picture against a backdrop of high fuel prices and the continuing sluggish global economy. Passenger growth will slow down from the expected six per cent in 2011 to four per cent in 2012, cutting profit projections by US$1.4 billion to US$3.5 billion.

Nothing new, except that all regions including Asia-Pacific that has up till now been hailed as the only growth bastion in the troubled aviation arena may dip into losses, particularly if the European Union economy continues to slide and the far-reaching effect of its spill-over can no longer be contained. Yet that has not deterred the heightened competition that we can expect in Asia-Pacific in 2012, if the airlines follow through with their plans. At no time in the aviation history are the players more unsure of their footing, so be prepared to be disappointed.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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