Is ASEAN Open Skies a myth?

LESS than a year to its full implementation, the ASEAN Open Skies remains an uncertainty. First mooted some 20 years ago, it has been a long time coming. While there was some open discussion in its early days, all seems somewhat quiet of late. Is it likely to be postponed? Or is it after all a myth?

The issue really hinges on how ready the ten-nation association are collectively. Even deeper than that, how prepared are they to overcome the hurdles, real or perceived, that stand in the way of full implementation. Unlike the European Union, ASEAN is by definition an “association” and not a common government with binding law enforcement obligations. The bloc is made up of a disparate string of nations that are vastly different in their stages of economic development. How they weigh the opportunities that such a common policy could bring against possible losses at home would determine their readiness for participation. Some nations may still prefer the seeming protection of local businesses accorded by bilateral exchanges. This was already tacit when at the outset, the various nations agreed on “the importance of the development of Competitive Air Services Policy which may be a gradual step towards an Open Sky Policy in ASEAN.”

Yet the good news is that against the uncertainty, the skies are already becoming more liberal as a number of airlines have stepped up expansion plans across the region. The battle for dominance has begun.

ASEAN nations

Courtesy The Bangkok Post

Courtesy The Bangkok Post

Indonesia is the largest nation in the association, occupying a land mass made up of more than 13,000 islands that is almost 75% the total area of the other nine nations put together. It is also the most populous with 250 million people, followed by the Philippines (98,000,000) and Vietnam (90,000,000). While ASEAN has a combined population of over 600 million – which speaks a lot about its huge market potential – expectedly the focus is likely to be Indonesia. But Indonesia, hampered by slow infrastructural enhancement and the past poor safety records of its carriers, fears the loss of domestic markets to better endowed foreign competitors. In May 2010, Indonesia declared it was not ready to fully open its skies and would limit access to only five airports, namely Jakarta, Surabaya, Bali, Medan and Makassar. Other ports would be subject to bilateral agreements and foreign carriers would not be permitted to ply domestic routes.

So it is with the less developed nations of Myanmar, Laos, Kampuchea and Vietnam even as they seek more foreign investments and ways to boost their exports. Accessibility to the landlocked outback of these nations could open up opportunities for growth, as noted at a meeting of ASEAN transport ministers in 1996 that the association aimed “to promote interconnectivity and interoperability of national networks and access thereto taking particular account of the need to link islands, land locked, and peripheral regions with the national and global economies.” The question really is how ready they are to embrace this objective to see to its implementation.

At the other end of the spectrum is Singapore, which is the smallest of the nations but the most advanced economically and most ready to go full hog with the implementation of the ASEAN Open Skies policy. After all, Singapore has been a pioneer in advocating liberal skies on the global stage. A concern among its ASEAN neighbours may be that of how they perceive Singapore carriers as benefitting from an enlarged Asean hinterland. It works both ways. Foreign carriers, particularly short-haul operators with limited capacity and resources, will benefit from Changi Airport’s hub connections to tap into other markets in the region. Besides its strategic geographical position, Changi offers excellent infrastructure and has appeal aplenty for transits,

Middle-of-the-road Malaysia and Thailand seem less passionate about the push. Brunei Darussalam, which has the smallest population, appears quite comfortable the way it is for now. However, the Philippines with a similar geography as Indonesia could benefit from more liberal connections.

Which airlines will rule the ASEAN skies?

The region’s growth is likely to be led by budget carriers. With the focus on Indonesia, its home-based carriers are not sitting by idly. Flag carrier Garuda Indonesia is acquiring smaller 100-seat planes more suited to the shorter runways of secondary airports, which will be largely served by its budget subsidiary Citilink. Asked how Garuda was gearing up for the ASEAN Open Skies, Garuda president and chief executive Emirsyah Satar said: “The ASEAN Open Skies Agreement will open up the Indonesian market to carriers from other ASEAN member countries, but our position is very strong in Indonesia and we are prepared for the competition. Our network’s aggressive international expansion and continual developments and service improvements will also prepare us for competing in a more liberal environment.” (Interview: Emirysah Satar, president & chief executive, Garuda Indonesia, 4 September 2013) He projected that Citilink would carry 19 million passengers by 2015 and there were plans to add international routes to several destinations in Southeast Asia. Garuda is also developing a new hub in Bintan, which is a hop away from Changi Airport.

Courtesy Lion Group/Picture by Rudy Hari Purnomo

Courtesy Lion Group/Picture by Rudy Hari Purnomo

Compatriot Lion Air, which is Indonesia’s second largest airline, is also expanding its fleet and gearing up its regional subsidiary Wings Air to service smaller airports. Lion Air has long expressed its intention to hub through Changi although it has also announced plans to develop Batam as an alternative transit hub to the congested Soekarno-Hatta Airport in Jakarta for both domestic and international flights. Lion Air president Rusdi Kirana said: “The distance is actually shorter if you transit in Batam rather than flying south to Jakarta to transit. The shorter flying time makes flying more convenient for passengers and it means aircraft burn less fuel, leading to significant cost savings.” From Batam, which, like Bintan, is a stone’s throw away from Changi, Lion Air hopes to fly to destinations such as Guangzhou, Hong Kong, Bangkok, Jeddah, New Delhi and Mumbai.

It is to be seen how the plans of Garuda and Lion Air to develop Bintan and Batam respectively will impact on Changi, which is likely to see higher growth as Singapore becomes an attractive destination in itself and as a desirable feed port for international and regional traffic. In introducing a direct non-stop service from Jakarta to London in May this year, Mr Satar has hoped that Indonesian travellers would fly Garuda instead of routing their travel out of another airport such as Changi.

Other smaller carriers are expected to go for a bigger slice of the growing pie and new carriers launched to serve secondary airports.

Courtesy Airbus

Courtesy Airbus

Not to be left out of the race, AirAsia and Tigerair made early moves to establish their presence in the huge Indonesian market. Until a full open skies policy is in place, joint ventures are the expedient way to gaining a foothold. Indonesia AirAsia, which is 49% owned by AirAsia, operates beyond Indonesia to Singapore, Kuala Lumpur, Phuket and Ho Chi Minh City. AirAsia chief Tony Fernandes’ ambition is to dot the region with the AirAsia brand. The Malaysian budget carrier has also set up joint ventures in Thailand and the Philippines. This means AirAsia, which is headquartered in Kuala Lumpur, and its joint-venture airlines are serving destinations in all the ten Asean countries, as summed up by Mr Fernandes: “Think we are done in Asean.” But liberalization offers more than just opportunities within Asean; AirAsia is well positioned to connect its passengers beyond to destinations in Australia, Japan, Korea, China, India and the Middle East.

Responding to AirAsia’s thrust into Indonesia, Lion Air teamed up with Malaysia’s National Aerospace and Defence Industries to launch Malindo Airways for services from Kuala Lumpur across Asean and to China, India and Japan, a move that Mr Fernandes had rebuffed as no match for AirAsia’s strong brand and positioning as Asia’s largest budget carrier. So far Lion Air appears to be one with the biggest plans, which include an airline leasing company to be situated in Singapore, a new full-service airline Batik Air which was launched in May last year and which plans to fly to Singapore as its first international destination sometime this year, and a premium charter under the Space Jet brand.

Not so lucky is Tigerair, whose partnership with Mandala Airlines Indonesia is teetering on the brink, as was its partnership with SEAir in Tigerair Philippines which has since been sold to Cebu Pacific Air. Its attempt to spread its wings across the region had met with a string of failures added to a blemished record of poor service. Its ambiguous relationship with sibling airlines within the Singapore Airlines (SIA) stable has not improved its fortune; today Tigerair and Scoot are competitors on some routes. Scoot, which is 100% owned by SIA, looks likely to overtake Tigerair in the game. It has partnered Nok Air to operate a domestic service in Thailand. Nok has hoped that this will be its vehicle for expansion overseas. Regional carrier SilkAir continues to fly in the shadow of parent SIA, which may have to continue to shore up the fortunes of its offshoots with feeder traffic from and into its long haul services.

Jetstar Asia, the only other airline based in Singapore that is not part of the SIA group, has proven to be a tough competitor. Parent Qantas has been actively promoting the Jetstar brand across Asia, having also set up joint ventures in Japan, Vietnam and Hong Kong.

Whether the Asean Open Skies is finally formalized or not, regional carriers have already started to prepare for the eventuality. The question as to whether it is a myth is no longer relevant. Clearly, the end-date is not as important as the progression towards it.

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Move over, Ryanair, the new low-cost model is Jetstar

Courtesy AFP/Getty Images

Courtesy AFP/Getty Images


REPORTING a net profit of 602m euros (US$831m) for the six months to end-September and despite an increase of 1% year-on-year, Ryanair yet again warned that profits are likely to fall for the full year. The airline reiterated an earlier exhortation about the numbers dipping as low as 500m euros compared to last year’s 570m euros, thus negating the gain made in the first half.

It is bad news that profits will fall despite an expected drop in fares by 10% over the winter months. Ryanair attributed this to “increased price competition, softer economic conditions in Europe and the weaker euro-sterling exchange rate.” As a result, the airline may ground some aircraft.

The truth is that Europe’s biggest low-cost carrier is beginning to feel that its hitherto successful modus operandi, hailed as a true budget model, may be finally running up against the wall. Surprise, surprise, surprise it is that the airline is talking about change, and more specifically in the department of customer service when previously it may even be said to have been sitting pretty comfortable and breathing arrogance about being labelled brusque, unfriendly and uncompassionate. Ryanair chief Michael O’Leary acknowledged it is now time to “listen to customers” in a somewhat belated but hopefully never too late attempt to retain customers and attract new ones.

Among the measures to be introduced are: the return of allocated seating in February next year for a smoother boarding process and to enable families and other groups of passengers to sit together; the allowance of a small second carry-on bag, which will be a bonus compared to other low-cost operators; and a 24-hour grace period to allow passengers to correct minor booking errors, a far cry from the alleged erstwhile practice of faulting or penalizing passengers on the slightest technical inaccuracy. It is a lesson learnt that in an increasingly competitive environment, customers do have a choice.

But, of course, many upstarts in the same niche market as Ryanair have failed to make the same strides as the Irish carrier. Some of them tried in vain to tweak the low-cost model to do one better and then ran the risks of evolving an expensive but misplaced hybrid model. Ryanair made no secret about flying the dollar and that everything else was baloney. Can you blame it that in its robust years it had not anticipated that this day of reckoning would arrive?

Image courtesy ABC

Image courtesy ABC


Younger Jetstar Airways and its sister airlines operating in a different part of the world might have gleaned some valuable lessons from the doyen’s experience. A subsidiary of Australian flag carrier Qantas, Jetstar has made its mark not only domestically but also in New Zealand and across Asia with local partners in Singapore, Vietnam, Japan and soon Hong Kong. It is fast becoming the region’s favourite low-cost carrier, competing with AirAsia and Tigerair whose founding fathers included Ryanair. Ranked tops in Australia, Jetstar Airways was second to AirAsia for best low-cost carrier worldwide in the Skytrax 2013 survey. Singapore-based Jetstar Asia was ranked seventh in the same category, but there was no mention of either Ryanair or Tiger Airways (now Tigerair) in the top ten list. In the Asia category, Jetstar Asia was ranked ahead of Tiger Airways. For Europe, Ryanair was outside the radar.

Jetstar is spreading its wings across Asia as Ryanair has done in Europe. It is enjoying an Asian boom, posting double-digit passenger growth. Since 2009, it has flown 23 million passengers within Asia and 10 million passengers from Australia to Asia. However, as pointed out by Jetstar CEO Jayne Hrdlicka, “low fares are just part of the story.” For too long while the going was good, competing on the lowest fares was everything for Ryanair. Price leadership has to be complemented by good products and services. Jetstar has identified “customer advocacy” as one of its drivers for growth. Providing a consistently good experience each time that a passenger flies is the surest way of attracting returning as well as new customers. It is the best advertisement that you can get.

Jetstar has contributed positively to the bottom line of the Qantas Group even though its last full year (ending June 2013) profit dipped by 32%, attributable largely to start-up losses in Jetstar Japan and Hong Kong. Is Jetstar, compared to standalone Ryanair, advantaged by its being an offshoot of an established legacy brand? Jetstar may attribute its success largely to its focus on local and independent management, but you cannot rule out parental influence. The airline is not alone in that aspect, if you consider the many others so conceived. This could well be the reason why AirAsia failed to work with partner All Nippon Airways (ANA) in the Jetstar Japan venture which has since been fully assimilated by ANA and the airline renamed Vanilla Air. Yet Qantas and Japan Airlines so far seem to have done all right in the case of Jetstar Japan.

It is not a given. The parental association can benefit or be detrimental to the offshoot carrier. United Airlines and Delta Airlines were reluctant parents to Ted and Song respectively. Or, it can disappoint. The magic of Singapore Airlines has not seemed to rub off Tigerair, not even Scoot that it wholly owns.

Good bloodline may provide an advantageous lift-off; the rest depends on the offspring coming into its own. Jetstar has scored many firsts since its inception, among them the first LCC in Asia-Pacific to introduce customer self-service for changes and disruptions, SMS boarding passes, and the unbundling of check-in bags. It was also the first LCC to put on board iPADS with the latest content and the first LCC to offer interline and codeshare flights. Soon it will be the first LCC to launch avatar chat (“Ask Jess”).

In all fairness to Ryanair, it is an equally innovative airline and it should be commended for being a bold one too. Here is where the path diverges for both airlines. As a true blue low cost carrier, Ryanair is focused on measures aimed at reducing costs further. The first principle of economics is that ceteris paribus, consumers will go for the lowest cost. If, for example, you do not fancy eating up in the air, why should you subsidise the cost of meals that other passengers tuck in? You pay only when you want to eat. Budget carriers, including legacy airlines – notably North American carriers – operating domestic or the short haul routes are already subscribing to that principle. Ryanair goes further with other measures such as charging a fee for counter check-in and has no compunction about bumping off a passenger who arrives at the airport without a pre-printed boarding pass. Scrimping on staff numbers to provide customer service also helps to reduce its operating costs. Mr O’Leary raised some brows when he suggested charging for the use of the aircraft loo and providing standing room only fares. The vibes turn out to be negative.

Jetstar on the other hand offers more positive solutions to perceived constraints that may be considered by many travellers as necessary evils of the budget travel mode. It has adopted a consolatory approach that has earned it brownie points. What little additional costs it incurs on the swings, it more than makes up for it on the roundabouts. Ancillary services are a major earner for the airline.

Move over, Ryanair, the new low-cost model is Jetstar. Still, it is quite something to hear Mr O’Leary say: “Listen to customers.”

Why is Singapore important to Qantas?

Courtesy Qantas

Courtesy Qantas


YET again Qantas reiterates the importance of Singapore to the airline. Qantas chief financial officer Narenda Kumar told Singapore’s Today newspaper just that, as if out of a guilt complex to having to continually justifying the Australian flag carrier’s recent shift of its hub for European flights from Singapore to Dubai, consequent to a mega commercial agreement with Emirates Airlines for the kangaroo route.

Singapore should however not be unduly flattered by Qantas’ reassurance – that it is doing Changi Airport a favour. It is cold business, and Qantas is doing it for itself. Singapore, as a major Asian hub, is not a point that Qantas would skip in its network, the way that many, if not all airlines, do not want to bypass London if it can help it in reaching out to, across and beyond Europe.

Truth be told, Qantas needs Asia, and Singapore is key to that strategy.

Mr Kumar said: “When you think about how the timings of our flights and how our schedules used to operate, it was all about the end-to-end destinations.” He added: “Now we are able to put in dedicated flights (in Singapore), improved timings and increased connections, and this has made Singapore and Asia that much more important.”

Yes, indeed, if Qantas is focussing on end-to-end traffic, then it does not matter whether its kangaroo run stops at Singapore or Dubai, or for that matter anywhere else, which could well be Bangkok, for example, so long as it offers the best deal for its customers and the most cost-beneficial modus operandi for the airline. For years now, the international arm of Qantas operations has been in the red, and the market served by the kangaroo route is a critical component of its operations.

Tying up with Emirates, Qantas now boasts that its customers can connect to more than 70 destinations to Europe, Africa and the Middle-East out of Dubai. For some travellers, Dubai might offer a more comfortable mid-point in their travel, depending on the timings of the flights. Unlike some other possible mid-points, Dubai International is said to be a competitive alternative to Changi. Strategically, it is not what Dubai offers on home ground but beyond that probably convinces Qantas of its advantage over Changi.

But, as Qantas from the day it announced the tie-up with Emirates until today continues to reiterate, Singapore is in the same way an important hub for its connections to the rest of Asia. It is not something new; Qantas has for years used Changi, courtesy of Singapore, to fan out flights to other parts of Asia without restricting Qantas passengers to having to access those destinations only from Australia. In other words, Changi has long functioned like Sydney, Melbourne or Perth for Qantas. Of course, Singapore enjoys the benefit of becoming a favoured and convenient tourist’s stopover for Qantas passengers as well, though not undeservedly for what it has to offer. This is not to underplay the popularity of Singapore as a destination for Australians, hence the remark by Mr Kumar about the focus on end-to-end traffic.

Then again, talking about end-to-end traffic, Qantas is not wasting time tying up deals with other airlines, such as China Eastern Airlines, to provide more direct access for Australians to Asian destinations and vice versa for nationals of Asian countries to Australia. In other words, this can reduce the reliance on Changi as a transit stop, not that this will spell immediate gloom for Changi since Qantas has announced it is in fact increasing flights to Singapore. The increase may be a necessary change for now, with its shift of its hub for European flights from Changi to Dubai International.

Still, the loss of Changi’s hub status has exposed the vulnerability of Singapore’s apparent geographical sovereignty, a reminder of how in the 90s there was rumour of Qantas threatening to move its Singapore hub to Bangkok. Changi has done exceptionally well in fending off the competition from regional airports, but that ghost may still be lurking in the shadow of its success.

As part of its Asian strategy, Qantas has been pushing and building up the Jetstar brand. It is Qantas’ intention to use budget subsidiary Jetstar Asia to increase its connections with Asian destinations such as Kuala Lumpur and Bangkok through Singapore, which is home to the budget carrier, and in direct competition with rival Singapore Airlines (SIA)’s Scoot and Tigerair and Malaysian operator AirAsia. Speaking of the advantage of the network connections between Qantas and Jetstar, Mr Kumar cites the following example: “If someone is going from Australia to Singapore to Shanghai and back to Australia, you can do that it in three sectors with us without having to return to a hub to complete your itinerary.”

It looks like Qantas may be having its cake and eating it. But if that helps to spur traffic growth at Changi, Singapore is unlikely to censure it. Qantas’ nemesis is not Changi but SIA. Tying up with Emirates is like two hitherto rivals taking on a common foe. Changi may not be that worse off without Qantas’ kangaroo run routing through it, so long as it continues to grow its Asian hub and, as Qantas has repeatedly assured it, remain important to the Australian carrier. For SIA, it will be a different story.

The race for Chinese connections as Qantas increases Asian presence

Courtesy Qantas

Courtesy Qantas

Qantas took another step forward to increase its presence in the Asian market, which it has recognized as a key strategy in returning the international operations of the airline to profitability. Just last week, it expanded its codeshare agreement with China Eastern Airlines.

“We said we would expand Qantas’ Asian network through our airline partnerships and we’re now delivering on that promise,” said Qantas General Manager Andrew Hogg.

The codeshare will provide greater access to China, offering a choice of 17 direct weekly flights between Australia and mainland China on either airline, and onward connections via Shanghai to 11 other Chinese destinations domestically. Qantas already has a codeshare service with China Eastern between Shanghai and Singapore.

It is inevitable that the competition will zoom in on the rivalry between Qantas and Asia’s leading airlines Singapore Airlines (SIA) and Cathay Pacific Airways. Although Qantas reiterated the importance of Singapore as its Asian hub – after moving its hub for Europe-bound flights to Dubai following a mega-alliance arrangement with Emirates Airlines – it is clear that Qantas will tackle the Asian market in more ways than just relying on transit connections as there will be more direct flight options between Australia and Asian destinations. That reduces the importance of Singapore and Hong Kong as the go-between.

Additionally, Qantas is pushing the low-cost subsidiary brand of Jetstar across the region through Jetstar Asia based in Singapore, Jetstar Hong Kong pending approval, and Jetstar Japan based in Narita.

If China is where the aviation pot of gold is, Qantas is not wasting time. Cathay, though unhappy with Qantas’ proposed Jetstar operations based in Hong Kong, already has a stake close to 19 per cent in Air China and a stake of 49 per cent in Air China Cargo. Its wholly-owned subsidiary Dragonair operates an extensive network connecting Hong Kong and other Chinese destinations.

That leaves Singapore Airlines to work on its Chinese connections. Five years ago, it failed in a bid to buy a stake in China Eastern, but it has not ruled out the possibility of reviving that bid now that it has divested in Virgin Atlantic – a lacklustre acquisition it made more than decade ago. There is also the possibility of it looking at China Southern Airlines.

AirAsia lets go the Singapore dream

air asiaAirAsia chief Tony Fernandes has long been pursuing the Singapore dream – to set up base in Singapore and maybe give its nemesis Singapore Airlines, not just Singapore-based budget carriers Tiger Airways and Jetstar Asia, some hard knocks. But it looks like he is letting that dream go. 

The region’s largest budget carrier has dropped plans to set up an airline in Singapore. It gives two reasons for that decision: Singapore’s high cost structure and its lack of domestic market potential. Mr Fernandes was quoted by The Wall Street Journal as saying, “We are concentrating on markets which have big domestic markets and big populations and markets that are more liberal and market orientated.”

Already the biggest budget carrier by the number of flights calling at Changi Airport, AirAsia probably finds the proposition superfluous. Mr Fernandes had in the past petitioned unsuccessfully to be allowed to operate from a secondary airport, but all commercial passenger flights by and large operate out of Changi Airport. Is cost the real issue, or is it competition?

Mr Fernandes may have a valid point in citing Singapore’s limited domestic market. But that argument is neither new nor surprising. Singapore thrives on being the region’s aviation hub, with good connections whose operations are supported and facilitated by Changi’s impressive infrastructure. If, indeed, AirAsia is looking at the local market alone, then it makes sense to shift its capital to larger markets elsewhere.

But that could be a narrow view as Singapore’s potential is larger than what its domestic market can offer. Take, for example, Indonesia is a huge market which is expected to grow even bigger when Asean Open Skies kicks in by 2015. As Indonesia opens up, so will Singapore benefit as the gateway to Indonesia and the rest of the region.

Jetstar Hong Kong stirs up a storm

JETSTAR Hong Kong, a new budget joint venture of equal partnership between Qantas and China Eastern Airlines, is stirring up a storm – and not quite in a tea-cup considering the market potential of 450 million passengers by 2015. The carrier is expected to commence operations in mid-2013.

The announcement drew mixed reaction from aviation analysts. Some of them think Qantas made a strategic move in penetrating the lucrative Asian market, following failed talks with Malaysia Airlines to set up a premium carrier to be based in the region. However, Qantas chief Alan Joyce insisted that it was not the end of the road for that project. “We are still in dialogue with both the Singaporeans and Malaysians but nothing is happening in the short term,” said Mr Joyce. “It’s more of a long-term issue.” By that, he meant a likely delay of two to three years.

The RedQ project got on to a rough start when it was announced a year ago as part of the Qantas restructuring to rescue the Australian flag carrier from further losses – it lost A$200 (US$207) – incurred by its international operations. Qantas flies less than 20% of Australia’s international passengers compared to a market share of 65% for domestic travel. Asia became its Holy Grail. Unfortunately, disruptive labor action in protest for fear of the loss of jobs at home put the brakes on the project. What started with a big bang simmered down to a proposal for a joint-venture instead. Singapore and Kuala Lumpur were identified as the possible Asian base, and Malaysia Airlines – which is also muddling in red ink – the only known interest in the partnership so far.

Mr Joyce explained that the project was put on hold “because the requisite traffic rights couldn’t be secured in Singapore while Malaysian Air (sic) is going through a restructuring plan of its own, so that reaching an accord with Qantas proved too ‘complex’.” It is to be seen as a matter of timing. Interestingly, Mr Joyce mentioned difficulties with Singapore, which is a strong supporter of open skies and where Qantas already enjoys hubbing privileges. While Jetstar Hong Kong – a budget carrier – is not a replacement for RedQ, would Qantas face similar impediments even though it had inked an understanding with China Eastern?

According to aviation consultant Andrew Pyne who had held senior positions at Cathay Pacific, Viva Macau (as CEO) and Avianova (as founding CEO), the deal is far from being final, in case we missed the fine print that reads “subject to regulatory approval”. In his opinion, neither Qantas nor China Eastern which is “controlled in effect from Sydney and from Shanghai can be said to have its principal place of business in Hong Kong” and therefore does not comply with Hong Kong’s Basic Law. This means the law would have to be tweaked to legitimize the union, but with pressure from Beijing, this is not likely to be an insurmountable hurdle.

But if that came about, Mr Pyne opined that two things could happen, both of which undesirable for Hong Kong. First, there would be a long line of other airlines wanting to operate from Hong Kong, which would end up being “a flag of convenience”. A bad thing? That would depend on the Hong Kong administration’s objectives, priorities and vision of growth – it has already given the green light for a third runway to be constructed at the Hong Kong International Airport (HKIA). Uncontrollable? Not quite.

Second, Cathay Pacific would probably look for a new home elsewhere. It could, but would it? Besides, it is unimaginable that the region’s most successful airline should be so ruffled by a new budget carrier on the same turf or be so terrified of the competition it poses that it should shake out of the territory where together with subsidiary Dragonair it has 50% total capacity share compared to 5% for all low cost carriers (LCC) at HKIA. Jetstar Asia on its own manages only 0.5%.

Yet there is suggestion that Cathay Pacific is not quite happy about Jetstar Hong Kong setting up base at HKIA – manifested in renewed speculation that it would withdraw from OneWorld (of which Qantas is a member) and consider joining Star Alliance. But it is really much ado about nothing if you consider that China Eastern is a member of the Sky Team, and not OneWorld.

A more pertinent question to ask is whether Jetstar Hong Kong would do much better than the average LCC at HKIA, and in particular for Qantas whether the new budget joint-venture was strategically the right move in its Asian plan, which looks set to employ the Jetstar branding as the growth vehicle. The Jetstar brand – including services within Australia and New Zealand – already connects eight cities in mainland China in a network of almost 60 destinations served by some 3,000 weekly flights. Besides Jetstar Asia that operates out of Singapore, Jetstar Japan in partnership with Japan Airlines and Mitsubishi Corporation will commence domestic services out of Tokyo’s Narita Airport in July. Jetstar Pacific in joint venture with Vietnam Airlines will follow on a date yet to be finalized.

However, the less optimistic group of analysts doubt that the Jetstar Hong Kong would work as hyped for Qantas (and China Eastern). They think that Hong Kong is just not the right market for budget travel. The volume out of HKIA is much too small and the yield very low especially if the target is the leisure market. For now, the options seem limited as destination rights are strictly rationed by the Chinese authorities. Cathay Pacific has said it would not follow in the footsteps of regional rivals such as Singapore Airlines and Japan Airlines in setting up budget offshoots. It is already complemented by subsidiary Dragonair that operates shorter regional routes. But Qantas chief Joyce had this to say: “Cathay will always be talking down (LCC opportunities) because it is in its interests to do so.”

Both Qantas and China Eastern are confident that Jetstar Hong Kong – which is eyeing the market beyond Hong Kong – would turn in a profit within three years. China Eastern chairman Liu Shaoyong estimated a market share of 6 to 7%. All this despite high fuel costs that have increasingly become the bane of LCC operations. Mr Liu said the costs would be offset by high aircraft utilisation and through surcharges. That, of course, would be premised upon a growing market and the elasticity of the demand vis-a-vis costs.

Jetstar CEO Bruce Buchanan said costs would be kept low, as much as 50% compared to full-service airlines, and fares would similarly be as much as 50% below what the latter are charging. By charging low fares, Mr Bachman has latched on to the promise of the theoretical economic model that it will generate new demand – the first principle of the budget business. Ceteris paribus, you may add, and given that the economy will fully recover and strengthen then on. He has also placed his bet on compensation by ancillary revenue, a new and convenient source of income that many airlines have begun to adopt. Jetstar is said to be amongst the cohort of high ancillary revenue earners.

Mr Joyce said Hong Kong Jetstar would enjoy “first-mover” advantage, but sceptics are apt to cite how two other airlines namely Hong Kong Airlines and Hong Kong Express are still struggling with a 60% load factor despite charging fares that are said to be 50% lower compared to full-service airlines. Both airlines are backed by Chinese conglomerate HNA Group and garner a combined 5% market share. Besides fuel costs, operations at HKIA do not come cheap for LCCs, particularly in the absence of a low-cost budget terminal.

Whatever the outcome, the storm stirred up by Jetstar Hong Kong has surfaced a few hard realities. First, Qantas is determined – almost desperate – to spread its wings far and wide over Asia, eyeing in particular the huge potential of China. Jetstar Hong Kong may not have been ideally timed, but it is a significant stepping stone if its sceptics are proven wrong. Mr Joyce is waiting in the wings to celebrate the fortune that China’s “booming middle class” would bring when the floodgates finally open fully, a key part of his bruised five-year plan to restructure Qantas. The Australian carrier badly needs a new lease of life.

Second, while still commanding a very strong presence in Hong Kong – and no reason to believe this would change any time soon – Cathay Pacific may have to brace itself to have to fight even more tenaciously to uphold its dominance. Elsewhere in the region, a visible shift in the market is taking place. In Singapore, LCCs have increased their market share to 27% and are continuing to grow, while flag carrier Singapore Airlines has seen its share reduced to 33%. In Australia, LLCs have a market share of 43% compared to Qantas’ share of 37%. The competition has broken down the barriers of segmentation. No doubt, the competition will intensify.

Third, Hong Kong may be undergoing policy changes in the wider China context. Past encumbrances may make way for new opportunities. Things can change.

And, lastly, the jury is still out on which way the wind will blow.

AirAsia X suspends flights to Europe, not a surprise

SCEPTICS doubtful of the viability of the budget long haul will be quick to state that it is not surprising AirAsia X has announced suspension of its services to Europe. The budget carrier, which is a subsidiary of AirAsia, commenced operations from Kuala Lumpur to London in 2009 (at first to Stansted before switching to Gatwick) and to Paris (Orly) in 2011. Services to London and Paris will cease on Mar 31 and Apr 1 respectively.

There are echoes of the now defunct Hong Kong`s Oasis Airlines which commenced services to London`s Gatwick in 2006 followed by services to Vancouver in Canada in 2007 before collapsing in 2008. Mind you, Oasis Airlines was voted “World`s Leading New Airline” at the Annual World Travel awards in 2007.

So it was with impressive panache that AirAsia chief Tony Fernandes launched the AirAsia X long haul budget venture amidst doubts that the budget model was not really apt for the long haul especially after Oasis Airlines (and others such as Canada’s Harmony Airways which folded its wings in 2007) had failed only but too recently. Once again it raises the question as to whether airlines can replicate short-haul success flying the long haul.

But note that AirAsia is still flying to other destinations nearer home. In fact, that has been cited as one of the reasons for its decision, i.e. to focus on key markets in Australia and East Asia (namely China, Taiwan, South Korea and Japan) and development of new markets in the region. This suggests that Europe is not the market it should be after in its revised strategy, or rather, its failure to develop the market it had once set out to prove that the budget long haul could work.

Of course, there is the issue of cost – rising fuel prices and the new carbon emissions trading scheme being mentioned – that is adding pressure on the already low yield. The sluggish European economy has not helped, if not being contributory to the carrier’s woes.

Some analysts have questioned AirAsia X’s deployment of the Airbus A340-300 aircraft for its services to London and Paris, the way that they have wondered whether SIA’s transfer of the older Boeing 777-200s to its new budget subsidiary Scoot (which is expected to commence flying by mid-year) might not place it in good stead to compete with rivals that are operating with more efficient equipment. If cost is the main driver, then equipment efficiency which has an impact on costs should be a primary consideration.

But the long haul market also has different demands that may not be compensated by low costs. For example, AirAsia X’s choice of Stansted might not have been the best of decisions to begin with. In some way perhaps, all this came as a painful awakening for AirAsia X when it recognized the limited wiggle room allowed by the traditional budget model to accommodate these other considerations.

The decision to suspend operations to London and Paris was inevitable in order to “improve operating cost efficiencies” according to a statement issued by the carrier. Yet with this suspension of the truly long-haul flights, AirAsia X CEO Azran Osman-Rani said: “AirAsia X remains focussed on maintaining its global leadership position in the low cost, long haul segment.”

However, the crack for AirAsia X may be deeper than it appears. Besides suspending flights to Europe, the carrier will also be ceasing operations to Mumbai and Delhi in India – not quite the long haul by comparison. Mumbai will be off-line by Jan 31 while Delhi will see reduced flights until end-date Mar 22 although Mr Osman-Rani did not rule out the possibility of service resumption if certain issues such as visa restrictions that apparently had a negative impact on travel between Malaysia and India were resolved. Cost inefficiencies were again cited as reasons, and these according to Mr Osman-Rani had resulted in a “structure not conducive to the low-cost model.”

Yet again it raises the question of whether the low-cost model has been stretched to beyond its limits. Perhaps not in this case, noting the flight time between AirAsia X’s home base and Indian ports and if you consider the apparently successful operations by rivals Jetstar Asia and Tiger Airways as well as similar operations by these and other airlines including AirAsia X to other regional destinations. And as expectations run high in our anticipation of Scoot`s entry to prove otherwise, it is fair to conclude that AirAsia X is feeling more the pinch of the competition than the model it has adopted to shape its operations.