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.”

Qantas finds its route to profitability

Courtesy Getty Images

Courtesy Getty Images

The market is tough, admitted Qantas chief executive Alan Joyce when he announced the airline’s FY13 performance. Against that background, even as uncertainty lies ahead for the industry – with the looming fear of a Middle-East crisis as the political turmoil in Syria comes to a head, threatening yet another round of spiralling fuel prices – the Australian carrier deserved a well-earned moment to celebrate its steady recovery in international operations whose losses have shrunk by half to A$246 million (US$221 million).

Mr Joyce attributed the positive swing to Qantas’ alliance with Emirates although the full impact of that partnership would only be felt in 2015, by which time he expected the international arm would be back in the black.

He said: “The Qantas Emirates partnership gives the group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.” According to him, “Bookings have been very positive, running at about twice the level of Qantas’ previous code-share arrangements for flights to Europe.”

So it has emerged that Qantas has made the right decision – to ditch British Airways for Emirates and re-route the flights through Dubai instead of Singapore. That was a move that could be said to have changed the rules of the game, much to the credit of Mr Joyce. In his words, “It gives us a clear network advantage over our competitors to London and Europe.” That demonstrates how geography can shift with improved technology, enhanced by strategic alliances and positioning. However, Mr Joyce said “there is still a lot of work to do bedding down the partnership in FY14”, unwittingly suggesting that even that could change if taken for granted.

At the same time, Mr Joyce reiterated the importance of Asia in Qantas’ international operations as laid out in its 5-year restructuring plan now in its second year. The approach is one of providing “the best possible product and service on routes to major Asian hubs – and to extend our network through the right partners.” Using Singapore as a major Asian hub is not an entirely new strategy; Qantas has long been taking advantage of Singapore’s liberal aviation policies to connect passengers within Asia.

Besides Dubai and Singapore as part of restructuring the international network “around a series of global gateways”, there is no clear indication of what other hubs Qantas is considering at this moment or in the immediate future. Unless there are more strategically placed and at the same time more cost-effective alternatives, it is unlikely that Dubai and Singapore will lose their importance in this respect. Nor is there any pressing need for Qantas to dot more hubs across Asia, excepting perhaps a most likely third hub to be Hong Kong or an airport in mainland China to capture the Chinese market. Qantas will most likely look to working closely with partners such as China Eastern Airlines to extend its reach across the region.

Softened by the reduced losses of international operations, the Qantas group made a net profit of A$6 million, reversing last year’s loss of A$244 million. The earnings were also boosted by a settlement of A$125 million it received from Boeing following B787 order cancellations. Qantas Domestic, Jetstar and Qantas Loyalty continued to be profitable; however, earnings for both domestic operations and the budget carrier declined.

Increased competition was cited as a reason for the 21-per-cent dip in profitability of domestic operations to A$365 million. However, Virgin Australia, which has acquired a 60-per-cent stake in Tigerair Australia, is expected to report a full year loss of up to A$110 million, pointing also to a general slowdown in demand across the country. Mr Joyce remained optimistic about Qantas’ prospects vis-à-vis the competition, reporting a trend of corporate customers switching back to the airline, apparently “after trying the alternative”. Qantas’s share of the corporate travel market in Australia is 84 per cent.

Jetstar’s profits suffered a steeper drop of 32 per cent to A$138 million. However, the budget carrier remains a strong contender in the low-cost market in the region and a complementary arm of the parent airline if not a key extension of the Qantas network. Jetstar Japan, launched in July 2101 in partnership with Japan Airlines, has emerged as the leading budget carrier in Japan, outshining rival AirAsia Japan which has since been fully acquired by All Nippon Airways and renamed Vanilla Air.

Qantas will prove wrong critics who doubted the viability of a budget carrier in Hong Kong as approval for Jetstar Hong Kong – a partnership with China Eastern Airlines and Shun Tak Holdings – by the authorities looks set to be formalized. With the huge potential of the China market, there is little reason to doubt that the carrier will make some impact on a market dominated by Cathay Pacific and Dragonair.

Going forward, Mr Joyce said “the global outlook is mixed” with signs of recovery in America and Europe but the uncertainty of its sustainability. It being a volatile market, his commitment to focus on “the elements we can control” may be about the best that any airline can do under the circumstances, but within the framework of a disciplined programme such as one known as Qantas Transformation.

Everyone likes vanilla, but do they really?

Courtesy Bloomberg

Courtesy Bloomberg

Following the breakup of AirAsia Japan between partners All Nippon Airways (ANA) and AirAsia, with the latter acquiring the stake of the latter, ANA has renamed the budget carrier. It is now Vanilla Air.

Vanilla Air president Tomonori Ishii explained the choice of the name as follows: “We chose vanilla as our brand name because it is popular and loved by everyone in the world.”

Vanilla Air as a new airline will commence operations in late December, targeting travellers heading for resort destinations. There was speculation that it might merge with ANA’s other budget carrier – Peach Aviation – based in Kansai, but it looked like Vanilla will continue on its own operating out of Narita. Whereas in the past year its predecessor was focused on domestic destinations within Japan, Mr Ishii said Vanilla Air aims to fly beyond Japan to other resort destinations in Asia. He said: “”We will begin with short-distance services but want to expand the range to mid- and long-distances in line with ANA’s branding strategy.”

Vanilla Air will start with two airplanes and increase the number to 10 by 2015.

Will the renewed branding help Vanilla Air turn round the loss of its predecessor in its inaugural and only year of operations to the tune of 3.5 billion yen (US$40 million)? The erstwhile partners had blamed the split on differences in strategy management, with ANA suggesting that AirAsia did not understand the profile of the Japanese market. Time will tell if the shift from online marketing – which is the mainstay of the AirAsia strategy – to working more with travel agents will boost the new airline’s bottom-line. However, Air Vanilla is not ditching online selling altogether; it will introduce a new online system that will appeal to the Japanese market, underscoring the importance of local knowledge.

It is a clear indication from what Mr Ishii had said that Vanilla Air will align itself with the ANA ethos, suggesting a stronger involvement of the parent airline which was perhaps restricted by the shared responsibility of two partner airlines with different backgrounds. The conflict that led to the breakup, with AirAsia chief Tony Fernandes declaring that he would not want to ever again work in partnership with another airline, told the familiar tale of how there can only be one boss. That, however, does not explain how AirAsia Japan’s rival Jetstar Japan – a joint-venture between Qantas and Japan Airlines – could outperform the former.

Is it therefore any wonder why a name like AirAsia Japan did not work, since it was not wholly owned by the Malaysia-based airline?

Mr Ishii thought Vanilla Air was “a very cute name”. It does not matter if some people outside Japan also thought of vanilla as being bland and boring, and in need of dressing. Maybe that is an appropriate appellation for a budget carrier, one without frills. But what matters more is that the Japanese people like it, as they are ever so fond of “cute” things from Hello Kitty to “boyfriend pillows”. Kawaii, they say.

AirAsia blames ANA for budget break-up

Courtesy Wikipedia Commons/Flickr

Courtesy Wikipedia Commons/Flickr

AirAsia chief Tony Fernandes has put the blame on All Nippon Airways (ANA) for the breakup of AirAsia Japan budget joint-venture. (See Budget business matures, Jun 12, 2013) The beef is that majority shareholder ANA as a full-service airline does not understand budget operations, giving rise to differences between the two partners in financial and management issues.

A marriage across cultures is not always an easy one, even if both partners hail from the same level. The aviation industry has seen the break-up of even the most likely partners. Ultimately it all comes down to the numbers. AirAsia Japan is not doing as well as the other budget operators, namely ANA’s other budget arm Peach Aviation with a Hong Kong partner and Jetstar Japan, a joint-venture between Qantas’ Jetstar and Japan Airlines (JAL) as major partners.

How then do you explain Peach and Jetstar being more successful? Mr Fernandes may argue that it is because Peach’s other partner is non-aviation, so is it a case of too many experts spoiling the broth? And, interestingly, Mr Fernandes said he has learnt one critical lesson from the failed tie-up; he was quoted as having allegedly said: “The lesson is I will never ever work with another airline in my life. Let me qualify that – premium airline.” That again may have also explained why he has chosen to set up AirAsia India with non-aviation partners Tata Sons and Amit Bhatia instead of with another airline or buying into an existing airline such as Kingfisher Airlines which is clutching at straws for some help.

What about Jetstar Japan, assuming it has so far not faced the kind of problems that confronted AirAsia Japan, even though JAL, like ANA, is a full-service airline and Jetstar, like AirAsia, operates the no-frills model? Or, if Qantas, instead of Jetstar, is driving the business, does it not augur ill when two full-service airlines try to operate a budget joint-venture along legacy lines? Yet the Jetstar brand has enjoyed good growth across the region.

ANA will now buy up the AirAsia stake in the joint-venture, and AirAsia Japan may then merge with Peach. Since Japan is a prized market for leisure travel, AirAsia may again seek to re-enter the market on its own. Can it do better the next time round? The longer it waits, the more it has to catch up with lost ground as the market matures.

Budget business matures

anaLESS than a year into its operations, AirAsia Japan – a low-cost budget joint venture between All Nippon Airways (ANA) and AirAsia – is facing a possible dissolution. Majority shareholder ANA with a 67-per-cent stake is considering buying up the AirAsia stake.

The discount carrier has not done as well as its rivals in the business. During the peak Golden Week holiday in Japan, AirAsia Japan managed a load of 67.6 per cent compared to Peach Aviation’s 91.3 per cent and Jetstar Japan’s 78.8 per cent. Peach is a joint venture between ANA and a Hong Kong partner and is based in Osaka’s Kansai Airport; Jetstar Japan is a joint venture between rival Japan Airlines and Qantas.

It is likely that following the dissolution, AirAsia Japan will continue to operate out of Tokyo’s Narita Airport but under the Peach brand.

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

While Asia has been experiencing quantum leaps in the growth of budget traffic in recent years – resulting in many more upstarts joining the competition – AirAsia Japan’s performance may be a forewarning of this business sector maturing even as analysts pointed out much has to do with a failed marketing strategy. The budget model was an initiative in its early years to generate growth in air travel which would not have otherwise materialised if not for its affordable fares, but many legacy airlines have also in their frenzy to prevent an outflow from their traditional markets set up budget offshoots.

Meantime AirAsia X – the long haul budget arm of AirAsia – is looking at the possibility of reinstating flights from Kuala Lumpur to destinations such as London and Paris which were suspended since early last year. The airline hopes to raise US$370 million in a share sale to repay debt and fund expansion plans. But the jury is still out as to whether the long-haul budget is a viable proposition, with many people inclined to think not so, as some airlines had tried and failed.

AirAsia eyes Indian joint-ventures

Courtesy telegraph.co.uk

Courtesy telegraph.co.uk

AirAsia chief Tony Fernandes is eyeing possible Indian joint ventures now that India has relaxed the rule on foreign ownership, allowing foreign airlines to buy up to 49 per cent equity in a local carrier.

Mr Fernandes said on Twitter: “AirAsia will focus on larger joint ventures. Think we are done in Asean.”

AirAsia has been expanding its presence in Asean (Association of Southeast Asian Nations), having set up bases in four member countries – home base Malaysia, Indonesia (Indonesia AirAsia), the Philippines (AirAsia Philippines) and Thailand (Thai AirAsia) – and operating to eight of the countries including Singapore, Cambodia, Laos and Myanmar. Mr Fernandes also made a bid to acquire a stake in Indonesian carrier Batavia Air but the deal fell through. Outside Asean, AirAsia has partnered with All Nippon Airways to set up AirAsia Japan.

Mr Fernandes’ renewed interest in India is interesting since it was only early this year that its long-haul budget arm AirAsia X announced suspension of flights between Kuala Lumpur and the Indian ports of Mumbai and New Delhi early this year. Thai AirAsia also reduced frequencies between Bangkok and New Delhi. (See AirAsia branding losing ground, Feb 1, 2012)

India is a huge market and AirAsia’s presence is thin compared to its coverage of Asean, but the competition is intense, in light of India’s many budget carriers, a number of which have come and gone. Would AirAsia be interested in rescuing Kingfisher Airlines which is teetering on the edge of extinction? Rumour had it that AirAsia might be interested in acquiring a stake in SpiceJet instead, but this was denied by Mr Fernandes.

Whichever airline he picks, will AirAsia – hyped as Asia’s largest budget carrier – be able to replicate its success elsewhere in India?

Jetstar Japan pushes the boundary for low cost travel

JETSTAR Japan – a budget joint-venture of partners Qantas, Japan Airlines, Mitsubishi Corporation and Century – took off on July 3 from Tokyo’s Narita Airport for Sapporo, less than a year after its inception was announced and five months ahead of schedule.

This put Jetstar Japan ahead of a similar joint-venture – AirAsia Japan – announced by rivals All Nippon Airways and AirAsia, which expect to launch the budget carrier in August. It looks like the competition has already heated up.

The target is Japan’s domestic market, at least for now. Qantas chief Alan Joyce said: “There’s a huge appetite for low fare travel options in this market.”

For Qantas, which is eyeing the growing Asian market and the growing demand for budget travel to boost the group’s earnings, this is an achievement. The Australian airline company has found its fortune shifting to domestic and budget operations while its premium international operations struggle in red ink.

It is also a step forward in expanding the Jeststar network and growing its brand – the same strategy adopted by AirAsia to dot the Asian region with its brand of joint-ventures. Jetstar already has roots in Singapore, Australia, New Zealand and Vietnam. Jetstar Hong Kong – a joint venture with China Eastern Airlines to tap the lucrative Chinese market – is expected to take to the skies in 2013 if all goes well according to plans.

Mr Joyce said Jetstar Japan would reshape domestic travel in Japan. There is no secret here. Cost is the key criterion. Jetstar Japan CEO Miyuki Suzuki said: “Our low domestic fares will see Jetstar become part of the fabric of everyday life for thousands of Japanese who can now afford to fly with us to see friends and family or have a weekend away.” This is an important consideration in a country which is also served by an efficient system of roads and rails.

The airline claims its fares are the lowest in the market and up to 50 per cent lower than full service fares. It is enticing customers with a Price Beat Guarantee that Jetstar Japan will beat any comparable fare by 10 per cent. It will be interesting to find out what rival AirAsia Japan has in store for its customers when it commences operations.

How low can the fare go? And what gives in an operation that is already without frills? We may not have to wait long to find out.