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?

Malaysia Airlines in crisis

IN announcing the Malaysian flag carrier’s performance for FY2011, Malaysia Airlines chairman Tan Sri Md Nor Md Yusuf said: “The company is in (a) crisis.” The airline group posted a loss of RM2.52 billion (US$841 million).

Malaysia Airlines carried 1.3 million more passengers on a total of 17 million passengers last year, contributing to a marginal increase in Group revenue (RM13.90 billion) of 2%. Expenditure however rose 21% from RM13.41 billion to RM16.20 billion, attributed largely to an increase of 33% in fuel cost.

Traffic (RPK) grew by 5% against a capacity (ASK) increase of 7%. Consequently the seat factor fell to 72.5%.

The last quarter (Oct-Dec) of the year dragged down the performance of the preceding nine months, with expenditure exceeding revenue by 35.60% compared to an average of 9.68%. Net loss for Q4 (RM1.28 billion) accounted for half the year’s loss. Traffic (RPK) for that quarter actually fell by 6% against a capacity (ASK) growth of 1%, resulting in a lower seat factor of 72.5%.

To state the obvious that Malaysia Airlines suffers a bad case of over-spending is an understatement. Group chief executive officer Ahmad Jauhari Yahya said the result underscored the urgent need for the airline to adopt strong measures to stop the “bleeding”. These, he announced, would include “staff redeployment, increasing productivity and efficiency, relentless cost control and making further reviews.”

It looks like the whole enchilada. Mr Yahya added: “We are also implementing an aggressive sales and marketing strategy.”

Just what exactly is that strategy? Aware of its ailing state, Malaysia Airlines has previously said it would restructure to focus on the long haul and to set up a new premium regional carrier that will operate the more lucrative short-haul routes as well as domestic services. The plan was to cut capacity by 12% though it had yet to be achieved. Then, before the publication of Q4 numbers, Mr Yahya already recognized the dire straits that Malaysia Airlines was in. He said the airline was in a “very, very deep crisis” and must act quickly – the same message that he was to reiterate after the Q4 results were released.
The proposed restructuring plan also called for cooperation with AirAsia, suggesting that both airlines should not compete directly with each other but rather complement their operations. The budget market was to be largely that of AirAsia. It looks like a national agenda to combat regional competition. In August last year, the two airlines swapped shares that gave AirAsia chief Tony Fernandes a 20% stake in the national flag carrier. AirAsia was the white knight come to rescue Malaysia Airlines in distress. The deal would give Mr Fernandes a bigger say in how the aviation landscape would shape up in Malaysia and beyond for both carriers.

Yet how far that cooperation would go and, more importantly, produce positive results is yet to be seen. It was a narrow view to think that reducing the competition between the two airlines would invariably enlarge their individual market shares by redistributing the pie from one to the other since they are not operating in a duopoly. A combined net loss can happen, not discounting how other players too stand to gain from the reduced competition.

Besides, AirAsia has its own basket of challenges in the near term. Although its full-year result showed improved operating profit by 12% to M$1.2 billion compared to M$1.0 billion the previous year – despite a 36% increase in fuel costs – Q4’s profit fell 56% decline from M$311.1 million a year ago to M$135.7 million. The performance of its Thai joint venture was flat and that of its Indonesian offshoot disappointing. AirAsia had earlier announced it was terminating flights to Europe and India because of high fuel process and weak demand.

Following Qantas’ announcement to launch a regional premium carrier (RedQ) based in Asia, AirAsia made a similar announcement to set up Caterham Jet. There was no indication that this would be in cooperation with Malaysia Airlines. Qantas’ plan was somewhat scuttled by labour action at home as Australian were concerned about the loss of jobs that shift overseas. Subsequently Qantas said it was looking for a partner to establish the regional carrier, which was likely to be based in either Singapore or Kuala Lumpur. At the same time, Mr Yahya said Malaysia Airlines was exploring the possibility of partnerships for its own regional premium proposal, and speculation was rife that the two airlines were talking.

One would have thought it would make sense for Qantas and Malaysia Airlines – both airlines looking to extend its reach in the lucrative Asian market – to join forces to take on the competition posed by more successful rivals such as Singapore Airlines and Cathay Pacific Airways. All the more so, as it would also interest the Malaysia aviation authorities to anchor Qantas at Kuala Lumpur International Airport to boost the airport’s growth. But talks have broken down. Qantas said the two sides could not agree on commercial terms. And Malaysia Airlines has decided to go it alone. It should not come as a surprise as both airlines appear to be ideologically different right from the start even as Malaysia Airlines has decided to join the OneWorld alliance. Their only common ground is their desperation to get back into the black. In the end, it is a lose-lose outcome for both airlines.

It would be interesting to know what else Malaysia Airlines would do to get out of the crisis. More specifically, the airline plans to retire and return to lessors 58 aircraft from now through 2014. This will result in capacity reduction which should in turn improve the break even factor if the airline’s load does not slip. On the flipside is the issue of growth, which though always desirable in a competitive market, may not figure in the near term as the soaring fuel price is likely to continue to hurt its pocket.

For ailing Malaysia Airlines, it is not just regional competition that it must be concerned about, but also the internal discipline to better manage its costs and improve productivity.

Dark clouds over Asia-Pacific

THERE has not been much good news lately in Asia Pacific aviation. This is worthy of note, not that airlines in other parts of the world are faring better – far from it – but that this region, in particular Asia, in these challenging times has been touted as the only region expected to be showing any growth.

Air Australia went bust. It is not the first nor will it be the last to bite the dust in light of rising fuel costs against the backdrop of a sluggish global economy. The Australian carrier’s demise raises the question as to whether there is room for such a supposedly boutique airline that grew from the charter business, relying heavily on government contracts, to expand into the wider and more competitive commercial arena of the more established carriers.

The future of India’s Kingfisher Airlines is hanging in the balance as it posted deeper losses – R4.44 billion in the last Oct-Dec quarter compared to R2.54 billion in the previous year, plunging 75%. The airline has never made a profit since it was launched in 2008. In a statement that it issued, Kingfisher said: “Steep depreciation of the Indian rupee coupled with consistently high crude oil prices has led to a challenging quarter for the Indian aviation industry.” Its fuel costs had risen by 37% to R1.9 billion. The company has already wounded up its budget arm.

Tiger Airways reported a net loss of S$17 million for 3QFY11/12 (Oct-Dec) compared to a profit of S$22.5 million in 3QFY10/11. Both Tiger Australia and Tiger Singapore were in the red. Latest data for Jan 2012 showed a fall in the number of passengers flown by 16% to 466,000 against seat capacity of 621,000 – giving a load factor of 75% compared to 83% in Dec 2011. High fuel costs and fleet under-utilisation were cited as the culprits.

Malaysia budget carrier AirAsia reported a 56% decline in Q4 (Oct-Dec) profit from M$311.1 million a year ago to M$135.7 million. However, full-year result showed increased operating profit by 12% to M$1.2 billion compared to M$1.0 billion the previous year. This was achieved despite a 36% increase in fuel costs. The airline had earlier announced it was terminating flights to Europe and India because of high fuel process and weak demand.

Performance for AirAsia’s 49% stakes in both AirAsia Thailand and AirAsia Indonesia was not encouraging. Although both carriers reported growth in revenue, AirAsia Thailand posted a profit of Bt2.04 million against Bt2.01 the year before, and that for AirAsia Indonesia dropped 53% to Rp150 billion from Rp312 billion. Two new joint-ventures – AirAsia Japan (in which AirAsia has a 49% stake) and AirAsia Philippines (40% stake) have been added to its stable this year.

It is not just the smaller airlines that are feeling the pinch, but the big guys too. Qantas posted a 52 per cent drop in first half profits before tax from A$417 million to A$202 million. Earnings for the airline plunged from A$165 million to A$66 million, down 60%. This was attributed largely to the cost of industrial action amounting to A$194 million and increased fuel costs that jumped 26% or A$444 million to A$2.2 billion.

Singapore Airlines (SIA) too reported that fuel prices had adversely affected its performance as net profit for 3QFY11/12 fell 64% from S$378 million to S$137m. Expenditure on fuel – which accounted for 40% of expenditure – went up by US$386 million or 33%. All three wholly-owned subsidiaries also recorded fall in operating profit: SIA Engineering, S$28 million down from S$34 million; SilkAir, S$32 million, down from S$45 million; and SIA Cargo, S$40 million from S$48 million. Looking ahead, SIA expects passenger yields to remain under pressure while cargo yields will continue to decline.

Thai Airways International posted a net loss of Bt10.2 billion for the year ending Dec 31, down from Bt14.7 billion the year before. Again, this was attributed largely to a 38.7% increase in jet fuel prices.

In announcing the results for Qantas, chief executive Alan Joyce said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” For Qantas, it means cutting jobs and unprofitable routes – the most likely route that most other airlines would similarly adopt. An added strategy is to grow budget subsidiary Jetstar, which achieved record EBIT of A$147 million, up A$4 million and focus more on the Asian market with the setting up of two new subsidiaries – a joint-venture with Japan Airlines and Mitsubishi Corporation and a regional all-Asia premium carrier.

SIA is also well supported by SilkAir, Tiger Airways (for which it has a 32.8% stake) and a new budget arm – Scoot – to be launched in July, operating regional long haul to destinations in Australia and China. In a climate of uncertain trends, it is a catch-all strategy.

Loss-making Malaysia Airlines is probably working on a similar strategy, announcing its intention to cooperate with compatriot AirAsia to divide the market between them, with Malaysia Airlines focussing on the long-haul full-service, AirAsia on budget and the likelihood of a regional premium airline in the fashion of Qantas amidst growing speculation that it could be a three-way partnership which, if it materializes, will base the new carrier in Kuala Lumpur.

While some airlines such as SIA, Thai and Hainan Airlines have reported improved traffic in January this year (and all eyes are now turned to Cathay’s impending result announcement in mid-March), dark clouds still loom large overhead considering the debt crisis that Europe continues to face and the escalating fuel price especially now that Iran has curbed its export to the European Union and the likelihood of its extension to other political foes. This is apt to squeeze the low-cost operators more than their bigger competitors, considering that fuel expenses make up a higher proportion of the former’s total operating costs. Full-service airlines may be able to cushion the impact by new rounds of fuel surcharge hikes, something that budget carriers are less likely to afford doing without losing market share.

The higher fare as a consequence of higher fuel costs may reduce the demand for leisure travel, which is likely to affect more the budget carriers that operate to vacation destinations (as in the case of Air Australia), whereas business travel is largely price inelastic. Several full-service airlines which thrive on the high yield of the premium market are hopeful of its recovery. The market has strengthened towards the end of 2011, contributing to a full-year growth of 5.5%. While mindful of the risks posed by the Eurozone crisis, the International Air Transport Association (IATA) is expecting some increase in business travel, lending some support to premium travel, in the months ahead. One cannot be too sure too if this lends enough credence to HongKong Airlines’ optimism to launch all-business class flights between Hong Kong and London.

What is happening in Asia-Pacific may be reflected in the strategy of an airline outside the region, namely Swiss International Air Lines – the successor of once the world’s most reputed airline, Swissair, that went bust in 2001. The resurrected Swiss airline has identified business class as its main focus in the competition, and its catchment has to extend beyond Switzerland.

It has also identified Middle East carriers such as Emirates as the “real” competitors, which are threatening to shift intercontinental hubs to where they are based – clearly the same threat that Qantas is facing on the kangaroo route as these carriers are offering strong connection alternatives, and a similar concern for SIA that an airport like Dubai is diverting hub traffic away from Singapore Changi Airport.

Swiss International chief commercial officer Holger Hatty opined that budget and network carriers would become increasingly similar in the short and medium haul business, and that the main battleground for competition is shifting to the long-haul trunk routes. Are the days of unprecedented growth for short-haul budget carriers over, which explains how some of them are already looking beyond the 4-hour flight-time limitation of the conventional budget model?

As for the long haul, Swiss International believes it has the right ingredients, where it can compete on product quality providing such creature comforts as air-cushioned seats and freshly-made food in first and business class, and on personalized customer service with some “intimacy”. That should be good news for airlines such as SIA and Cathay Pacific, and perhaps Qantas as it restructures its international arm.

Currency conversion
US$1 = A$0.93 = R48.98 (Indian rupee) = S$1.25 = M$3.02 (Malaysian ringgit) = Bt30.32 (Thai Baht) = Rp9,046 (Indonesian rupiah)

AirAsia branding losing ground

FIRST, it was AirAsia X that announced it would be suspending flights between its Malaysian base in Kuala Lumpur to Mumbai and New Delhi in India. Mumbai went off-line on Jan 31 while frequencies to New Delhi would reduce gradually before end-date Mar 22. The long-haul budget arm of AirAsia will also cease operations to London and Paris.

Now, Thai AirAsia – a joint venture between AirAsia and Thai Airways International – has announced similar plans to suspend its daily flights between Bangkok and New Delhi, the frequency to be reduced to four times weekly from Feb 14.

Is this a problem with India or a problem with the AirAsia brand?

AirAsia X cited visa restrictions imposed by the Indian authorities as a main reason. One wonders if Thai AirAsia faces the same problem. That might have been contributory, as it is with the issue of the volatile fuel price; ultimately it is about not just cost efficiencies (that which as recognized by AirAsia X CEO Azran Osman-Rani) but also the competition which is not necessarily confined to the budget cohort.

India is well-served by both budget and full-service airlines. It would seem that the AirAsia companies may not have been quite successful in penetrating the Indian market to the same measure as the parent company has done elsewhere in the region. The problem may not belong to AirAsia X or Thai AirAsia alone, but the AirAsia brand.