No longer a one-horse race

AirAsia will soon face challenge from Indonesian neighbour on Malaysian home turf.

AirAsia is among the most profitable low-cost carriers in the world and in the past decade it has expanded like no other budget airline in Asia. It has one of the lowest unit costs and thrives on its ancillary income.

Last year it carried more than 30 million passengers in 105 aircraft across Asia and this year the numbers will be more impressive. Its flamboyant boss, Tony Fernandes, is constantly on the lookout for more ventures, to expand routes and destinations.

South Korea is its next target market for a joint venture, though a market such as Vietnam cannot be overlooked despite an earlier failed attempt. India and China remain on Mr Fernandes’s radar screen, but entry into these markets may take some time.

To Mr Fernandes, Asia offers great growth potential and he has ordered 375 Airbus aircraft to drive that growth.

Across the South China Sea, Lion Air boss Rusdi Kirana is also counting on Asia’s growth to fuel his airline’s expansion. Lion controls about 45% of the domestic air travel market in Indonesia, which accounts for nearly half of the 600 million people in Asean.

The Indonesian market is also a market that Mr Fernandes is eyeing. Lion has 100 aircraft in operation and 382 new Boeing aircraft on order. It will begin its long-haul unit, Batik Air in March next year.

But Malaysia has also been on Mr Rusdi’s radar screen for a while now. That is part of his regional expansion plan and after two failed bids earlier, he has managed to wrap up a deal with Malaysia’s National Aerospace and Defence Industries (Nadi) to set up Malindo Air, a 51:49 partnership between Nadi and his PT Lion Grup.

Starting in May next year, Malindo Airways will rival AirAsia on its home ground, and it follows Mr Fernandes’s decision to relocate his main base to Jakarta in June to focus on regional expansion.

Though Mr Fernandes was quick to play down any threat of competition, AirAsia’s share price lost 10% in a knee-jerk reaction after the Malindo announcement.

However, Mr Fernandes lately has been sounding more conciliatory. “We can collaborate with Malindo Airways. I am not here to make enemies. I will meet Rusdi over dinner soon,” he said.

But some experts worry, as the last collaboration he had with Malaysia Airlines (MAS) resulted in the removal of competition that was coming from the latter’s Firefly operations.

“There is a need to infuse competition in the air sector in Malaysia. Competition is not as intense in Malaysia as in other Asian markets and fares are a bit steep,” said an aviation expert who asked not to be named. “We hope Mr Rusdi will keep his word to offer the same or better airfares than that offered by AirAsia.”

And while some contend the market of just 29 million has limited growth potential, politicians and some experts believe Malaysia is big enough to add one to two more LCCs judging from the air travel growth in Asia and the number of budget carriers in neighbouring countries.

It is growth that is driving Mr Fernandes to say that he may soon place an additional order for 100 aircraft. Surprisingly, Mr Rusdi said the same.

Dozens more carriers in the region have made orders for Airbus and Boeing, who say a third of their orders now come from Asia. A report said Asia will be home to 11,450 new aircraft by 2013, when passenger traffic in Asia will have reached 2.2 billion. Of this, Malaysia is projected to have 200 million passengers.

Whether they are coincidental or tit-for-tat strategic moves, the fact remains that the fast growth of LCCs underlines surging demand in the region for affordable air travel. Asian airlines in recent years have accounted for half of total industry profits.

Competition in other markets is even more intense — Scoot of Singapore is offering vouchers up to S$1,000 for its flights to Tokyo.

The competition from LCCs is pushing the profits of full-service carriers lower and lower. In the second quarter this year, several airlines reported significant profit declines of 20- 60%.

If you can’t beat them, join them, say the legacy airlines, which are bankrolling LCC startups to tap the growth. Singapore Airlines has stakes in Tiger Airways and Scoot, Thai Airways International has Thai Smile and Nok Air, Japan Airlines has Jetstar Japan.

The rise of budget carriers in Asia follows similar expansion in Europe and North America in previous decades.

This year alone three LCCs started flying in Japan: Peach Aviation, AirAsia Japan and Jetstar Asia. Also taking flight in 2012 were Scoot, Thai Smile and AirAsia Philippines. Next year it is set to be Malindo Airways’ turn.

Malindo will serve domestic and regional markets from May 1 from KLIA2 and Kota Kinabalu with 12 aircraft, and in a decade it will have 100 planes, all coming from Lion Air’s huge order of aircraft.

Apart from a strategy is to offer lower airfares, Malindo also wants to fight AirAsia by providing free light snacks, entertainment and WiFi and use aerobridges. AirAsia offers all that for a fee, which makes up its ancillary income, and it refuses to use aerobridges.

The demand for low-cost travel may be there with rising affluence but the sector is vulnerable to volatile jet fuel prices. Any spike can affect budget airlines’ bottom lines but businessmen such as Mr Fernandes and Mr Rusdi are ready for the ride.

About the author

Writer: Jen Rita