Qantas, AirAsia May Make Budget Long-Haul a Force on Asia-Europe Routes

[flee 5]

Qantas Airways Ltd. and AirAsia Bhd. are challenging Singapore Airlines Ltd. and other full-service carriers with a low-fare, long-haul business model that has previously failed.

 

Qantas’s Jetstar unit will add budget long-haul flights from Singapore later this year. The carrier cuts costs by renting movies to passengers and using lightweight equipment to pare fuel usage. AirAsia X, which flew more than 1 million passengers in 2009, squeezes 35 percent more seats onto its planes than full-service carriers to pare expenses.

 

The two carriers also have support from existing airlines, with AirAsia X able to access flights to about 70 cities from its Kuala Lumpur hub through cooperation with AirAsia Bhd., Asia’s largest budget carrier. These ties may help the long-haul carriers avoid the fate of standalones Oasis Hong Kong Airlines Ltd. and London-based Zoom Airlines, which both folded in 2008.

 

“Long haul, low cost is transforming the whole aviation landscape in Asia,” said K. Ajith, an analyst at UOB-Kay Hian Research in Singapore. “Budget carriers may be a force to reckon with in the future because if they have a strong network and are viable, they can potentially lure passengers from established carriers.”

 

London, Australia

 

Long-haul discount airlines differ from Southwest Airlines Co. and Ryanair Holdings Plc because they offer flights of more than five hours and have premium-class seats. AirAsia X, part- owned by AirAsia Bhd., flies twin-aisle Airbus SAS planes to London and Australia, and it’s planning services to Japan and South Korea. Jetstar intends to begin Singapore-Melbourne flights in December followed by services to Auckland in March. It’s also planning flights to European and Asian destinations.

 

“There seems to be a market for long-haul discount travel if prices are low enough,” said Sean Fenton, who helps manage $740 million at Tribeca Investment Partners in Sydney. “It’s a threat to the incumbent carriers.”

 

AirAsia X charges from about 1,286 ringgit ($400) for a flight from Kuala Lumpur to Stansted Airport, 40 miles outside of central London. An economy ticket on Malaysian Airline System Bhd., the nation’s largest carrier, to Heathrow Airport costs from about 2,104 ringgit. Singapore Airlines charges from about S$1,486 ($1,067) for a Singapore-Heathrow coach-class ticket.

 

Singapore Airlines serves “different market segments with different service propositions,” Nicholas Ionides, a spokesman, said in an e-mail reply to Bloomberg questions.

 

Malaysian Air doesn’t intend to compete directly with the lowest fares rivals are offering to safeguard margins, Chief Executive Officer Tengku Azmil Zahruddin said in an e-mail. The airline is targeting customers who don’t make decisions based on price alone, he said.

 

‘Real Killer’

 

AirAsia X, which last year had its first annual profit since starting flights in 2007, has gained from AirAsia Bhd.’s feeder traffic, said Chief Executive Officer Azran Osman Rani. Oasis Hong Kong, which flew to London and Vancouver, and transatlantic carrier Zoom, didn’t have similar partners.

 

Relying on a point-to-point market “will be a real killer because there won’t be enough people flying every day,” Azran said. “That’s why the Oasis of the world really struggled.”

 

Jetstar, which operates domestic flights within Australia and services to Japan, has code-shares with Qantas and a partnership with Air France-KLM Group, Europe’s largest carrier.

 

Low-Cost Flying

 

AirAsia X cuts costs by using fewer attendants per flight than full-service carriers because it only loads and serves hot meals that customers have ordered, Azran said. That saves the carrier as much as $100 per passenger, he said. Jetstar also formed a venture with AirAsia Bhd. in January aimed at lowering costs for spare parts and ground-handling services.

 

AirAsia X’s costs were 2.8 cents per available seat kilometer last year, Azran said. Jetstar had costs of 6.8 Australian cents (5.7 cents) in the six months ended December, said Chief Executive Officer Bruce Buchanan. The carrier made twice as much profit as the Qantas mainline business in that period.

 

Costs at Singapore Airlines, including premium and economy cabins, averaged 8.7 Singapore cents (6.2 cents) last year, according to Bloomberg calculations on figures from the carrier.

 

Jetstar plans to boost its fleet to about 100 aircraft by 2015 from 65 as of June. AirAsia X aims to increase its twin- aisle fleet to 20 planes from eight over the same period, as it strives to more than triple sales.

 

Market Share

 

Including short-haul routes, budget carriers may account for 30 percent of Asia-Pacific capacity by 2015 from 20 percent now, said Derek Sadubin, chief operating officer at the Sydney- based Centre for Asia Pacific Aviation.

 

Singapore Airlines may be shielded from budget competition by its reliance on premium passengers, who account for about 40 percent of revenue, said Ng Sem Guan, an analyst at OSK Research Sdn. in Kuala Lumpur.

 

“There’s always demand for luxury things such as Mercedes Benz,” he said. Singapore Airlines is “a different animal” from low-cost carriers, he said.

 

Travelers now flying economy-class with full-service airlines may also be reluctant to give up frills just for a cheaper ticket, said Rohan Suppiah, an analyst at Kim Eng Securities Pte in Singapore.

 

“Do you really want to sit for hours in a budget configuration?” he said. “This model will probably only appeal to customers who are very price-sensitive.”

 

Zoom stopped flying in August 2008 about a year after it began London-New York flights, crippled by competition and rising fuel costs. Oasis Hong Kong, which halted services after 17 months of flying, entered liquidation in June 2008 with about a HK$1 billion ($128 million) of debts.

 

Stephen Miller, who was Oasis’s chief executive officer, said there is “great potential in Asia” for low-cost long-haul because of the high costs at full-service carriers.

 

“But it’s a tough business until you get a name, a certain percentage of the market and a critical mass of aircraft,” he said.

 

Source: http://www.bloomberg.com/news/2010-07-04/qantas-airasia-may-make-budget-long-haul-a-force-on-asia-europe-routes.html

[KC Sim 2]

Long haul LCCs will erode the lowest yield traffic from full service carriers ... and full service carriers that fail to differentiate their product from that offered by long haul LCCs will be the one to find their marketshare dwindling.

 

Once an LCC moves into the long haul arena, they will also no longer hang on to some of the features that make their operation successful ... and it would not be that easy to control costs. The day fuel price rises to the highest levels about two years ago, you will see long haul LCCs bleed again - and they will waste no time cancelling flights that are not booked from nose to tail. Passengers who have flown on both full service carriers and LCCs will have to decide where their threshold or tolerance ends and then choose accordingly.

 

I was worried for MH when instead of upgrading its product and targeting a higher-yield clientele, it went the same way as AirAsia and offered Zero-Ringgit fares to a whole basket of destinations (think that was about almost two years ago). That effectively lowered it to the same level as the LCCs and compete in a territory that does not favour MH's higher cost model. It also serves to erode it brand identity and value in many markets - and I think that this will continue to have a negative effect on consumers' perception of MH.

 

It remains for long haul LCCs to prove their stamina ... and their ability to maintain service when the challenges emerge. If they cancel their flights at will - the same they do when their short haul flights are poorly booked - and do not offer satisfactory alternatives to their stranded passengers, customers will quickly lose faith in their service. Oasis Hongkong and Viva Macau will not be the last ones to join the dodos in extinction . . . and the day Jetstar International or Jetstar Asia begin to fly to more of Europe, the value of the Air France - KLM - Jetstar group interline agreement will be negatively impacted.

 

Frankly, Europe - Australia low fare operators aren't new ... Britannia and Thomsonfly have previously operated seasonal charters to Australia and New Zealand with B767s packed in a high density configuration ... Britannia even shifted the intermediate stop in SIN to Batam to save costs but eventually returned to SIN ... before finally disappearing altogether. Flying from Europe to Australia/NZ in a full service carrier is a tough enough proposition and it remains to be seen if the human body's tolerance can make low cost offerings on this long Kangaroo Route a sustainable option.

 

KC Sim

[Ruiz Razy 1]

Long haul LCCs will erode the lowest yield traffic from full service carriers ... and full service carriers that fail to differentiate their product from that offered by long haul LCCs will be the one to find their marketshare dwindling.

 

Once an LCC moves into the long haul arena, they will also no longer hang on to some of the features that make their operation successful ... and it would not be that easy to control costs. The day fuel price rises to the highest levels about two years ago, you will see long haul LCCs bleed again - and they will waste no time cancelling flights that are not booked from nose to tail. Passengers who have flown on both full service carriers and LCCs will have to decide where their threshold or tolerance ends and then choose accordingly.

 

I was worried for MH when instead of upgrading its product and targeting a higher-yield clientele, it went the same way as AirAsia and offered Zero-Ringgit fares to a whole basket of destinations (think that was about almost two years ago). That effectively lowered it to the same level as the LCCs and compete in a territory that does not favour MH's higher cost model. It also serves to erode it brand identity and value in many markets - and I think that this will continue to have a negative effect on consumers' perception of MH.

 

It remains for long haul LCCs to prove their stamina ... and their ability to maintain service when the challenges emerge. If they cancel their flights at will - the same they do when their short haul flights are poorly booked - and do not offer satisfactory alternatives to their stranded passengers, customers will quickly lose faith in their service. Oasis Hongkong and Viva Macau will not be the last ones to join the dodos in extinction . . . and the day Jetstar International or Jetstar Asia begin to fly to more of Europe, the value of the Air France - KLM - Jetstar group interline agreement will be negatively impacted.

 

Frankly, Europe - Australia low fare operators aren't new ... Britannia and Thomsonfly have previously operated seasonal charters to Australia and New Zealand with B767s packed in a high density configuration ... Britannia even shifted the intermediate stop in SIN to Batam to save costs but eventually returned to SIN ... before finally disappearing altogether. Flying from Europe to Australia/NZ in a full service carrier is a tough enough proposition and it remains to be seen if the human body's tolerance can make low cost offerings on this long Kangaroo Route a sustainable option.

 

KC Sim

 

Very well said. In the end, it remains difficult for such LCC to sustain. Do note that low fares may be applicable to say the first 5% of the seats and rises up. The higher fare categories may still make Legacy Carriers attractive and to charge low fares throughout the aircraft may bleed the airline further.

 

I've just checked D7's Christmas flights to PER on XL for three , the fare seems to be similar to MH Club if one considers the Buy one get one free offer and redeem the third from Enrich. In the end, smart travellers with FQTV and once all the addons are included , the fare may likely remain the same. And no need to mention which will they opt for.

Edited July 6, 2010 by Ruiz Razy

[flee 5]

I think that legacy carriers do not reward those who book well in advance. LCC's can only claim significant advantage if you book more than 6 months ahead and during their promotions and sales.

 

So how do LCCs make their money? Firstly airlines like D7 have more seats on their planes. Like legacy carriers, they are also carrying cargo. They also price their tickets according to the competitive situation on each particular route. The important thing for them is to sell as many seats as possible. Once they get the seats sold, their next thing is ancillary income. Selling premiums, in flight entertainment, meals, checked in luggage, insurance, bus transfer tickets, etc. Even their inflight magazine is some sort of income generator for them.

 

As to whether this long haul low cost model is sustainable, only time will tell. Some think that if there is another fuel hike, it would kill long haul LCCs. Somehow, I don't think so. Fuel hikes affect all airlines. The fact that LCCs pack more seats will mean that their costs per seat mile will still remain lower than that of legacy carriers. If fuel prices go up but the world economy is stil OK, I suspect that leisure travel might not collapse.

 

I think that for long haul LCCs to survive, it is vital that they remain a viable option for travellers. Flight cancellations and delays are more important than comfort for these types of pax. So it is important that LCCs try to maintain their schedules as top priority. D7's connectivity with AK, FD and QZ is also important. These sister airlines feed pax to D7 and vice versa. I suspect that is why D7 was able to make a profit (its first) in 2009 despite the recession.