Low-cost long-haul players will be worst hit

[Naim 6]

29-05-2008: Low-cost long-haul players will be worst hit

by Doreen Leong

The Edge

 

KUALA LUMPUR: Low-cost carriers (LCCs), especially those operating long-haul flights, are likely be the worst hit by rising crude oil prices as they may not have much room to raise prices.

 

“Players at risk in the current high oil price environment include LCCs whose growth-based business model could be curtailed by massive increases in fares,” KLM Royal Dutch Airlines director of alliances Henk de Graauw said.

 

Speaking at the Malaysia Airlines Speaker Series recently, de Graauw said LCCs getting into long-haul flights such as AirAsia X, would find it difficult amid the rising fuel bill and economic slowdown.

 

Oil prices touched a record high of US$135 (RM438.75) per barrel recently and many experts are not expecting a decline in price anytime soon.

 

De Graauw said AirAsia X would need deep pockets to weather the storm.

 

However, AirAsia X has stated that the key to its cost competitiveness is to stick to its low-cost principles by focusing on a single aircraft fleet, high aircraft utilisation and seat density as well as tight control of operating and overhead costs.

 

Still, aside from rising fuel prices, AirAsia already faces increasing competition from Malaysia Airlines’ unprecedented zero and low fares campaign.

 

Budget carriers may not have much flexibility in terms of raising fares.

 

This is because their passengers are mostly price-sensitive holidaymakers and may opt to defer travel plans if fares increase.

 

“The rise in fares to compensate for higher fuel costs will weigh on demand for the time being,” de Graauw said.

 

He said other players at risk in the current challenging operating environment include airlines that are operating with an older fleet and those that do not have strong hubs.

 

De Graauw also said that the new landscape in the aviation industry includes capacity reduction, acceleration of mergers and acquisition activities, the exit of some players and the reinforcement of the strongest players.

 

http://www.theedgedaily.com/cms/content.js...992130-dce56cfc