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AirAsia X route changes spotlight ownership complexity post MAS deal, but also growth opportunities

13th January, 2012

Doomsayers will be quick to look at a series of route cancellations from Malaysia-based AirAsia X and proclaim the demise of the modern low-cost long-haul model AirAsia X pioneers. The context for the changes – ending service to London Gatwick, Mumbai, New Delhi and Paris Orly – expands beyond fuel costs, rising taxes in Europe and new visa restrictions in Malaysia. AirAsia X was already struggling in Europe and particularly in India. The recent cross-ownership deal between Malaysia Airlines (MAS) and the AirAsia Group was also clearly a big factor.

That is not to suggest AirAsia X's changes are simply a matter of submission to MAS. The biggest advantage, besides brand awareness, of the high profile London and Paris routes was their ability to put passengers on multiple AirAsia short-haul flights as they travelled around southeast Asia. MAS' deployment of the A380 later this year will lower unit costs to London, narrowing the gap with AirAsia X, currently using more fuel-thirsty A340s. With the AirAsia-MAS partnership, and plans for the two to facilitate passenger transfers, the AirAsia group can still gain feed on its short-haul network while AirAsia X will benefit from redeploying capacity in Asia Pacific and, notably, China.

Northeast Asia and Australia probably offer more opportunities for AirAsia X in the new era of the AirAsia-MAS collaboration. But it is also a market becoming increasingly crowded, with fellow long-haul LCCs Jetstar and Singapore Airlines' new Scoot making fast moves. Jetstar has set its sights on China's main cities, from which the Malaysian Government previously blocked AirAsia X, in order to protect MAS. Meanwhile, Scoot's first route will be to Sydney, another plum city market where the Malaysian Government protected Malaysia Airlines, preventing AirAsia X from flying. Clear indications of growth opportunities in China and Australia would bode well for AirAsia X's IPO, which may occur this year if market conditions pick up.

AirAsia X blamed the cancellations, which were announced on 12-Jan-2012, on jet fuel and specific problems each in Europe and India. In Europe AirAsia X pointed to rising taxes. The carrier now charges MYR40 (USD12.73) per flight to London and Paris to comply with the European Union's Emission Trading Scheme (EU ETS), which came into effect 01-Jan-2012. In the UK, the Air Passenger Duty (APD) tax will increase by approximately 10% in Apr-2012 to GBP92 (USD141) for AirAsia X's regular economy seats ex-London. For an average round-trip AirAsia X ticket between London and Kuala Lumpur, these additional costs represent around 3% of the ticket price. In a highly price-sensitive market, where margins are low, this is a severe impost, even though AirAsia X has reported average load factors of around 80% to Europe.

For its cancelled Indian destinations, AirAsia X blamed airport charges, which are due to increase at Delhi later this year, and visa restrictions in Malaysia. However, AirAsia will maintain A320 flights to Bangalore, Chennai, Kochi, Kolkata and Tiruchirappalli from Kuala Lumpur, as well as an A320 flight between Bangkok and Delhi. AirAsia and AirAsia X typically divide network opportunities by AirAsia flying sectors under four or five hours and AirAsia X taking flights above that. Mumbai and New Delhi are the only two long destinations in India from Kuala Lumpur. While the Malaysian Government's cancellation of visa-on-arrival for Indian nationals has been punitive and AirAsia X has lamented it for some time, there have been no recent developments to change the situation. Far more of a problem was AirAsia X's lack of distribution in India, a market where direct online ticket purchasing is small.

The four route cancellations represent 27% of AirAsia X's total weekly available seat kilometres, and 22% of available seats, based on Innovata capacity data for this week. London and Paris are the only points AirAsia X serves in Europe, while Mumbai and New Delhi are the only points AirAsia X serves in south Asia.

AirAsia X route changes

Route

Gauge

Current frequency

Last service

First commenced

Kuala Lumpur-London Gatwick

A340-300

6x weekly

31-Mar-2012

 Mar-2009

Kuala Lumpur-Mumbai

A330-300

4x weekly

31-Jan-2012

May-2010 

Kuala Lumpur-New Delhi

A330-300

7x weekly, reducing to 4x weekly in March

22-Mar-2012

 Aug-2010

Kuala Lumpur-Paris Orly

A340-300

4x weekly

30-Mar-2012

Feb-2011 

AirAsia X international capacity (ASKs) by region: 09-Jan-2012 to 15-Jan-2012

European routes were mostly about networking, and AirAsia X is now growing up

Low fares between Malaysia and the UK were a personal objective of AirAsia founder Tony Fernandes, who went to boarding school in the UK but could seldom afford to travel home to Malaysia. He originally envisioned AirAsia as a low-cost long-haul operator before investors and consultants reined him in to start with short-haul, which he did in 2001 – with wild success. But a long-haul operation was still in his sights and London was on Mr Fernandes' lips when he announced AirAsia X in Jan-2007, even though it would not be until Mar-2009 that AirAsia X would arrive in the UK. Commenting in the lead up to AirAsia X's first London flight, Mr Fernandes remarked, “Once I touch down in London, that will be a very special day for me.”

Profitability was a lesser focus, as AirAsia X CEO Azran Osman-Rani explained in 2008 of the London route. "Even if I just break even, it will do wonders to feed our route and establish our brand presence." AirAsia X estimated 70% of passengers on its Kuala Lumpur-London flights were not originating in either city or making one of them their final destination. Passengers frequently self-connected onto short-haul Southeast Asia flights on AirAsia, allowing AirAsia X's investors to take a holistic view on the route being strategically important. The benefits worked both ways.

AirAsia's brand was still developing outside Asia a few years ago, before it had events like an order for 200 A320 aircraft to place it in the headlines, or the near-global reception Mr Fernandes now receives. Mr Fernandes is often called the Richard Branson of Asia – who also happens to be a partner in AirAsia X.

He cultivated a role as the crusading leader of the AirAsia underdog against the stale, monopolistic carrier that was MAS. Mr Fernandes chided MAS publicly, especially on Twitter, vowing never to fly it, even posting photos of himself on Singapore Airlines aircraft. At home, AirAsia transformed a turgid domestic market into a flourishing and profitable operation, while AirAsia X's routes to Europe made MAS cut its fares and expose its inefficiency.

But what a difference a few months can make. In Aug-2011 Mr Fernandes engineered a nearly unthinkable equity swap between his AirAsia and Khazanah Nasional, a Malaysian Government controlled investment company that owns 70% of MAS. The deal saw a management shake-up, Mr Fernandes gaining a seat on the board of his one-time vehement competitor and global headlines about an LCC forging a partnership with its previous full-service carrier competitor – all accomplishments throwing Mr Fernandes and AirAsia into the limelight more than prestige routes to Europe could.

See related article: Turning the industry on its head: AirAsia joins Malaysia Airlines

The EU ETS could perhaps have been a tipping point, although the cost is proportionally small and being passed on to passengers. Aviation had long been scheduled to be included from 2012 and Europe consistently held firm that there would be no dithering. Despite the strong signals, AirAsia X in Feb-2011 ordered three A330-200s to replace from later this year the fuel inefficient and older A340s the carrier operates to Europe. AirAsia X also solicited proposals to serve additional European points. Finally, in Oct-2011 AirAsia X moved from London Stansted to Gatwick, but its presence at Gatwick will only end up lasting for six months, when it terminates service at the end of the current schedule season.

While jet fuel prices were higher in 2011 than the previous year, they are comparable to levels in 2008, when AirAsia X planned the London route. AirAsia X's CASK is USD2.8 cents ex-fuel; its fuel cost per ASK in 2010 was USD1.3 cents which, adjusted for 2011's fuel prices, gives an approximate cost for a one-way London-Kuala-Lumpur sector of USD488. AirAsia X's entry level prices (non-sale) are MYR1130 (USD360) one-way. There is an additional USD29 fuel surcharge, and with AirAsia X reporting average ancillary revenue per passenger of USD42, the carrier is looking at USD431 of revenue, USD57 short of cost (all excluding taxes) for those seats.

However, to that should be added cargo, which AirAsia X carries, the popular premium seats with their considerably higher yield, or the probably-higher ancillary spend per passenger on the flight, given its longer sector length.

Both would help revenue, but pushing costs up are the fuel inefficiency of the A340 (although this would later have been mitigated with the A330-200s) and a lower seat density than on the A330-300 which AirAsia X now uses on its non-European routes. When AirAsia X is not offering sale fares, Gulf network carriers are typically slightly more expensive while MAS is a few hundred dollars more.

Monthly price of US Gulf jet fuel, USD per gallon: Jan-2008 to Dec-2011

MAS and AirAsia X can work together to achieve objectives more efficiently

The MAS-AirAsia equity swap brought new opportunities for network rationalisation. MAS in Dec-2011 unveiled a business plan to stem losses, which when completed alongside the replacement of Boeing 747-400s by A380s on MAS' London route, will give MAS lower unit costs and help narrow the gap with AirAsia X. MAS would have been challenged to fill its A380s, which seat 128 more passengers than its 747s.

Once MAS' A380 replaces the 747 to London, the net loss of Kuala Lumpur-London seats from AirAsia X is only 1066 weekly seats. AirAsia X would have decreased capacity anyway once it replaced its A340-300s with A330-200s. MAS will also benefit from the feed it gains from AirAsia’s Asian network, which now includes several destinations MAS does not serve. AirAsia’s short-haul network will gain feed from MAS flights that originate in London and throughout Europe, more than offsetting the loss in feed that results from the cancelled AirAsia X flights.

Working with KLIA to facilitate transfers

Key to the rationalisation and optimisation of the part merger will be in improving how the airlines interface at their Kuala Lumpur hub. MAS and AirAsia earlier revealed they would develop a transfer programme, although the carriers are at present on opposite sides of the airport, with MAS in the traditional terminal and AirAsia in the LCC terminal.

KLIA has long been actively involved with AirAsia in evolving transfer-friendly infrastructure as a new LCC terminal is built (AirAsia has outgrown its original low-cost terminal) and this programme is now being accelerated as the national interest features become – theoretically at least – more homogeneous.

British Airways/IAG still a card waiting to be played – and a potentially transformational role for KLIA

A factor in the background may also be British Airways (BA), with which MAS has said it is seeking a partnership. A close partnership could see BA resume services to Kuala Lumpur, which it suspended in 2001 in favour of a Southeast Asia hub in Singapore. The AirAsia linkage makes that a little more intricate. BA/IAG dancing around MAS' partner AirAsia will, however, require delicacy, with Richard Branson's Virgin Group owning 16% of AirAsia X. (Other key stockholders in AirAsia X include Mr Fernandes' Aero Venture, with 48% and AirAsia with 16%. Khazanah, the MAS shareholder, is in talks for a 10% stake, to complete a cross-equity transaction.)

AirAsia X’s withdrawal from Europe also opens a window for the UK/Spanish group, as Malaysia Airlines will be the only carrier left operating between Malaysia and France and the UK.

KLIA and its government have always been keen to emulate the success of Singapore Changi and the flag carrier hub role of Singapore Airlines. The opportunity now exists to maximise the network potential that a combination of AirAsia, AirAsia X, Malaysia Airlines and IAG could bring – perhaps along with Qantas and its low-cost (long-haul and short-haul) Jetstar subsidiaries. If the multitude of complexities and airline culture differences could be overcome, the upside for Malaysia’s economy would be enormous. But there is a big gap between what is possible and what is achievable.

Capacity from Malaysia to France and the UK: 09-Jan-2012 to 15-Jan-2012

Malaysia-France Malaysia-UK

AirAsia X’s India withdrawal highlights distribution challenges and geographic differences

AirAsia X was at a disadvantage in India for reasons within its control (distribution) and reasons beyond it (geography, and to a lesser extent visas and airport charges).

While AirAsia will maintain A320 services to five Indian cities, all but one is in southern India, where most of Malaysia's ethnic Indians have their ancestry, establishing a large VFR market between Malaysia and India. AirAsia has a marketing advantage in these cities that it does not have in Mumbai or Delhi because Malaysians account for a larger portion of the passengers. Even the Indian passengers on this route are more likely to be aware of AirAsia, because many have relatives in Malaysia, where unlike in India AirAsia has become a leading national brand.

The 180-seat A320 operation is also on a different economic scale from AirAsia X's 373-seat A330-300s that serve Mumbai and New Delhi. While the A330s boast a better unit cost than A320s, that is only relevant if demand is sufficient. The AirAsia group (including AirAsia and AirAsia X) has the highest number of weekly seats between Malaysia and India, but after AirAsia X withdraws, MAS will take first spot, with AirAsia in second place and Indian carriers Air India Express and Jet Airways a long way behind.

Successful Indian LCC IndiGo, which has already been evaluating Kuala Lumpur as a potential new destination as it expands into international operations, may well now accelerate plans for launching Mumbai-Kuala Lumpur and Delhi-Kuala Lumpur services following AirAsia's exit. The carrier in 3Q2011 launched its first Southeast Asia services to Bangkok and Singapore, where it has quickly expanded. IndiGo will not have the same issues AirAsia X faced on the Mumbai-Kuala Lumpur and Delhi-Kuala Lumpur route because it has a powerful brand in India and has a strong relationship with travel agents. IndiGo also operates A320s, which will be much easier to fill up than A330s.

See related article: IndiGo eyes large operation at Singapore

Carriers serving Malaysia-India (seats): 09-Jan-2012 to 15-Jan-2012

Mumbai and New Delhi, which AirAsia X serve, lack the strong social ties to Malaysia, as well as a VFR market and brand awareness. AirAsia X had been forced to rely too heavily on Malaysian-originating traffic for these routes. The majority of tickets purchased in India are not sold directly through airlines but via travel agents or online travel agencies (OTA). For the former, AirAsia X offered no commission, gaining them little support among retailers. At the same time, for OTAs, AirAsia's exclusive joint venture with Expedia blocked the carrier from distributing through India's three local and dominating OTAs: MakeMyTrip, ClearTrip and Yatra.

Expedia has a very small share of the Indian market, effectively causing AirAsia X to lock itself out of the most effective distribution channels and rely on its own direct website bookings, typically commanding a very low level of consumer preference in India. The typical middle-class Indian in the northern cities of Mumbai or New Delhi, whom AirAsia X would have targeted, would not know of AirAsia X through family or friends, would not hear about it from their travel agents and would not come up on the search result screen of their OTA. A single flight to a single destination from each Mumbai and New Delhi further limited the awareness AirAsia X could generate, which in turn made filling a high-capacity widebody difficult.

This disadvantage was compounded by the Malaysian Government ending visa-on-arrival facilities for Indian passport holders, introducing a substantial bureaucratic barrier to travel, especially for short trips. Promoting a last minute cheap fare to shop in KL for the weekend loses its power if potential passengers first have to apply for a visa.

In Thailand, where Thai AirAsia has a daily A320 flight between Bangkok and Delhi, which will be maintained, visa on arrival is available, making Thailand more accessible to Indian nationals. While Thailand has a smaller Indian population than Malaysia, most Indians living in Thailand are from north India. As a result, AirAsia doesn’t have to rely much on India point of sale tickets for its Bangkok-Delhi service. The smaller A320 is also less challenging to fill. 

AirAsia X also cited high airport charges as a factor to withdraw from Mumbai and New Delhi. The airports today are mid-range in the cost scale. However, later this year, once proposed new charges are approved by India's regulator, each will have significant price increases (280%), pushing Mumbai and New Delhi up towards the upper end. The prices are unlikely to have been a factor in AirAsia X's poor performance to date, but would be a concern in the future, given their weak position in the two cities.

India is a difficult airline market to serve

Southeast Asian LCCs Jetstar Asia, Nok and Tiger Airways have been in and out of India over the years (only Tiger currently serves the country), further illustrating the market's complexity to foreign carriers, and especially LCCs that place stricter controls on distribution. Tiger has recently had some success in India but only in markets with strong ethnic connections to Singapore such as Chennai. As a result, these routes can be successful by relying primarily on web sales in Singapore, where Tiger has a powerful brand, and on sales to Indians who are familiar with Tiger because they have family in Singapore. Jetstar has said it no longer sees a need to serve India in the short/medium-term.

See related article: Jetstar's new North Asia focus leaves room for Qantas Singapore expansion to Europe and India

Low-cost carriers linking India to Southeast Asia (ranked by seats): 09-Jan-2012 to 15-Jan-2012

Rank

Airline

Total seats

1

AK

AirAsia

12,600

2

TR

Tiger Airways

11,520

3

6E

IndiGo

10,080

4

IX

Air India Express

8316

5

D7

AirAsia X

8206

6

FD

Thai AirAsia

5040

Opportunity for 21 new weekly services; Sydney will be top priority, with network upside

Assuming AirAsia X retains all of its existing capacity, it will want to move quickly to fill it. This is important not only for its own sake but also for AirAsia, which relies on it for short-haul feed (recall the 70% figure on the Kuala Lumpur-London flight). AirAsia X's available capacity after these changes will be equivalent to 21-times weekly eight-hour return flights, although the carrier has not ruled out leasing aircraft if it has oversupply, especially with upwards of six A330s joining the fleet this year. Another, more complex, alternative could be to send new build aircraft to MAS.

Group CEO Tony Fernandes has already long flagged his intention to add services to Australia, China, Japan and Korea. A route to Sydney will be a first priority so AirAsia X can get there before competitor Scoot, Singapore Airlines' long-haul LCC that aims to launch its first route there in the middle of this year. AirAsia X would want to launch with a daily service, something that would greatly boost AirAsia’s network connection possibilities – as well as setting KLIA up as a much more competitive Australia-Europe hub, given the potential for onward connections on MAS and possibly British Airways.

See related article: In selecting Sydney as its first route, Scoot favours a low risk market with little competition

Since its inception, AirAsia X has battled the Malaysian Government to secure route authorities. The Government was acting to protect MAS. Even though AirAsia X was low cost and MAS full service, MAS dropped its prices whenever AirAsia X entered one of its markets. The Government blocked AirAsia X access to cities including Sydney as well as Beijing and Shanghai, forcing AirAsia X to use the alternative respective airports of Tianjin and Hangzhou. Contention over Sydney became so strong that in Sep-2010 AirAsia X made the bold move of placing a "Liberate Sydney. End the monopoly" decal on an aircraft.

Significant progress was made in Jun-2011 when the Malaysian Government confirmed it would lift restrictions on AirAsia X, which it flagged the previous year as part of its programme to grow the country's economy. "Previously there was something about you've got to fly three new routes before you are allowed to fly one parallel route with Malaysia Airlines," Mr Osman-Rani explained at the time. With the Government's Jun-2011 decision, AirAsia X received approval to serve Beijing, Jeddah, Istanbul, Osaka and Shanghai. "The one exception we did not get was Sydney," Mr Osman-Rani said, explaining the Malaysian Government had not rejected the Australian city, but rather said "not just yet". Scoot's selection of Sydney likely ended the Government's inertia.

AirAsia X launched services to Osaka in Nov-2011. Beijing and Shanghai could be of high interest too. Jetstar in Dec-2011 started flights between its Singapore hub and Beijing while SIA added a fourth daily route in response at the same time, making it a suitable candidate for Scoot to possibly takeover. This month, however, MAS announced its intention to launch a second daily Kuala Lumpur-Beijing service, placing doubts on if AirAsia X would enter the market. Obtaining slots could be difficult in Beijing as well as in Shanghai, where Jetstar is believed to have been unsuccessful in obtaining slots and instead has redeployed capacity to the Australian leisure market.

Saudi Arabia also a priority market for AirAsia X

Mr Fernandes also singled out Jeddah in Saudi Arabia as a likely new route. AirAsia X has been trying to secure permission from the Malaysian Government to serve the Saudi city, among others. Jeddah is popular with Malaysian Muslims making religious trips, as well as for Saudis visiting Islam-friendly Malaysia on holiday. Emirates is a key competitor in Malaysia with three daily flights linking Dubai and Kuala Lumpur, including one on the A380, with strong onward connections to Saudi Arabia (it deploys the A380 to Jeddah too).

MAS recently announced it would end service to a different Saudi city (Dammam) as well as Dubai, largely seen as a result of Emirates, and its low fares, nudging MAS out.

See related article: MAS will achieve its targeted 12% capacity reduction by February, to the delight of Gulf carriers

AirAsia X provides an alternative with its substantially lower cost base, and would likely serve Jeddah three or four times weekly.

There are also opportunities in AirAsia X's network to increase some services to daily, or at least add one or two additional weekly frequencies. London and Paris are served by 327-seat A340-300s while all other destinations are served by 373-seat A330-300s. Both are in a two-class configuration with 12 lie-flat seats in the A330s and 18 in the A340s with six seats in each row. Economy has a tight 3-3-3 configuration.

Weekly AirAsia X flights from Kuala Lumpur: 09-Jan-2012 to 15-Jan-2012

Destination

Weekly frequencies

Chengdu, China

4x

Christchurch, New Zealand

4x

Gold Coast, Australia

6x

Hangzhou, China

5x

London Gatwick

6x

Melbourne

12x

Mumbai

4x

New Delhi

7x

Osaka

4x

Paris Orly

4x

Perth

10x

Seoul

7x

Taipei

7x

Tehran

4x

Tianjin, China

4x

Tokyo Haneda

3x

Jetstar and Scoot advancing in Asia, but ignoring Europe for now

The two other Asia Pacific long-haul LCCs, Jetstar and Scoot, have both ignored Europe and India in favour of operating within the fast growing Asia-Pacific region, and North Asia in particular. And Jetstar's fleet of A330-200s (lower-weight variants than the ones AirAsia X is due to receive) cannot reach Europe from its Singapore base. The 787s Jetstar is due to receive from mid-2013 can reach Europe non-stop, but the carrier has said it will first look to replace A330s with 787s and then use 787s for intra-Asia growth before contemplating European services.

Echoing Mr Osman-Rani's statement about a breakeven to London being good for traffic feed, Jetstar CEO Bruce Buchanan told CAPA about his views on ultra-long-haul markets: “Europe and North America are really network extension opportunities for us. They’re not core market or revenue sources for us as opposed to the core Asian market.” He went on to describe Europe as "not a high priority".

See related article: Qantas and Jetstar change 787 strategy to support Asian growth and unit cost improvement

Scoot, also based in Singapore, will launch services with 777-200 aircraft, which can receive thrust upgrades to easily reach Europe. But Scoot, too, is not interested in immediately serving Europe. Its first phase of growth will concentrate on intra-Asia-Pacific services, with a strong focus on Australia and China, the two markets AirAsia X is also by no coincidence now focussing on. Scoot's second phrase of growth will commence from 2014, during which time it may consider European services. But based on AirAsia X’s experience with London and Paris, it may be that the long-haul low-cost model only really excels on flights in the five to 10 hour range.

Despite enormous competition for sixth freedom traffic between Asia Pacific and Europe – and with Chinese airlines now sniffing the opportunities too – this does leave some breathing space for enhanced full service operations over Malaysia, particularly with a comprehensive and growing spread of short-haul services feeding into KLIA.

See related article: Scoot represents a radical change of pace for SIA but the new long-haul LCC is no pioneer

AirAsia X growth would be positive for its IPO

The Malaysian Government’s constraints on AirAsia X's expansion plans had been seen as a hindrance to AirAsia X's IPO, originally planned for 2011 but postponed to this year in order to close Khazanah's 10% stake and wait for better market conditions. Until the route restrictions were lifted, Mr Osman-Rani said in Jun-2011, "investors are going to say, 'Look if we give you money, you get planes, but you're going to have real constraints getting route approvals'."

Local reports suggest AirAsia X may gain further route approvals after these network changes. Although this is as yet unseen, it would further boost AirAsia X's outlook ahead of an IPO.

And wait for more route announcements…

With 31-Mar-2012 and the cessation of European operations now only a few short weeks away, both AirAsia and AirAsia X will be keen to ensure that their respective feeds are maintained. This will almost certainly mean that further announcements about route changes are imminent.

Background information

AirAsia X route map: 13-Jan-2012

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