AirAsia X

Australia needs to negotiate expanded bilateral agreements with Malaysia and the Philippines

This is the second of a series of articles on Australia’s need to urgently negotiate expanded bilateral agreements. The first part looked at bilateral constraints in some key North Asian markets, in particular mainland China and Hong Kong, as well as with the United Arab Emirates. This part looks at constraints in Australia currently facing carriers from Southeast Asia, particularly Malaysia and the Philippines.

Australia is an important and generally profitable market for airlines from Malaysia and the Philippines, as well as other Southeast Asian countries that have fewer or no limitations on expansion. Australia needs to negotiate new air service agreements with Malaysia and the Philippines or risk having their airlines focus expansion on other destinations.

Scoot selects Nanjing, capping a busy first year of operations for the Singapore Airlines subsidiary

Singapore Airlines' (SIA) low-cost long-haul subsidiary Scoot has completed the last phase of its initial network development, announcing on 8-Apr-2013 the selection of Nanjing as its 11th destination and fourth in mainland China. Scoot will be the only foreign LCC at Nanjing, which like most secondary cities in China is underserved from an international perspective.

Singapore-Nanjing will be launched on 3-Jun-2013 and give Scoot a total of eight routes by its first year anniversary on 4-Jun-2013. After celebrating its first year anniversary the start-up is expected to take a hiatus from fleet and network and expansion for at least 18 months. The hiatus will allow the carrier to focus on improving profitability as its initial network and business model beds down.

The hiatus also gives Scoot ample time to prepare for the delivery of the first of at least 20 787s in late 2014. The 787 will usher in a new era of growth and improved profitability for the carrier. But while Scoot waits for its mix of 787-9s and 787-8s, competitors could pursue faster expansion, leaving Scoot with a smaller slice of Asia’s emerging low-cost medium/long-haul market.

AirAsia X selection of Bangkok as second base increases pressure on Thai Airways

AirAsia X is close to finalising plans for establishing an affiliate in Thailand, a fast-growing market with favourable conditions for long-haul low-cost operations. The new joint venture project between AirAsia X and Thai partners, which will almost certainly include sister short-haul carrier Thai AirAsia, will put further pressure on the Thai Airways Group.

Thai Airways has already been struggling to fend off increasing LCC competition in the domestic and regional international market, which it has responded to by increasing its involvement in short-haul LCC affiliate Nok Air and launching new hybrid carrier Thai Smile. AirAsia X will bring new LCC competition to some of Thai’s strongest medium-haul markets, particularly Australia, Korea and Japan.

Thai Airways has been studying potential long-haul low-cost options and the launch of an AirAsia X affiliate in Thailand, which will likely commence services within the next year, adds urgency. Thai Airways has already been slightly impacted by Asia’s two other long-haul LCCs, Jetstar and Scoot, but having to compete with a local long-haul LCC represents a much bigger challenge.

Lufthansa weighs future in Asia Part 2: Amassing scale for partnership/new airline will be critical

With Lufthansa looking to revamp services to India and Southeast Asia, which can be unprofitable, CAPA in part 1 of this report looked at Lufthansa's disadvantaged cost base to European, Asian and Middle Eastern peers as well as the carrier's challenge in maintaining an effective presence in Asia.

Part 2 considers the necessity of amassing scale for whatever Lufthansa does: whether that is to launch its own long-haul low-cost carrier or enter a partnership with an existing LCC. Lufthansa may be worried about the number of destinations Middle East network carriers serve, but a local LCC will have a far wider network.

This presents a partnership opportunity for Lufthansa – and any airline – but also a threat in that Lufthansa's competitors have realised the strength and opportunity of Asia's LCCs.

Why AirAsia doesn’t need a new affiliate in Singapore, the rest of ASEAN and potentially all of Asia

The AirAsia Group has started focusing on growth at its existing portfolio of carriers after determining there is no need for additional affiliates in ASEAN and potentially in the rest of Asia. After spending the last several years actively searching for new joint venture partners, AirAsia has realised that most Asian markets where it does not yet have a local affiliate can be sufficiently covered by its existing carriers. The only possible short-term exception is India, but AirAsia remains wary of entering the Indian market and India has been the only Asian market where the group has reduced capacity over the last year.

Asia’s leading low-cost carrier group will spend most of 2013 growing domestically in its five home markets and expanding international services to some strategic non-home markets, particularly mainland China. But expansion in AirAsia’s largest non-home market, Singapore, will be slowed significantly. Congestion in Singapore – more so than the saturation of Singapore’s LCC market – is prompting AirAsia to focus more on other non-home markets.

AirAsia X IPO prospectus shows strength. AirAsia synergies help, also require definition

The prospectus for the forthcoming IPO for AirAsia X, a separate business from AirAsia, shows that the low-cost long-haul model can be successful, operationally and profitably, but only when deployed sensibly. During 1H2012, a challenging time for the global industry, AirAsia X reported a respectable 7.9% pre-tax margin on services to Australia, which comprise about half of the carrier's capacity.

The low cost model is ideally suited to Asia's price sensitive, high growth environment and AirAsia X's symbiotic relationship with Asia's biggest LCC, AirAsia, makes it a formidable model.

Attempts to serve Europe, since ended, resulted in a -26% margin in 2011. Yet Europe's weakness for AirAsia X was acknowledged early on. The sharply business-minded CEO Azran Osman-Rani went in saying he would be happy to break even; AirAsia X fell to pressure to plant the red flag in Europe at the behest of part-owner AirAsia, which still harbours an entrepreneurial spirit – and, at times, the associated confidence.

This will be the market's crux for AirAsia X's future – where AirAsia stops and where AirAsia X begins. AirAsia X is substantially complemented by AirAsia to sustain its effectiveness. The relationship between the two is a give and a take. The market, in assessing the IPO, will determine the balance.