Mumbai Airport

Thai Smile turns attention to international market, including three routes to India

This is the second part of a report looking at the Thai Airways Group performance from 2012 and outlook for 2013. The first part looked at Thai’s mainline operation, which has been impacted by unfavourable economic conditions on long-haul routes and faces increasing competition in Asia. This part looks at Thai Smile, a new hybrid unit that the Thai Airways Group launched in Jul-2012.

2013 will be a key year for Thai Smile as the unit rapidly expands and continues to evolve its hybrid model. Thai Smile is adding five international routes over the next month, giving it a network of six international and seven domestic routes. Several more destinations, primarily international, are expected to be added in 4Q2013.

2013 will also likely see Thai Smile transition from being a unit of Thai Airways to a 100%-owned subsidiary. Thai Smile was launched as a unit because using the Thai Airways operators’ certificate (AOC) was seen as a quicker and cheaper solution. But Thai’s board is expected to soon approve a proposal to convert Thai Smile into a subsidiary, which would see it apply for its own AOC.

Indian airport retail tenders herald the next wave of travel retail growth

With both Mumbai and Chennai airports releasing tenders in Aug-2012 for duty free and retail concessions at their new terminals, the Indian travel retail scene is set for yet another boost, following on from the impact of the opening of Delhi which has raced ahead to become the largest duty free market in the country.

Although non-aeronautical revenue at major Indian airports is growing and considerable progress in this arena has been made in recent years, it still lags in the global context. The global duty free market was around USD23 billion in 2010, while duty free sales in India amounted to only around USD215 million in FY2011 (with growth of around 25-30% forecast for FY2012), which is less than 1% of the total revenue, while Indian airports handle around 3% of global airport passenger traffic. Compare this to Dubai, which reported sales of USD1.46 billion from duty free in 2011. All Chinese airports registered combined revenue of USD1.9 billion.

South African Airways ends Cape Town-London service for bigger growth in West Africa and beyond

Cyclical downturns can disproportionately affect end of line carriers since they have few opportunities to pull traffic for long-haul flights, as has been seen with Qantas and to a lesser extent Air New Zealand. But now South African Airways (SAA) is feeling the pinch and will end from 16-Aug-2012 its London Heathrow-Cape Town service after over two decades of operation.

As with Air New Zealand and Qantas redistributing some capacity from competitive intercontinental routes to less competitive and higher-yielding regional markets, SAA intends to expand capacity to the healthy west African markets of Abidjan, Accra and Lagos as well as open longer routes to the healthier markets of Mumbai and Perth.

SAA has not previously encountered challenges the way ANZ and Qantas have, a result of South Africa taking a more restrictive approach to air service agreements, SAA being able to fly non-stop to key markets and there is limited sixth freedom competition from other African carriers.

Jet Airways-Jetstar interline positions carriers for growth in India, Southeast Asia and Australasia

A new interline agreement between India's Jet Airways and low-cost carrier Jetstar is a significant development for the two carriers and their respective markets. Jet Airways on a single ticket will be able to sell across Jetstar's network from Singapore, which predominantly includes points in Southeast and East Asia (where Jet Airways' network is thin) as well as Australia and New Zealand, where traffic flows to India may shift in the short/medium-term as Air India looks to commence direct flights and Virgin Australia works with new alliance partner Singapore Airlines.

The agreement further evolves Jetstar's hybrid model as Jet Airways passengers, like those of select oneworld carriers, will receive checked luggage and, on long-haul flights, meals and comfort kits on Jetstar flights as part of their ticket whereas other passengers have to pay separately. While this adds complexity and some are sceptical of LCCs moving away from a stripped-down model, blurring the lines and adding complexity is rational when yields and network enhancements outweigh the additional cost.

Qantas cuts international services to grow profitable domestic market as Jetstar grows all around

Qantas is making significant competitive responses to invigorated challenger Virgin Australia’s push in the lucrative Australian domestic market. Qantas will withdraw international routes and re-allocate aircraft primarily to the domestic market to keep the 65% market share it believes is optimal for overall performance. Additional network changes will right-size its fleet to demand while the company looks to shrink engineering facilities due to aircraft retirements. For its planned Asia-based premium carrier, Qantas will pursue a capital light option in which an airline partner – likely Malaysia Airlines (MAS) – shares part of the risk.

The story is more positive overall at the group’s low-cost subsidiary Jetstar, which posted its largest-ever underlying profit. The carrier is benefitting from increased yields in Australia while its Singapore operation has held up profitably despite its competition, Tiger Airways, not being able to profitably absorb significant capacity increments.

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

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.