AirAsia has reconstructed the network model from a lower cost base.
This article appears in the June edition of Airline Leader, CAPA’s airline management magazine. Go to www.airlineleader.com to download the full edition.
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AZRAN OSMAN-RANI IS CEO OF LONG-HAUL AIRASIA X, an offspring of the region’s biggest LCC, AirAsia. There is a clear symbiosis between the two and, like Qantas/Jetstar, much of the strategy relies on substantial connectivity – but in a new world style. Here he talks to Airline Leader about the carrier’s special features and its outlook.
AirAsia X and Jetstar are the biggest long-haul low-cost operators in the world. Each of you coincidentally (or not) has a bigger parent/partner. Like Jetstar, you seem to be evolving into a network airline, in your case working closely with AirAsia. For example, the profile of the large new LCC terminal in KLIA provides for a high proportion of transfer traffic – up to half of the total – in a cost-effective way of course. How important is transfer traffic to your “long-haul low-cost” operation?
The low-cost long-haul model that we are pioneering is based on creating a new way of operating long-haul flights at a much lower operating cost compared with the traditional legacy airline model. It is not about simply taking the traditional short-haul LCC model and applying it to long-haul, although the principles of deriving significant cost advantage through much better asset utilisation is similar. Short-haul and long-haul operations are different.
You need a big widebody aircraft with a large enough fuel tank so AirAsia has reconstructed the network model from a lower cost base to physically traverse the long-haul flight distances, and with many more seats, you cannot depend only on point-to-point traffic. That’s why legacy carriers developed the hub-and-spoke model to drive connecting transfer traffic and it evolved into the synthetic networks of codesharing and global alliances.
We discovered that you can derive the same effects of the hub-and-spoke feeder network without the cost and complexity of the legacy model – essentially through the use of the internet to make it easy to piece together multiple flight sectors.
Our long-haul trunks also provide a competitive advantage for our short-haul LCC associate, AirAsia, because they can now tap into customers from faraway markets such as Europe, Australia and North Asia into their short-haul flights, which their regional LCC rivals cannot.
In short: yes, transfer traffic is important to our business. It represents 20-30% of our passenger volume, with more growth potential.
You still operate using a stripped down IT platform. Are you looking at evolving that into something more connective, as many LCCs are doing?
I don’t think the Navitaire New Skies booking engine that we use can be dismissed as a “stripped-down platform”. We have already introduced multi-sector bookings through our fly-thru connecting transfer service, where you can buy Paris-KL and KL-Christchurch as a single Paris-Christchurch combined booking in a single PNR and have your bags checked in at Paris straight through to Christchurch. And I think New Skies is capable of even further enhancements. So no, we are not looking at changing our IT platform ... for now.
Still on connectivity, at Stansted, the airport you operate to in London, you have been able to rely on a variety of other short-haul LCCs flying there to provide onward connections, usually self-booked by customers. Is that going to be a long-term fix or, for example, can airports become more active in facilitating connections?
This will be an evolving space. For now, the self-connect model at our overseas ports will be the mainstay. We will focus on developing connections primarily at our home base. However, there are airports that have started discussions on how to facilitate connections. They are the more innovative ones that are open to new ideas and models that are more suitable for low-cost operations than trying to impose the traditional “one-size-fits-all” approach.
You’ve said you are generating more bookings through social media links than through the Amadeus GDS to which AirAsia signed up – although the numbers are still small. Do you see social media channels as a sizeable distribution stream for the future? And will they generate the higher yielding traffic?
This comment is more a reflection of the failure of traditional GDSs to develop effective solutions that work for the LCC model and our a la carte ancillary streams, to market LCC services effectively through their network and bring in new business. They have been disappointingly not proactive.
Social media channels are proving to be a very cost effective way to market our services, build up interest in new destinations through interactive promotions and run tactical sales campaigns. However, we do not see social media platforms as a standalone “sales” channel per se. We are, in fact, working on integrating the social media networks directly into our core internet (web and mobile) booking platform, which will be a great way to generate new demand. I can see this being a higher yielding demand than just pure internet tactical sales, because you create the interest to travel not solely based on price, but driven by personal interests in events or destinations and through recommendations by friends.
You have introduced near-lie-flat seating in your aircraft. What sort of market is that attracting? Is it working as you expected?
Our Premium FlatBed product has certainly delivered higher yields for the same real estate space on the aircraft compared with the premium economy seats, before or even if we had used the space for incremental economy seats.
We attract a wide range of travellers with the premium seat – from more discerning leisure travellers enticed to fly with more comfort for a similar cost compared with a legacy airline’s economy class fare, to business travellers that range from budget-conscious smaller businesses that have to tightly control travel expenses, to even top corporate leaders of multi-national corporations that just love the value-for money quality that we offer.
You are experimenting with some new ancillary revenue products. Are they generating good returns? And do you see much more upside for ancillary revenues?
I think today we’re already generating the world’s highest ancillary revenues per passenger at EUR30 each. Most of this comprises traditional ancillary revenue streams such as checked baggage fees, seat assignments and in-flight meals and duty free. However, we’ve continued to develop new streams such as the Fly-Thru Connecting Transfers and OptionTown upgrades. There is definitely more upside for us and we have a pipeline of new developments that we are preparing to bring to market.
You recently gave high fuel prices as one of the reasons for possible deferral of AirAsia X’s IPO till next year. Do rising fuel prices – which by definition account for a higher proportion of your costs – have a more painful impact for you as a low-cost operation than for your full service competitors?
No. The numbers speak for themselves. For the 2010 period, our fuel cost per ASK was USD1.3 cents, compared to legacy carriers at the USD2.5-2.7 cents level in the same period. This is derived from our world-beating 2.18 litres/seat/100km fuel consumption rate that is 40%-50% more advantageous than legacy airlines’.
When fuel prices go up, the additional cost per passenger for legacy carriers is higher, and that’s why you see them imposing much higher fuel surcharges.
Our continued success in a high priced environment depends on our ability to attract the higher-yielding passengers from legacy airlines as the lower-end passengers trade down to less travel or shorter travel. We did this in 2008 and I think we can continue to do so.
The issue of fuel prices and the IPO timing has more to do with the uncertainty of fuel prices because of the Middle East unrest, rather than a structural impediment to a listing. High fuel prices won’t stop our listing.
You are projecting that China will soon overtake Australia as your lead market. How do you see your Asian market expansion prospects over the next five years?
That’s based on the sheer size and growth of China. There’s a lot more potential there, especially if we can obtain rights for Shanghai and Beijing, two of the world’s largest and fastest growing metropolises.
Our growth focus is primarily Asia Pacific. Our A330-300 fleet – where we have another 17 firm orders to be delivered – will be deployed to connect southeast Asia with the six main regions in Asia Pacific: China, India, Australia, Japan and Korea. The Middle East too is an important market for us. Tehran has worked very well for us, and Jeddah is our next priority because of the huge demand. We are keen to pursue all the major population centres in the Middle East. The US market, meanwhile, is not going to be a priority until we get the A350s.
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