CAPA Asia Aviation Summit Day 2: AirAsia X & Spring Airlines discuss opportunities in China


The second day of the CAPA Asia Aviation Summit began with a Q&A featuring AirAsia X CEO Benyamin Ismail and Spring Airlines VP Jonathan Hutt. The Chinese market dominated the conversation, particularly opportunities between China and Southeast Asia for both airlines.

The CAPA Asia Aviation Summit was held on 16-Nov-2016 and 17-Nov-2016, attracting over 300 delegates. The summit also included a gala dinner on 16-Nov-2016 featuring the CAPA Asia Pacific Aviation Awards for Excellence.

The remainder of Day 2 featured three panels: on distribution, ancillaries, and a wrap-up of the market outlook.

Daytime slots key to AirAsia’s success in China 

Mr Ismail said “China is a huge market for us” with 18 destinations in China served by the AirAsia Group. He noted that “we are lucky in that we started early”, as it enabled the group to secure slots at key Chinese airports while they were still available. “You don’t see many international airlines with daytime slots”, Mr Ismail said. “Now it’s impossible to get a daytime slot.”

The AirAsia Group is fortunate to have secured daytime slots at the main airports several years ago - including Chengdu, Beijing, Hangzhou and Shanghai. At some airports the group has added second frequencies more recently, using night slots. There are still opportunities to add frequencies at some of the main Chinese airports, but only with less than ideal slots.

For example, Mr Ismail said AirAsia X is keen to add a second daily flight to Chengdu and is considering an 0500 slot offered by the airport. Additional frequencies to Beijing and Shanghai are also high on AirAsia X’s list. While the additional frequencies may use late night slots a thicker schedule improves connectivity, including with AirAsia X’s Australia flights.

Having both the long-standing grandfathered daytime flights and late night flights also gives AirAsia X a better schedule for business travellers in the Malaysia-China market. AirAsia X has a small business class cabin with lie-flat seats on its A330 fleet and is attracting an increasing number of business travellers – particularly SMEs – as it beefs up its schedule to key business destinations such as Beijing and Shanghai. 

AirAsia X to add more secondary, and potentially tertiary, cities in China

AirAsia X is also focusing on launching services to new secondary and tertiary cities where slots are generally not an issue. There are several new destinations in China under consideration, including Dalian and Urumqi.

Xian in western China was the first secondary destination for AirAsia X in China. Mr Ismail said Kuala Lumpur-Xian service was launched two years ago “and this year we’re are making money on this route and it’s doing very well”.

He added that “we are even looking at third-tier cities” that are not served by any foreign airlines. “We just want to develop it.”

Serving smaller and more remote cities in China such as Xian also has the advantage of less congestion and a more direct routing. Mr Ismail said some of AirAsia X’s routings to its Chinese destinations are circuitous due to airspace constraints.

AirAsia X is lobbying for more airspace to be opened to commercial traffic for the benefit of all airlines – most airspace in China is set aside for military use. Mr Ismail said the Chinese market will grow much faster “if we can open up airspace as big as it can, similar to the US”.

Spring grows with new bases at tertiary cities

Mr Hutt said airspace congestion also impacts Spring. The LCC has found that establishing bases in tertiary cities in more rural provinces is effective as operating out of such airports is significantly more efficient than operating out of major cities.

Spring is able to use such bases to connect passengers flying within China as well as internationally. Foreign LCCs are unlikely to sustain international routes to some of the small cities where Spring now bases aircraft, but Spring has the domestic connections needed to sustain such routes, particularly given its low fare model.

“We have connectivity you would have never heard of”, Mr Hutt said, citing the names of several small cities – but still big cities by non-Chinese standards – that are unknown outside China. Several of these cities opened new airports in recent years and Spring decided that if it did not jump at the opportunity it could lose out. Services and even bases or hubs at smaller cities have proven to be highly successful, and Spring is now “are looking further down to fourth-tier cities”.

Bases at tertiary cities results in more efficient operation

Spring is still keen to build a bigger presence in the major cities, particularly Beijing and Shanghai. However by its expansion in more rural areas – due to a lack of slots at major airports – there has been a silver lining in that it has resulted in a better on-time performance. Hubs at third-tier cities also support faster turnarounds and an efficient operation – critical components of the LCC model.
Mr Hutt pointed out that “on-time performance is a major concern now for the CAAC” and some airlines are concerned they may lose slots due to poor on-time performance. In some months this year Spring has had the highest on-time performance in China, which is due partially to having a large part of its operation based outside the main congested airports.

Mr Hutt said the new third-tier hubs had great on-time performance, helping with Spring’s overall punctuality performance.

An AirAsia-Spring Airlines partnership would make a lot of sense

Mr Hutt said so far Spring had had “no concrete overlap” with AirAsia as initially Spring had focused mainly on the domestic market and shorter international routes within North Asia. Mr Hutt added that Spring is now starting to penetrate more deeply into Southeast Asia “so you will start to see a little more overlap” with AirAsia.

But he added that Spring’s operations in the China-Southeast Asia market are still “mainly complementary” with AirAsia.

Mr Ismail said that AirAsia X is keen to offer domestic connectivity in China and could pursue a partnership with a Chinese airline.

AirAsia and Spring have a lot in common, as both were LCC pioneers in their home markets and are now market leaders. Given their relatively limited overlap – and huge respect for each other – a partnership would be logical.

Distribution panel discusses opportunities for airlines

The remainder of Day 2 featured three panels: on distribution, ancillaries, and a wrap-up of the market outlook.

In the distribution panel Expedia transport partner services APAC James Marshall said that real-time data provides greater value compared to “big data”, by enabling quick decisions and market agility.

Japan Airlines VP marketing and research strategy Asia Akira Mitsumasu said that airlines are redefining products, and product is becoming about more than just ancillaries. Mr Mitsumasu said the challenges are to offer compelling, relevant, value propositions to customers, and how to distribute the new value propositions.

Travelport global head of product and marketing air commerce Ian Heywood said that GDSs will be “absolutely crucial for airline distribution in the future.” Mr Heywood said intermediaries need to do a better job of selling their value to airlines and noted that there was an incorrect belief among airline executives that the direct sales channel is cheap. Mr Heywood also said the aviation industry is not working together to move forward, and that airlines, intermediaries, corporates and travel agents need to work collaboratively.

Booking.com Director Strategic Partnerships David Peller said there is big opportunity for airlines to upsell using the mobile platform. He said Booking.com now partners with 120 airlines to offer accommodation as an ancillary revenue.

Ancillary panel featured executives from three LCCs

The ancillary panel included Jetstar Group Head of Sales Paul Rombeek, VietJet Air Board Member Chu Viet Cuong and Spring’s Mr Hutt.

Mr Rombeek said ancillary revenues in Asia are lagging behind other regions but the product is growing rapidly. He said ancillaries are “strategically important” for Jetstar, and the LCC group is investing heavily in this area.

He added that Jetstar is open to new opportunities, but any new idea must pass a “heavy filter” to make sure it does not add complexity. Mr Rombeek said Jetstar is open to working with all channels, including with TMCs and GDSs. “We are channel-agnostic”, he said. “We just want to promote the channel that brings the most profitable growth for us.”

Mr Hutt said education is critical in Asia as consumers from this region are not used to unbundled fares. “These are new concepts that have to be put to the market and explained very, very clearly.”

Mr Hutt said Spring is looking for new partners to boost ancillaries. Spring has been a disruptor in the Chinese market with its very low fares, ancillary offering and decision not to work with the local GDS. However an LCC cannot afford to simply maintain the status quo, and needs to continue to innovate its offering. “You can’t just stick to your core offering anymore. If you do you will become irrelevant in that marketplace”, Mr Hutt said.

VietJet’s Mr Chu said that ancillaries now account for more than 22% of the airline’s revenues and are growing fast. “We have huge opportunities in ancillaries”, he said, pointing out that VietJet had introduced a premium product called SkyBoss, and was selling advertisements that can be painted on its aircraft.

Outlook for Asia is relatively bright 

In the wrap-up panel, BOC Aviation head of strategy and research Peter Negline said BOC is “very bullish” on India and the market has, “years of growth ahead”. He added that North Asia is an “exciting” market and represents a significant opportunity for LCCs.

In Southeast Asia: Mr Negline said political challenges in some Southeast Asian countries may limit the acceleration of aviation growth. However, he said the fundamental core of the global economy is “quite solid” and BOC Aviation is “fairly upbeat by and large”. 

DVB Bank SVP Aviation Research Albert Muntane Casanova said Japan is “really interesting for LCCs” due to its large population, high tendency to travel, and high GDP per capita. He pointed out that Japan is one of only two mature aviation markets, along with Germany, that have low LCC penetration.

Mr Casanova said he expects lower cost airlines and airlines with a dominant market position to survive the next downturn in the aviation industry. He added that traffic will continue to grow, but potentially not across all airlines.

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