In the final quarter of this year, AirAsia will celebrate two important milestones in a journey that has seen it firmly established as the largest low-cost airline brand across Asia and one of the most recognised brands in the world. On November 18, 2016 it will be 20 years since the carrier first inaugurated operations in Malaysia, while just a couple of weeks later on December 2, 2016 it will mark 15 years since former Time Warner executive Tony Fernandes secured control of the business and transformed it into a low-cost carrier.
At this time the government-linked operator of a small fleet of four Boeing 737s was heavily-indebted and having previously failed himself to set up a new budget carrier, a decline in global air traffic after the 911 terrorist atrocities provided the entrepreneur with the leverage to secure control of the ailing business for the token sum of one ringgit (approximately $0.25 at the time) and debts of around $11 million.
Having seen the emergence of the low-cost carrier model in other parts of the world, Fernandes believed a discount operation would revolutionise air travel across Southeast Asia. However, he knew that with only limited airline experience from a spell as an auditor at Virgin Atlantic that it would be tough to deliver.
"It really was a little bit of stick your finger in the air and hope for the best. But we were good marketing people from the music business… we just went out there and felt the market and said if you halve the fare, there's a huge enormous untapped market," he says.
What followed was a regional revolution that many independent analysts place strong weight on Fernandes leading. What was once a highly restrictive market dominated by historic bilateral agreements has now opened up to be among the most significant market opportunities across the globe.
And the Air Asia Group is profiting from the evolution having grown from a small Malaysian airline to a group that encompasses operations from India, Indonesia, Malaysia, Philippines and Thailand through joint ventures with local business partners. Together they operate a combined fleet of around 170 Airbus A320s firmly establishing AirAsia as largest airline customer for the Airbus single aisle product line.
The Asia-Pacific region is now home to seven of the world’s top ten busiest routes and international visitor demand into the Asia Pacific region is forecast to grow at an average rate of 4.6 percent each year to more than 657 million by 2020, according to International Air Transport Association (IATA) data.
The industry’s growth holds big economic promise for the Asia-Pacific with an additional 2.5 billion more passengers estimated to be flying annually to, from, and within the region by the mid-2030s with one in every five global air travellers traveling to, from, or within China by 2034.
The latter fact is why AirAsia is now looking more closely at developing its penetration across North Asia as its activities start to mature across Southeast Asian markets and has seen the return of one of Tony Fernandes’ most trusted generals into an AirAsia senior management position.
In an eight year career at AirAsia between 2004 and 2013, Kathleen Tan was widely credited for making AirAsia a financial success and global brand acting as Fernandes’ right-hand woman responsible for top-line performance. During her tenure as regional head of commercial and senior vice president of China, the airline’s fleet size increased from 17 to 143 aircraft, revenue surged 14-fold to over RM5 billion and AirAsia secured the first of many Skytrax World's Best Low-Cost Airline awards as it became a household name, even in parts of the world it didn’t serve.
Tan was seconded by Fernandes to AirAsiaExpedia where as chief executive officer she successfully turned around the loss-making joint venture within eight months, delivering a net profit of S$20 million in her second year.
A bold, dynamic business leader and self-proclaimed "disruptor", Tan accelerated growth especially in key markets such as Japan, Korea, Hong Kong and Taiwan, establishing AirAsiaExpedia as a major player in North Asia.
In her new role at AirAsia, Tan is president of North Asia and has a brief to replicate her success at AirAsiaExpedia and build the airline’s market in China, Hong Kong, Macau, Japan, Korea and Taiwan.
"Kathleen Tan lives and breathes North Asia. She was the first to spot the massive potential of China when no budget airlines operated to it. She made sure we were the first low-cost carrier to fly to China and built a strong network there,” says Fernandes.
Today, China contributes nearly 40% of AirAsia’s revenue but there is still a lot of opportunities to develop further across North Asia. It is an important long-haul market and it will take on greater significance once AirAsia Japan launches next year.
"North Asia is close to my heart and I look forward to pushing AirAsia's engagement there even further,” says Tan. “What we have achieved in China is just the tip of the iceberg. There is much more we can do to position AirAsia as the low-cost carrier for the region and I won't rest until everyone knows our name."
The focus right now is on Japan where AirAsia will return to the sky with a new local airline operation in early 2017 having previously abandoned a previous business venture in the country with All Nippon Airways (ANA). The new business will operate from a base at Chubu Centrair International Airport in Aichi prefecture initially to Shin-Chitose Airport in Sapporo, Sendai Airport in Sendai as well as to Taiwan Taoyuan International Airport in Taipei.
The original AirAsia Japan was established in August 2011 and launched operations the following year but struggled in what was a competitive marketplace. A statement from AirAsia at the time suggested that issues with the business were deeply rooted in the business model. The low-cost airline strategy is new to the Japanese market and AirAsia suggested that corporate business mentality was at least part of the problem.
Elsewhere in North Asia, the AirAsia Group is pursuing a rapid expansion in China as it uses its strong brand position to meet the growing demand in the booming Chinese international market. The company has grown capacity to China by an average annual rate of 38.1% this decade and is forecasting growth through 2016 of 30.2%, based on already published schedules, as a number of additional routes have been introduced.
AirAsia currently serves 22 points in mainland China from 10 points across Southeast Asia and operates a total of 46 different city pair routing in and out of the country. To further expand its activities China would be a logical new market for a future AirAsia joint venture and a local operator domiciled in one of the nation’s fast expanding second tier regional cities such as Chengdu, Chongqing, Shenzhen, Wuhan or Xiamen.
Fernandes has even suggested on social media that such a move could be part of the ‘To do’ list for Tan to explore as part of her return to the business, although he has highlighted that current regulations may need to be eased and barriers brought down before it could become a reality. There is also the matter of finding a local partner to support such a joint venture with the experiences in Japan highlighting that a marriage with an existing operator to ease licencing issues may not be a fruitful relationship.
AirAsia has been quick to play down the suggestions of another birth within the AirAsia Group family. In an official stock market filing it said that while it does “from time to time receive proposals to establish airline joint ventures in various jurisdictions” it is currently “not pursuing any new joint venture proposals”.
Barring unforeseen circumstances, AirAsia remains positive for the prospects of the group in 2016. Net income for the first quarter of the calendar year climbed almost six-fold to 877.8 million ringgit ($216 million) from 149.3 million ringgit a year earlier. Revenue rose 31% to 1.7 billion ringgit, aided by a 17% growth in passenger volume (the airline carried 13.9 million passengers) and an 11% increase in average fares.
While AirAsia chairman Kamarudin bin Meranun acknowledges the group sees the “strongest growth in China,” what is also guaranteed is a “strengthening of its existing joint venture airline operations” within Asean and India.
An amendment to the 5/20 rule in India which required airlines to fly domestically for five years and have a fleet of 20 aircraft before being allowed to serve international routes, has provided an attractive growth opportunity and the potential for AirAsia India to fly international routes.
The change in the civil aviation policy has certainly eased the restrictions on airlines, but they are still required to operate a fleet of at least 20 aircraft or reserve 20 per cent of the fleet for domestic routes, whichever is higher.
“Though a 0/0 or 0/10 would have been more than welcome, the amendments that have been made to the policy are encouraging,” says Amar Abrol, chief executive officer, AirAsia India. “We will now focus on aggressively investing in India and increasing the fleet size from six at present and achieving the target of 20 aircraft.”
Across the Asean region AirAsia is now working to support a maturity within its operations and the low-cost business model. At this year’s Farnborough International Air Show the carrier signed a firm order with Airbus for the purchase of 100 A321neo aircraft, its first order for the largest model of the A320 Family. Seating up to 236 passengers in a single class layout, the A321neo will enable the airline to increase capacity versus its current A320 fleet while benefitting from the lower operating costs.
“The A321neo will be operated on our most popular routes and especially at airports with infrastructure constraints. It will allow us to bring higher passenger volumes with the same slots, therefore providing immediate benefits to the airports,” says Fernandes.
The AirAsia Group currently operates close to 1,000 flights per day to more than 120 destinations in 24 countries and has reported healthy load factors of 85 percent in the first quarter of 2016, up 8 percentage points from the same period last year. The A321neo will help the carrier to facilitate this ongoing strong demand as well as further reduce cost per available seat kilometre across the group and enable the carrier to maintain its low air fare offer.
AirAsia is also in it for the long-haul. Alongside its narrowbody operations AirAsia is also growing its medium- and long-haul widebodied activities through AirAsia X and newer ‘X’ businesses in Indonesia and Thailand. Thai AirAsia X now serves numerous markets from Bangkok’s Don Mueang International Airport and U-Tapao–Pattaya International Airport, while Indonesian AirAsia X flies international links from Jakarta’s Soekarno–Hatta International Airport and Ngurah Rai International Airport, serving Denpasar in Bali.
However, it is at the restructured AirAsia X where a revised network strategy is introducing new markets to the low-cost, long-haul business model that is getting the air service development community talking. After a retrenchment earlier in the decade and with costs now firmly under control, the airline is on a growth trajectory again.
Auckland and Tehran are already new markets for 2016, while flights to Mauritius, the airline’s first destination in Africa, will commence from October this year. At the same time it appears the airline will also make its return to the European market with its schedules and online route maps recently displaying the introduction of daily flights between Kuala Lumpur and Barcelona, via Istanbul, albeit the airline says it was simply a test.
The network growth is offering favourable benefits to the business with data from the second quarter of this year showing its operating performance exceeded expectations despite historically being the leanest quarter, as demand returned across all regions on the back of the ongoing turnaround plan initiated last year.
The long-haul business recorded a double-digit increase in passengers carried of 27% year-on-year, exceeding capacity which grew 13% and boosting load factors by 7 percentage points to 75%. Following a strong 1Q16, AirAsia X remains “cautiously optimistic” on its operating performance given ongoing regulatory issues, challenging competitive landscape, currency volatility, and confirms it will “explore other strategic initiatives” to ensure sustainable growth going forward.
This article is modified from an original feature that appeared in...
ROUTES NEWS - ISSUE 6, 2016
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