Asia’s low-fare upstarts launch airline revolution

Singapore Air Show » 2008
February 11, 2008, 9:22 AM

Asia accounts for 25 percent of the world’s air traffic, a figure expected to grow to more than 30 percent in three years, largely thanks to the proliferation of low-cost carriers. With cheap fares, easy online bookings and direct connections to previously sleepy backwaters, budget carriers are bringing air travel to the masses in this part of the world.

The emergence of these upstarts has forced incumbent legacy carriers to offer better and more competitive products. The net effect of all this has been a huge surge in demand for air travel in Asia over the past five years, fueling the ambitions of low-cost carriers.

During the past three years, Malaysia-based AirAsia has placed firm orders for 175 medium-range Airbus A320s and taken options on another 50. This prolific fleet-expansion program will make the airline Asia’s largest low-cost carrier and the world’s biggest A320 operator by 2015.

The carrier, launched with two leased aircraft in 2001, took delivery of its first aircraft in December 2005 and now operates 31 A320s on a rapidly expanding domestic and regional network. According to founder and CEO Tony Fernandes, AirAsia expects to be the largest airline in the region in terms of passengers carried by 2013 or 2014. Its passenger load factor this year, or in 2009, could even be larger than those of established major players Singapore Airlines and Cathay Pacific. And this year, AirAsia will become an A320-only operator as it retires the 737 Classics flown by its Thai and Indonesian affiliates.

AirAsia X, its long-haul, low-cost subsidiary (in which Sir Richard Branson’s Virgin Group has a 20-percent stake) started flying from Kuala Lumpur to Australia’s wealthy Gold Coast in November, offering four weekly flights with a leased A330. This part of the network is operated by Fernandes’ Fly Asian Express company, which has ordered 15 A330-300s, the first scheduled to be delivered this August. The company, set up in January 2007, is also considering possible new orders for up to 20 Boeing 787s or Airbus 350s.

Fernandes has said he expects the airline to carry 500,000 passengers this year after flights begin to China, Japan and South Korea. The lucrative Kuala Lumpur-Singapore route, which had been monopolized by Malaysia Airlines and Singapore Airlines for over three decades, opened up for AirAsia last October.

AirAsia X may now be poised for a restructuring of its capital base. According to financial press reports, the company is contemplating the sale of a 10-percent stake to Orix Corp., Japan’s largest non-bank finance company, for approximately $37.5 million. Bahrain’s private equity fund Perigon Capital may also take a 10-percent stake.

However, AirAsia’s plan to start a low-cost carrier in Vietnam has been rejected by the government following objections from domestic carriers Vietnam Airlines and Pacific Airlines. The plan was to set up Vina AirAsia in a joint venture with the state-owned Vinashin Group to fly to destinations in southern China from its hub in Hanoi.

Developments Down Under
In November, Australia’s Qantas Airways placed firm orders for 68 A320s or the 20-percent larger A321 for its low-cost subsidiary Jetstar Airways, to be delivered by early 2014. According to Jetstar chief executive Alan Joyce, the carrier would need new aircraft in 2009 to support domestic and offshore growth. In March 2007, Qantas ordered nine Airbus A320s for Jetstar, deliveries of which are under way. In early 2009, Jetstar–set up in 2004–will start receiving the first of 65 Boeing 787 Dreamliners Qantas has ordered to service long-haul routes.

Joyce said Jetstar is considering taking equity stakes in more Asian airlines, similar to its deal in April 2007 to acquire a 30-percent interest in Vietnam’s Pacific Airlines. The Australian carrier has also revealed plans for a possible franchise deal with Southeast Asian carriers when the region’s airline markets are deregulated.

Qantas is looking to invest in airlines in the Philippines, Indonesia and Thailand, which would be allowed to adopt the Jetstar brand. Jetstar faces stiff competition from Singapore Airlines’ low-fare subsidiary Tiger Airways, which plans to launch a new domestic service in Australia. Its affiliate Tiger Australia began operations late last year and will start four more routes this year to Adelaide, Newcastle, Canberra and Hobart.

Tiger Airways has ordered 50 Airbus A320s to grow its fleet to 70 Airbus aircraft by 2016 from the current 12, making it one of the region’s largest and fastest growing low-fare airlines. The operator has formed a joint venture with South Korea’s Incheon city government to launch Incheon Tiger Airways, which is expected to take wing by the end of this year or early 2009.

The Scene in Hong Kong
Meanwhile, Hong Kong’s long-haul budget carrier Oasis Hong Kong has also come a long way since its canceled first flight in October 2006. It was named the leading new airline at the World Travel Awards, the travel industry’s equivalent of the Oscars, in December. Oasis beat Air Asia X, Silverjet, Virgin America, VivaAerobus and other new airlines to receive the award at a gala event at the Turks and Caicos resort islands in the Caribbean.

Oasis got off to a bad start when its debut flight to London on Oct. 25, 2006, was canceled at the last minute because it lacked permission to fly over Russia. About 280 passengers on the chartered jumbo were sent home or to hotels after waiting on the tarmac at Hong Kong International Airport for more than five hours. The company said the Russian authorities had suddenly revoked its permission to fly over the country. But the carrier now sells more than 25,000 tickets a month and employs more than 600 staff.

Hong Kong fund manager Value Partners is to take a $30 million stake in Oasis to help fund the carrier’s fleet expansion by 2011. Oasis is also to receive a $25 million cash injection from existing shareholders.

Oasis operates London and Vancouver direct services using three used aircraft and is scheduled to have a fourth delivered soon. By 2011, it plans to operate 14 Boeing 747s on eight routes. Chairman Raymond Lee said Oasis will go public in three to five years when 15 to 16 aircraft are in service.

Unlike other low-cost carriers, Oasis provides business and economy class with movies and other kinds of onboard entertainment. The airline already has secured licenses from the Hong Kong government to fly to San Francisco, Cologne, Melbourne, Sydney, Milan and Berlin.

Other than Oasis, two independent airlines in Hong Kong–Hong Kong Airlines and Hong Kong Express–plan to go public this year. But Indonesia’s Lion Air is facing difficulties in its bid to acquire stakes in airlines in Australia, Hong Kong, Thailand, Bangladesh, Vietnam and Malaysia.

Company president Rusdi Kirana said the obstacles include regulations on ownership by foreign investors and manpower problems. He said regulations in Australia, Thailand and Bangladesh limit foreign ownership to 49 percent, while Lion Air wished for controlling stakes of more than 50 percent. With regard to manpower, he said regional airlines generally have personnel not considered suitable for Lion Air’s strategy, which will be based on low-cost market.

“For the time being, I cannot disclose the names of the regional airline companies that we will try to take over, but I predict that in the first quarter of 2008 the acquisition will cover two regional airline companies of two countries,” Kirana commented. He said the strategy to take over regional airlines is preparatory to entering the ASEAN (Association of Southeast Asian Nations) free market in 2010.

To bolster its position in the local and regional business, Lion Air ordered 22 Boeing 737-900ERs at December’s Langkawi Air Show in Malaysia.

From modest beginnings as a one-plane airline in 2000, Lion Air now operates 37 jets, flying to Indonesia’s major cities as well Singapore, Penang and Kuala Lumpur in Malaysia.

Last month, Lion Air confirmed plans to launch new subsidiaries in both Australia and Indonesia. It will base six of its Boeing 737-900s in Australia and two in Indonesia.

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