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Saturday April 27, 2013

Air France to expand in Asia, returns to Malaysia after 25 years

Air France’s B777 touching down in KLIA on Tuesday for the first time after 20 years to a wet welcome. Air France’s B777 touching down in KLIA on Tuesday for the first time after 20 years to a wet welcome.

IT is no secret that the action in the airline industry is taking place in Asia.

By just looking at passenger growth rates in Asia, it is clear that Asian airlines are doing relatively better than their global peers.

Population growth in Asia is the highest and so is economic growth. Furthermore, businesses in Asia are booming and hence the attraction for global airlines to get a slice of that action.

It is therefore no coincidence that Air France decided to take a bite at the pie when it landed on Malaysian soil on Tuesday after a 20-year absence.

For a start, Air France will begin with three weekly flights into Malaysia and may increase them should the demand rise.

It may even change from the B777 that it now operates to a A380, which is what Malaysia Airlines (MAS) deploys on the KL-Paris route.

“There is big potential for us here. We are targeting Malaysian tourists and businessmen to use our aircraft and we are pretty optimistic about that, otherwise we would not have opened the route, considering that we also have daily flights to Bangkok and Singapore,” Air France chairman and chief executive officer Alexandre de Juniac tells StarBizWeek.

He is looking at loads of over 80% for his three weekly flights and that is what MAS is enjoying with its A380. That load is also shared by Air France's sister airline KLM on its KL-Amsterdam flights. Air France is not alone in returning to Malaysia. Just two days ago, Turkish Airlines returned after a decade's absence. Turkish Airlines will fly three times weekly between Istanbul and Kuala Lumpur. And in a week's time, Philippine Airlines too will return after a decade's absence.

The move by Philippine Airlines indicates that they too want to partake in the vibrancy of Asia and the sentiment is not lost on British Airways which is rumoured to be returning to KL International Airport before 2015.

“Nowadays the Asean area with Malaysia, Indonesia, Thailand and Singapore represent a major opportunity for businesses, so we need to cover more,'' he says.

The rising affluence

The International Air Transport Association (IATA) says demand for air travel continues to rise on economic optimism and improved business confidence. Much of the growth is concentrated in emerging markets especially in Asia. Europe continues to be a laggard.

Air France chairman and chief executive officer Alexandre de Juniac. Air France chairman and chief executive officer Alexandre de Juniac.

IATA estimates that by 2014, Asia Pacific will account for 30% of all passengers, followed by North America at 23%. Of the 800 million new passengers who will fly by then, 360 million of them, or almost half, will be in Asia Pacific. China alone will account for 214 million passengers.

Asia is now the unchallenged leader in aviation, with 787 million journeys last year and if the present rate of increase continues, the one-billion passenger figure will be overtaken in 2015, said another report.

That explains why Europe's biggest airlines are reassessing their long-haul alliances, particularly in Asia as a growing number of emerging-market carriers are fighting hard to take a bigger share of Europe-Asia traffic.

De Juniac was candid when he said: “We are here for the margins and traffic.”

But it is not just Asia, even the Asia Pacific region offers plenty of opportunities, especially for low-cost carriers and Asian airlines. Route connectivity is not as dense as Europe as there are many points in Asia and Australia which are not covered.

Demand for flights even drove Singapore Airlines (SIA) to increase its stake in Virgin Australia Holdings Ltd this week and Abu Dhabi's Etihad Airway bought into India's Jet Airways. The deal by SIA will intensify its challenge in the Australian market against dominant carrier Qantas Airways, whose new partner is Emirates, said a report.

Pricing pressure

With Air France and Turkish Airlines coming to Malaysia, the number of seats in the European sector will shoot up. Though the number of travellers will increase, so will competition.

MAS is already flying to five points in Europe London, Amsterdam, Paris, Istanbul and Frankfurt. Four European carriers, namely Air France, KLM, Turkish Airlines and Lufthansa offer connections into multiple cities in Europe from Asia.

Besides that, the Middle-East carriers are aggressively marketing European routes via a Middle East stop. Emirates is hugely popular in Australia as many like the 30kg baggage offer even though it means sitting in Dubai airport for up to four hours to catch a connecting flight into Heathrow in UK.

As at 2011, KL, Singapore and Bangkok offered 15 million seats to Europe and back, and last year the numbers fell to 14.2 million, and they are lower at 14 million this year. In contrast the seats offered by the Middle Eastern carriers to Europe is on the rise, from 8 million in 2011 to 9.5 million in 2013.

Lesser seats are offered by carriers out of Singapore and Bangkok to Europe but the seats offered from KL have increased from 1.8 million in 2011 to 1.9 million in 2013.

CAPA Centre for Aviation analyst Brendan Sobie believes the arrival of Air France is good for KLIA. It boosts competition to Europe, which is positive after AirAsia X dropped Europe including Paris last year. But that also means more competition for MAS.

Competition will intensify for the airlines as they vie for the customers even though the pie is getting bigger as more Asians take to the skies.

Competition is already intensifying when it comes to ticket prices. A return all inclusive airfare to London is between RM3,000 and RM4,000 but some airlines offer tickets at RM2,800 depending on the season. Air France is offering an all-in fare of RM3,626 for a standard economy round-trip from KL to Paris and RM11,333 for business class. It also offers premium economy seats (the in-between business and economy) at RM5,777.

An air hostess at the
first class seat. An air hostess at the first class seat.

With competition comes pricing pressure and being full service carriers, the airlines need to meet the high expectation of travellers.

That is despite Visa's latest Global Travel Intentions Study 2013 that showed global cross-border tourism is thriving and people are more willing to increase their budgets for their next trip by an average of 5%.

Alliances

European carriers have been facing tough times back home and margins are thinning because of the eurozone crisis and they are jockeying for positions to grab a bigger share of the fast-growing Asian market.

Given that competition can get fierce in Asia with pricing pressure, can these European carriers sustain the momentum?

De Juniac is taking a page from KLM's success story of being able to sustain in Asia for several decades now. He believes Air France is a “high class” product where quality matters and it will be able to attract travellers both from Europe and Asia.

“We will open additional Asian destinations and the reasons why we are targeting this part of the world is because of the strong growth here compared with the eurozone which is slow and lagging. It could recover but for the long haul we have to target the fast-growing areas,” De Juniac says.

KLM flies to KL and also flies to Indonesia because of its historical ties and Air France will use the KLM's KL-Jakarta connectivity as it penetrates Asia.

CAPA's Sobie believes “the connections to Indonesia will be key in making the route (KL-Paris) work for Air France.”

For players like Air France to make it big in Asia, they need partners.

De Juniac is thinking of working with partners in Asia, and China, including MAS. During his visit, he met up with the top brass at MAS for exploratory talks on cooperation.

Alliances are important for long haul carriers. A major shift occurred in the industry when Australia's Qantas partnered Emirates. That ended Qantas' relationship with Air France and BA.

Both now need to find new partners to connect to Australia because Qantas cannot do that any more from Singapore. BA has found Cathay Pacific but experts believes a viable proposition is via Singapore or Malaysia.

Hence the talks between MAS and Air France. What will come out of it is unclear as both are members of different alliances. MAS is with oneworld and Air France SkyTeam. But De Juniac believes there can be a way.

Air France’s economy
class seating Air France’s economy class seating

“Of course, the difficulty at this stage is that it (MAS) belongs to oneworld and we belong to SkyTeam, which are competing alliances. But it is not impossible that we could envisage something. It could be possible if MAS asks its other oneworld members and any arrangement could be limited to a particular route, destination or traffic,'' De Juniac says.

Perhaps the cooperation could be beyond the KL-Paris route to include Australian and the Asian connections. Even BA needs that connection into Australia and greater Asia, experts believe. MAS is in talks with BA for a code share.

The big brands

One major beneficiary from new flights coming into KL is the tourism sector.

According to Tourism Malaysia director (international marketing division Americas, Europe, Oceania) Datin Normasila Musa, tourist arrivals from Paris alone totalled 136,172 last year and the target is over 140,000 French tourists this year.

That means there are more arrivals at KLIA, and one immediate beneficiary will be Malaysia Airports Holdings Bhd (MAHB). Hopefully with Air France. Turkish Airlines and Philippine Airlines returning, other big airlines will also be attracted to KLIA.

More than a decade ago BA, Qantas and Lufthansa left because of the economic crisis. The latter returned some years ago and MAHB has been in talks with BA.

BA may return, some say, but is there a compelling reason for its return or can it just make do with the code share with MAS?

Passenger arrivals will help boost tourist receipts and the airport. A decade ago, it was hard to justify KLIA as a hub in Asia. That is changing with the return of more big brands.

Last year, KLIA was the 27th busiest airport globally, recording 39 million passenger arrivals, according to Airport Council International (ACI) data. Experts believe it should go up a few notches over the next two years and should be in the top 20 by 2020. But it would be hard to beat the growth Soekarno Hatta records as last year, 57 million passengers passed through the airport in Jakarta, beating Changi which chalked up 51 million and Bangkok's Suvarnabhumi 53 million.

A decade ago, both Jakarta and KLIA was not even on the ACI charts.

All this indicates the growth is in KLIA and Soekarno Hatta and Malaysia's vibrant economy led by the economic transformation programme is also seeing a lot more foreign investors coming and setting shop in the country.

With more investments, the expatriate community will also increase and it also induces tourism activities. Just this week Germany's BASF and Petronas Chemicals Bhd say they will invest US$500mil (RM1.5bil) to expand their operations at Gebeng, Kuantan to manufacture products for the global flavour and fragrance industry.

All this bodes well for Malaysia, which is moving in the right direction. If the European carriers want a slice of this market, they need to be in Asia and Malaysia stands to benefit from that.

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