South-East Asia low-cost airlines set to take flight

BY Hanim Adnan

THE concept of air travel in South-East Asia is transforming as low cost airlines (LCAs), now restricted to just a few countries in the region, take off. 

Standard and Poor’s (S&P) said in its report, Asia Equity Research, that the success of LCAs such as Malaysia’s no frills carrier, AirAsia Sdn Bhd, lay in the simplicity of its business model concept.  

The key elements of the LCA were simple, one-class configuration, point-to-point, one type of aircraft, quick turnaround of 15 to 20 minutes, using cheaper airports and Internet booking, it said. 

“This inevitably means no airport lounges, no choice of seats, no newspapers, no food, no frequent flyer programme, no connecting flights, no refunds and no possibility of rebooking to other airlines,” S&P said, adding that there were also no travel agents to cut out the commissions. 

AirAsia, it added, had managed to become profitable since its inception in September 2001. 

“Major national carriers in the region are likely to face the prospect of increased losses as they battle to remain profitable, serving passengers who have become savvier with their needs and requirements and at the same time fighting against smaller more cost efficient airlines which are focused specifically on a certain set of customers,'' the report said. 

According to S&P, the impact of LCAs has been quite disastrous to some national carriers in Europe. 

Air France, for example, once flew a route connecting Nice and Geneva. It did fairly well until EasyJet, an LCA based in Britain, started flying the same route.  

EasyJet took advantage of the deregulation by the EU Commission and offered tickets for FRF360 return compared to Air France, which could not offer less than FRF760. 

Similarly, AirAsia has been able to charge less than a third of the fares that national carrier Malaysia Airlines charges on all of its routes, including those to east Malaysia. 

A Booz Allen Hamilton study showed that LCAs spend 7 US cents to 8 US cents per seat mile to complete a 500- 600 mile flight. Larger airlines spend about 15 US cents. 

The report said the fact that investors paid US$26mil for a 25% stake in AirAsia indicated that they “obviously'' thought there was a market for LCAs in South-East Asia. 

It said there were many potential short haul markets that could be developed by a LCA based in Singapore.  

These included Singapore-Yangon, Singapore-Ho Chi Minh and Singapore-Denpasar, and could be expanded to Guangzhou and Chennai. 

“But to achieve this requires an overhaul of regulations among participating countries,” it added. 

The governments’ roles, it said, must change with the result of a greater development of multilateral traffic agreements that allow LCAs to fly in and out of cities easily. 

And for those who dared to try, the low-cost approach has proven to be an excellent niche strategy.  

“AirAsia came into the picture at the right time and the right place,” the report said. 

But can AirAsia conquer a broader market? Banks seem to think so, S&P said. 

Islamic Development Bank, one of AirAsia’s three latest investors, bought 10% of the airline. In fact, AirAsia is in the midst of raising funds via Islamic bonds. 

On the issue of low costs, S&P’s said lower costs and higher seat-load factors allow no-frills carriers to offer fares 50% to 70% lower than those of the incumbents.  

The average price (revenues divided by the number of passengers) of AirAsia for a one-way ticket on its KL-Penang route is around RM60 to RM70 compared with over RM150 for Malaysia Airlines. 

Many travellers are attracted to the low prices but business passengers may find the lack of flexibility unappealing, it added. 

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