Air China's - Orient Aviation

NEWS BACKGROUNDERBy the end of February he had announced asweeping turnaround plan, including a majorrestructure of the international network.The airline will stop flying to six internationaldestinations over the next threemonths – Ahmedabad and Kolkata in India,Xi’an in China, Padang in Indonesia andManchester and Vienna in Europe – and trimservices on several other routes. Jala said themove would improve loads, increase yieldsand reduce losses by up to $82 million in thecurrent financial year (ending December31, 2006).One concern of MAS, the maintenance ofits connectivity from around the country to itsinternational flights, has been clearly cateredfor in the new domestic airline structure. Theairline carries about 10 million internationalpassengers a year and up to 15% are domestictravellers joining overseas flights.“We have always emphasised that bothairlines can co-exist as they each serve verydifferent market segments,” Fernandes toldOrient Aviation. “MAS’s goal is to connect‘ We will give Singapore a runfor its money’Tony FernandesChief executive, AirAsiaMalaysia with the rest of the world whileAirAsia has taken on the challenge of makingair travel a mass commodity accessible to asThe analysts’ view....many people as possible.“With shared operation of domestic trunkroutes, MAS will be assured of connectivitybetween its international and domesticnetworks while AirAsia focuses on servingpoint-to-point markets. Both airlines willcollaborate cohesively to ensure connectivitybetween our networks, particularly on routeswhich will be operated only by AirAsia.”Amidst all of this there was an undertoneof one-upmanship directed at neighbouringSingapore.As the market rationalization plansemerged, Kuala Lumpur InternationalAirport (KLIA) pulled out all stops to openits new low-cost carrier terminal beforeSingapore Changi could open the doors to itsbudget facility. KLIA succeeded, putting theterminal into operation on March 23, threedays before Singapore. AirAsia has nowmoved its operations to the new terminal.Whether the love affair between MASand AirAsia becomes a permanent feature ofAsia’s aviation scene only time will tell.JPMorgan regional transport analyst, Peter Negline, said it wastoo early to come to any conclusions about who will benefitmost from the new arrangements, particularly when there isa lack of detail available about AirAsia plans to operate thecountry’s rural services.“A large proportion of the routes will not be operated by AirAsia,but will be outsourced to a third party airline. Yet no other airlinein Malaysia, apart from Malaysia Airlines has the capacity orthe capability of operating them,” saidNegline.He said he could not understand whymany analysts have been upgrading theirprojections for AirAsia stock.“I’d say there are many more questionsthan answers at this juncture. I have seensuggestions that this is fantastic becauseAirAsia is going to get 80% of the domesticmarket. It’s a complete and utter fallacybecause in most domestic markets you get80% of the traffic on 20% of the routes andMalaysia Airlines is still going to operate 20%of the routes, the crucial trunk routes.“Everyone is assuming that AirAsia is the‘ Morequestionsthan answers’Peter Neglineone that is going to come out of this smelling sweet. But the domesticbusiness has been a poisoned chalice for a very long time and MASare about to unload that poison chalice.“The share market’s response in favour of AirAsia, given the lackof detail, has clearly been premature.”Shukor Yusof, analyst at Standard and Poors in Singapore, saidMAS appeared to have emerged with more to gain from the changesthan AirAsia because it still has access to the 19 primary trunk routes.“It is possible domestic yields will improve as supersaver fares arenot allowed. We think the government will continue to support MASin whatever fashion it could, without appearing to be bailing outthe carrier,” said Shukor. “At the same time, the government alsosees the need to incentivise AirAsia, hence subsidising the rural airservices that AirAsia will take on”.Shukor believed AirAsia will remain profitable in the near-termdue to its rigid cost structure and savvy management.“It is doubtful if MAS is able to be competitive in the face ofconsistently high jet fuel prices as well as its ability to deal with anyspread of [the likes of] avian flu.”However, Vince Ng, transport analyst inthe research department at KAF-Seagroatt& Campbell Securities in Kuala Lumpur,believes the collaboration is “definitely awin-win proposition” for both airlines.“Firstly, MAS will be able to do away witha huge chunk of their loss-making domesticroutes and AirAsia will be able to expand itsreach into the domestic market.Ng pointed out MAS would still handlethe key trunk routes, which would allowconnectivity to its international flights. Onthe other hand, AirAsia “will benefit from‘ A win-winproposition’Vince Ngsecuring more domestic routes from MAS, considering its primeobjective is to fill the capacity that is coming on stream with thepurchase of 100 Airbus A320s [60 firm orders and 40 options].”32 ORIENT AVIATION MAY 2006