3 November, 2007

THE local aviation sector has provided riveting theatre in the last few weeks. In mid-October, national carrier MAS’ wholly owned low-cost unit Firefly secured a coup, and ruffled feathers (AirAsia’s to be exact) in the process, when it got the government’s nod to operate flights out of the old Subang airport.

In a case of tit for tat, the move prompted AirAsia to re-open its Subang LCCT case files. For its effort, it was given the nod a week later to operate two flights daily to Singapore during off peak hours.

MAS cried foul over the move arguing that the opening up of the KL-Singapore route ahead of the January 2009 deadline would jeopardise its business turnaround plan. It lost no time to lobby for Firefly to operate flights to Singapore out of Subang.

The jury is still out on whether the national carrier will win this round of lobbying but one thing is for sure – the sector has undergone changes so massive over the past couple of weeks that they are bound to shape the future of the industry.

The route, which until recently was dominated by national carrier Malaysia Airlines and Singapore Airlines, will now see the entry of two additional airlines – one each from Singapore and Malaysia – that have been granted the rights to fly the lucrative KL-Singapore route. On Singapore’s side the beneficiary is SIA’s low-cost unit Tiger Airways, while on this end, the winner is, obviously AirAsia.

The news couldn’t have been better timed as it has coincided quite nicely with long haul low-cost carrier AirAsia X’s inaugural flight last Friday. For long, AirAsia Bhd’s chief executive officer Datuk Tony Fernandes has lobbied hard for the opening up of this route. The need became more pressing recently when Fernandes, together, with a group of investors, formed AirAsia X to make long-haul low-cost flights out of Malaysia a reality.

Fernandes hopes the latest development will bring an end to the notion that certain routes should remain closed and instead bring about more liberalisation in the sector.

“This psyche that Singapore is better than Malaysia and so we must protect these routes must end. We are hoping that the Ministers not only discussed the opening up of the KL-Singapore route but other routes like Kota Kinabalu-Singapore and Kuching-Singapore,” he said, referring to the meeting between the two Transport Ministers at the Asean Transport Ministers Meeting in Singapore late last week.

Indeed, a local brokerage notes that the real killer routes for AirAsia when it comes to Singapore will be the ones between the city-state and Penang, Kota Kinabalu and Kuching.

Still, it is easy to appreciate why opening up the KL-Singapore route ahead of the planned January 2008 deadline is integral to AirAsia X’s success. Fernandes has conceded that to have to wait out the original deadline would mean setting back sister airline AirAsia X’s operations by a year.

The opening up of the KL-Singapore route on the other hand will give AirAsia X access to a whole new market of cost-conscious travellers from across the region as more people are expected to make use of the cheap flights between Changi and Kuala Lumpur to connect to international destinations serviced by long haul low-cost airline AirAsia X.

This will have the effect of accelerating the growth of Kuala Lumpur as the region’s low-cost hub.

However, some industry participants caution that the move could have the opposite effect, that of driving passengers out of Malaysia to Singapore’s Changi airport.

“There are 4,000 flights out of Changi every week as opposed to 2,000 flights out of KLIA. Given that Changi has better connectivity, travellers may opt to take the cheap flight from KL to Singapore and then take flights out of Changi instead. In Singapore’s case, its Budget Terminal is not located 20km from the main airport. The Budget Terminal is at Changi, so it is less of a hassle,” he says.

Sure boost for AirAsia

Either way, the opening up of the route is expected to have a profound impact on AirAsia’s bottomline although the low-cost carrier will only be allowed to operate two flights a day during the off-peak hours of 11am to 7pm in the first year.

The KL-Singapore route is deemed to be one of the most lucrative ones in the region owing mostly to the very high frequency of business travellers. MAS and Singapore Airlines have ruled this particular sector for more than three decades, charging travellers a return fare of RM830 nett.

AirAsia’s KL-Johor Baru return trip on the other hand cost less than RM200.

ECM Libra Avenue Securities reckons the KL-Singapore route could potentially contribute about RM34mil per annum to AirAsia’s operating profit.

This is based on the assumption that AirAsia will charge a one-way airfare of RM250, inclusive of surcharges. This airfare assumption represents a 38% discount to MAS airfare of RM400 per way. It also assumes a load factor of 80%, although its checks show that the load factor for this route ranges from 70%-90%. The third assumption is that fuel is priced at US$85 per barrel.

At this juncture, it seems unlikely that AirAsia will be able to capture a significant portion of the sector’s business traveller segment.

As pointed out by CIMB Research, business travellers who dominate demand for KL-Singapore flights are unlikely to switch to AirAsia, especially since the off-peak timing is inconvenient for day trips.

“We believe the LCCs will tap new leisure-based demand, rather than cannibalise MAS’ or SIA’s business traffic,” the house says.

Things could get more eventful in the industry if Firefly too is allowed to fly to Singapore out of Subang.

It’s worth pointing out here that Firefly was given the greenlight to operate flights out of the old Subang airport on Oct 18. In fact, last week was equally momentous for the community airline as it greeted its inaugural flight to Subang on Oct 29. (Firefly operates on turboprop planes. Only these planes are allowed to land at Subang airport.)

Operating flights to Singapore out of Subang is obviously advantageous to any airline as the airport is a lot closer to the centre of activity in the Klang Valley, where demand for this route is heaviest.

Apart from cutting down on their travelling time to the airport, travellers also save costs.

The government has said that it will consider opening up the route further to allow Firefly to fly the route. Transport Minister Datuk Seri Chan Kong Choy has said that he will raise the matter with his Singaporean counterpart in a bilateral meeting that may be held this month.

Some analysts doubt that MAS’ request will be granted, as the agreement between the two governments is to allow two LCCs, one each from Malaysia and Singapore, to ply the route now. Firefly would upset that balance.

AirAsia too is unlikely to accept a decision like that without putting up a fight. Fernandes gave some indication of this when he said, “We won’t stand by and let Firefly be granted rights to fly to Singapore at AirAsia’s expense.”

One thing is for sure, consumers certainly won’t be complaining about the various travel alternatives ahead of them.

This article is a verbatim copy of the original article from The Star.