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Asian carriers eye hubbing opportunities

Saturday December 25, 2010

Most airports nowadays are busy, but some are just busier. The simple and obvious explanation for this is that there are more travellers going through certain airports. Digging deeper though, some airports are busier because they are hubs of particular airlines.

Some airlines choose to only have one airport as their hub while others have three or four. For this reason, airports such as the KL International Airport (KLIA) and Low Cost-Carrier Terminal (LCCT) in Sepang, which are the respective hubs of Malaysia Airlines (MAS) and AirAsia Bhd, tend to be busy airports.

A hub is essentially an airport in which an airline has a major presence and many flights to other destinations.

Many carriers use the hub-and-spoke system to maximise profits by keeping the aircraft in the air as much as possible.

A hub is a main airport where flights are routed through, and spokes are the routes taken by planes to fly out of the hub airport. Most major airlines have multiple hubs. Airlines claim that hubs allow them to offer more flights for passengers.

While MAS and AirAsia “hub” at KLIA and LCCT respectively, both carriers also have hubs further out like in Kota Kinabalu and Penang.

The hub-and-spoke system for MAS (with KLIA as its hub) works like this. Let's assume a passenger in Kuala Terengganu (KT) wants to fly with MAS to London. The fact remains that there is small number of passengers from KT flying to London. Due to this limited demand, the airline will fly the passenger from KT (its domestic spoke) to KLIA, and then from KLIA to London, through a connecting flight.

Industry experts explain that in a hub-and-spoke model, airlines usually use smaller planes to bring their passengers to the hub, typically, making several such flights into the hub every day. This of course, is to keep down its cost considering that only a small number of passengers are coming in from these out-of-town places. Singapore's Changi Airport is another good example of how the hub and spoke concept works. It is the hub for the country's flag carrier Singapore Airlines. Indeed, that air hub makes Changi the world's sixth busiest international airport.

Likewise, Thai Airways has a hub in Bangkok Suvarnabhumi Airport. The Thai national carrier also has “focus cities” in Phuket International Airport and Chiang Mai International Airport.

In the airline industry, a focus city is a location that is not a hub, but from which the airline has non-stop flights to several destinations other than to its hubs.

Hubs mean higher cost

Hubs, however, could strain resources and increase the airlines' operating costs. Analysts say airlines have to pay fees for airport services and facilities like passenger service charges and aerobridges. The fees are usually higher in line with the aircraft traffic at the airport. But this is offset by increased revenue as more passengers fly into the hub.

“Airlines figured correctly, that if they do it right then the increase in cost will be offset by a greater increase in revenue by serving more destinations and they would be ahead and have a greater market share, thereby weakening the competition,” he says.

Industry experts say when choosing their hubs, airlines generally look for airports that have high traffic and great connectivity. “Singapore and Hong Kong have great connectivity to Europe and the United States. Moreover, both airports have managed to attract a lot of traffic, making it one of the global hubs in Asia,” an analyst says.

Airlines' choice of hubs also tend to be mutually exclusive, especially in situations where alliances have been formed. “The typical strategy is for two (or more) airlines with a formal alliance, to use different airports as their hubs so that they enjoy the benefits of passengers coming through from each others airline,” explains an analyst.

Airlines must also schedule flights very carefully to ensure that all of the “spokes” are getting the flights they need.

MAS' move to hub

MAS had over the years restructured its network and opted to shift from a point-to-point network towards a hub-and-spoke (connecting) network, thereby allowing it to intensify flight frequencies on chosen trunk routes.

Unlike its previous and costlier point-to-point network, the hub-and-spoke model with assistance from its code-share partners, enables it to expand its reach further, quicker and cheaper.

MAS senior general manager (network and revenue management) Dr Amin Khan says that its strategy is to work with its partners for its hub-and-spoke strategy.

He says MAS has over the years built a strong hub-and-spoke network with its partners allowing its customers to connect to more than 2,000 destinations around the world.

Last month, MAS launched its first domestic hub at the Kota Kinabalu International Airport.

MAS chairman Tan Sri Dr Munir Majid says in a statement that the carrier aims to rake in RM60mil to RM80mil revenue a year from its new Kota Kinabalu hub.

He says MAS is leveraging on Kota Kinabalu's strategic location as an ideal gateway for tourists from Australia, China, Hong Kong, Taiwan, Japan and South Korea.

MAS managing director/chief executive officer, Tengku Datuk Azmil Zahruddin, says the new hub at Kota Kinabalu will be developed over three stages from, where new destinations and frequencies will be added to complement the currently served foreign cities from Kota Kinabalu.

“This is the right time to develop the (eastern) hub with the upturn of this industry in Asia. It provides us opportunity for growth in yield, load factor and destinations. As a result, we expect a potential improvement of between RM60mil and RM100mil per year to our bottom line,” he said.

Meanwhile, Firefly Sdn Bhd (a unit of MAS) managing director Datuk Eddy Leong said it wants to set up at least four new hubs for its jet operation within the next two years.

(Firefly recently announced the introduction of jet aircraft into its service. It had only been flying only turbo propeller aircraft for the last three years since its inception.)

Calling itself the community airline, Firefly currently has hubs in Subang SkyPark Terminal and Penang. The four new hubs the airline is looking to establish would be in Kota Kinabalu, Kuching, Senai and Penang.

AirAsia's own version

On the other hand, AirAsia flies on a point-to-point basis to key cities in the region to keep routes and turnaround time short.

However, AirAsia group CEO Datuk Seri Tony Fernandes was previously quoted as saying the airline did deploy a hub-and-spoke strategy but on its own terms. He said AirAsia, in effect, flies passengers into Kuala Lumpur and these passengers then have the option of flying on AirAsia flights to the airline's 140 other destinations.

But the difference between this concept and the traditional hub and spoke is that AirAsia passengers technically aren't getting a “connecting flight” like they do when they buy a ticket to fly from say, KT to London via KLIA on MAS. In AirAsia's case, the passenger is buying two separate tickets and having to make his or her own arrangements to make the second-leg journey.

Even so, AirAsia is rapidly expanding their hubs'. It had recently set up a 40:60 joint venture with Philippines-based partners, to set up AirAsia Philippines. With this hub, AirAsia is set to fly to more destinations in the Philippines.

AirAsia is currently evaluating its choices of airport between Subic International Airport and Clark International Airport as its hub in the archipelago.

The low-cost carrier, which currently has hubs in Bangkok and Phuket in Thailand, will open a new hub in Chiang Mai on Jan 24 and launch daily flights from there to Haadyai and Singapore. It also have hubs in Bandung, Bali, Jakarta and Singapore.

Analysts say hubs are geographically dispersed to enable airlines to capture different markets. Hubs add value to an airline to help it gain access to other markets.

“The hub-and-spoke model is a system that makes transportation much more efficient by simplifying a network of routes,” an analyst says, adding that the model is extensively used in commercial aviation.

Another analyst says it is an uphill task for an airline to fill up a plane on a point-to point model hence some airlines signed code-sharing pacts with each other to save on resources. A number of spokes provided by partner airlines would help increase load factor.

The future

Analysts say a combination of both hub and spoke and point-to-point transportation will be the future landcsape of air travelling.

Many airlines supplement their hub-and-spoke model with codeshares, partner flights, or a small commuter airline.

While many sing praises of the hub-and-spoke model, there are of course, disadvantages as well.

“Any disruption at the hub, such as bad weather, can create delays across the whole system. The overall operating efficiency is also limited by the capacity of the hub,” an analyst say.

A very good example was the Volcanic ash from Iceland early this year which saw some 1,000 flights cancelled and affecting hundreds of thousands of passengers all over the world.

A more recent example is the heavy snow fall in Europe that caused major airports in London, Paris, Frankfurt and Amsterdam to cancel or delay flights.

Meanwhile, Malaysia Airports Holdings Bhd has been working very hard to attract airlines to Malaysia.

Since the beginning of this year, the airport operator has been offering perks in the form of cash to airlines under its new incentive package, Airline Recovery Programme.

Under the programme, new airlines flying into KLIA, LCCT and Subang airport will receive an incentive payment of RM10 per inbound passenger for the first 12 months of operations.

A higher incentive payment of RM25 per inbound passenger will be given to all new airlines flying international services to all the other airports in Malaysia

New airlines flying into Malaysia will also enjoy a waiver in landing fees for three years for each new service operated. New airlines also get to enjoy free office rental for six months.

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

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