Saturday December 25, 2010
By B.K. SIDHU
THE bout of wintry weather has thousands of travellers stranded in Europe. Hundreds of flights have been cancelled and this is the second time this year travellers to Europe had to spend countless hours in terminal buildings instead of holidaying.
The blizzards are not likely to stop and it may well continue into January. In April, the enormous ash cloud from an Icelandic volcano caused the biggest flight disruption since 9/11 as it drifted over northern Europe. Travellers were stranded on six continents.
While Europe struggles, emerging markets such as Asia, the Middle East and Latin America prosper. Last year Asia charted a major milestone in air travel when it became the most profitable region in the airline world. That was because of the strong economic growth. Asia will again lead the way next year as its economies are booming and rising wealth is pushing air travel up.
Clearly, China will lead growth in Asia and its domestic market is booming, says Malaysia Airlines managing director Tengku Datuk Seri Azmil Zahruddin.
“Asia is where the action is and we are fortunate to be in Asia. The recovery from the downturn has been strongest in Asia but it is not immune to challenges,'' he adds.
Asia is essentially home to the world's three most populous nations India, China and Indonesia where four billion people live and this represents 62% of the world's population. The Asia-Pacific region generates about 27% of the world's GDP and rising wealth continues to drive air travel.
There are 600 million passengers in Asia Pacific, of which about 400 million travel within the region and about 200 million take to the international skies, annually. Just for November, the Association of Asia Pacific Airlines says Asia-Pacific carriers flew 15.5 million international passengers, reflecting a 10.7% rise from a year ago.
The number of passengers travelling in premium seats first and business class was 10.9% higher in October than a year earlier, the International Air Transport Association (IATA) said.
“The percentage of people flying in Asia is higher compared to the United States and Europe. Asia is made for aviation as road infrastructure is poor and land area is huge. The growth of aviation will be vibrant in Asia in 2011,'' says AirAsia group CEO Datuk Seri Tony Fernandes.
Air travel moves in a 5-6 year cycle and it is currently in its fourth cycle. The first cycle began in 1979 and the fourth in 2008. During each cycle there is the boom and bust period.
“History suggests that the strongest growth period occurs in the 4th to 5th year after a crisis and 2011 will be the 4th year of the current wave,'' Maybank Investment says in a report. It says load factor in the region is in the 70% range.
The cycle began during the downturn and the recovery has been strong with most airlines in Asia having reinstated the capacity they took off in 2008 and 2009.
However, IATA says that after the 2010 bounce-back, flattening yields, slowing revenue growth and rising oil prices could cap profit growth for all airlines. IATA expects the global air industry to post net profits of US$9.1bil for 2011, which is lower than its US$15.1bil projections for 2010. Of the US$15.1bil, IATA says Asia-Pacific carriers will be the star performers, contributing US$7.7bil to global profit.
“The industry has recovered after a tough year in 2009. I am optimistic about 2011 but it will not be without challenges. Both MAS and Firefly are well-positioned to take advantage of the growth domestically and regionally,'' says Azmil.
The low-cost factor
A major change in travel was brought about by the low cost carriers (LCCs). Had they not mushroomed, travellers in Asia would still be paying premium prices and even with higher disposal incomes, only a portion of the market would have taken to the skies. Booming economies helped but the arrival of LCCs accentuated the growth in air travel in Asia.
Now the LCCs are winning market share. They also did that during the downturn when the full service carriers (FSCs) had to shrink their networks.
Expect more LCCs to emerge as Asian economies grow as FSCs see the need to also have a finger in the LCC segment. Qantas has a unit in JetStar, Singapore Airlines has Tiger Airways, there are more than half a dozen in India and China each. Thai International Airways will launch Thai Tiger next year and Garuda is toying with the idea even though the number of LCCs in Indonesia is huge.
“Indonesia now is the world's 12th biggest domestic market and the market is set to grow 60% by 2015,” says Centre for Asia Pacific Aviation (CAPA).
Tiger also recently teamed up with SEAir in the Philippines and AirAsia is setting up a hub there.
“Singapore is next. The people want us to have a hub there and we will do it,'' Fernandes says.
MAS is unleashing Firefly into the LCC market. Firefly will use jets for the LCC operations from KL International Airport (KLIA). It should enter the Asean region no later than 2012.
Firefly managing director Datuk Eddy Leong says legacy carriers are forced to respond to the growth using different vehicles and the creation of Firefly low cost is a clear example of that.
“We are entering the low cost market at the right time and our entry will change the landscape. Competition will certainly increase. To us the market is healthy and travellers know the product they want,'' Leong says. He adds that the turboprop operations will remain intact.
Fernandes thinks MAS is making a big mistake by fielding Firefly in the LCC market.
“It will be a disaster. I will be very concerned and believe MAS is losing focus yet again. Since I have been in the aviation sector they have had three equity injections and the shareholders should take a hard look at the business model again,'' Fernandes says.
But Azmil is unperturbed and so sure Firefly will succeed.
To Azmil, it is about “having a portfolio of products (full service, value and low cost) for the traveller, depending on their needs. If people want a full service product they fly MAS, and for those where price is a factor, they now have a choice with Firefly.''
Branching to the LCC segment for full services carriers is an extension of their business. They need a presence in that robust market. But all airlines, be it LCCs or FSCs, will expand their networks next year by adding new routes and frequencies in Asia to tap growth that is expected to be exceptionally good.
Maybank Investment expects a total of 1,370 airplanes to be delivered and Asia will lead in the deliveries. That adds 6%-8% new capacity to the global system. Malaysia will take delivery of 19 new aircraft, which adds nearly 3,000 new seats representing 8%-10% new capacity in the local market.
“We see different types of growth (patterns). We are well-positioned to take advantage of the growth in Asia. Our key focus is in Asia but that does not mean we will not go out of Asia,'' Azmil says.
He has lined up many routes to places like China, India, Australia and South-East Asia. MAS recently added Kota Kinabalu as its domestic hub and the airline will fly to Seoul, Osaka and Perth from there.
Fernandes has many routes mapped for next year. India and China are AirAsia's big growth areas. Other players are also into China, which is experiencing a domestic air travel boom.
“We are all over and we see tremendous growth in our Indonesian and Thai operations. The Philippines will come onstream soon and we will expand to a lot of markets. AirAsia X is also growing from strength to strength,” Fernandes says.
AirAsia X focuses on the six core markets of India, South Korea, China, Australia, Japan and the Middle East. It hopes to fly to Sydney and Jeddah next year. It has firm plans to fly to Paris and Christchurch in February and April 2011 respectively.
“We want to know where travellers want to go and (that is where we want to fly to),'' Azran says.
The next gateway
If Asian air travel were to boom, it is also the perfect window for airports to flourish. Ready to ride that wave is KLIA.
For years, Tan Sri Bashir Ahmad and his team at Malaysia Airports Holdings Bhd have been cajoling airlines to fly into KLIA. Today over 55 airlines have made KLIA their home.
A few more will come next year and the possible entrants are Air New Zealand, India's Kingfisher, Turkish Airlines and Qantas/Jetstar.
If either Qantas or British Airways makes it back to KLIA, it would be a big boost for the airport. It would be a “major handicap for international airlines not to fly from KLIA as that is going to be a major gateway in Asia if not Asean,'' says Maybank Investment,
Today KLIA has the volume of traffic to attract airlines. With the robust growth in the region, both Changi and Bangkok's Suvarnabhumi may not be able to cater for the growth and the outlook of both KLIA and Jakarta's Soekarno-Hatta looks very promising.
Today KLIA is the 32nd largest airport in the world. It is third fastest growing with a growth rate of 17.3% for the first nine months of 2010 and is in the 30 million passengers per year category. Shanghai Pudong leads with a growth rate of 29.4%, to be followed by Jakarta with 20.7%.
Globally, Atlanta airport in the United States leads as it handles 87 million passengers a year, followed by London's Heathrow with 66 million and Beijing 65 million. Singapore's Changi handles 37 million passengers a year, Suvarnabhumi 40 million and Jakarta 36 million.
Both LCCs and FSCs gain from Asia's growth, says Fernandes.
“An airline has got to be either one (full service) or the other (LCC), you cannot be both. Many airlines are trying to be both. Those who remain focused will benefit more, such as AirAsia, Cathay Pacific and Singapore Airlines,'' he adds.
Maybank reckons AirAsia will be a big winner and so does CAPA.
“AirAsia has the world's lowest cost (11.42 sen) producer in available airlines seat kilometre and it is perennially a mouth-watering airline to watch for airports, suppliers and competitor airlines in 2011,'' CAPA says.
Maybank Investment adds that by virtue of being the biggest in fleet size, widest in network coverage and lowest in unit cost, AirAsia is the primary beneficiary of the air travel up-cycle along with its long-haul unit AirAsia X.
But players like Tiger Airways and Jetstar are also rushing to strengthen their foothold in Asia and so are the FSCs. In Asia, the carriers in China will thrive with the boom in domestic tourism.
Maybank Investment believes MAS has repaired its business as evident by the decreases in its unit cost and its 3Q10 profits was the inflection point.
“MAS should generate strong profits going forward,'' the Maybank Investment reports says.
All airlines will make money so long as they do not over expand, are nimble, oil prices do not go out of whack and most importantly there is no major catastrophe in the air sector.
For financial year 2011, the research house has forecast MAS to earn RM660mil in net profit, but a year later the house reckons MAS will be a different airline with net profits soaring to RM1.6bil.
AirAsia will bring in RM540mil this year, RM665mil next year and RM828mil in 2012, says the report. AirAsia shares have gained much ground of late and yesterday closed 4 sen higher to RM2.57 while MAS shed 7 sen to RM2.07.
Azran is right to say that competition exits but it will not get intense so long there is no breakthrough unless three airlines or more operate one route. He believes that Asia is a big consumer market and for a leap there needs to be a breakthorugh.
If there is a monopoly, one airline can charge whatever it wants. When a second player enters, the incumbent tries to emulate so as not to rock the boat. They can share the pie together. It takes a third player to set new rules for the game and only then can there be intense competition. It is then when innovation becomes key to the differentiation of services.
For now, real competition is seen on the KL-Melbourne route where three players AirAsia X, Emirates and MAS operate. The KL-Singapore route has become very competitive with four players.
With more disposable incomes, the travellers will move from short haul to medium and long haul, and from low cost to full services, thereby adding more stress to airlines to take passengers more seriously. That is the challenge for all airlines going forward as they try to tap this big growth they all want to be part of.
The pie in Asia is big enough for several more LCCs and FSCs to enter. But one big factor that stops that is the regulatory framework which leans towards protectionism.
The barriers are there and if Asia wants to be the next Europe, then it has to change the rules of the game and it begins with real liberalisation of markets. Or else growth will be there but competition is not going to be intense to drive up quality and innovation.
This article is a verbatim copy of the original article from The Star.