AirAsia X goes the distance

obmar · AirAsia X goes the distance

30 Jul 2007: Special Report: AirAsia X goes the distance
By Doreen Leong & P Gunasegaram
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AirAsia, launched in December 2001 with two planes flying to Sabah and Sarawak, has without doubt become one of Asia's airline success stories, scoring many Asian and world firsts.
As phenomenal as its achievements have been in the low-cost, short-haul arena, it may not be so easy to repeat that kind of success in the low-cost, long-haul sector when AirAsia's sister company, FAX, starts services later this year.
Long haul refers to flights longer than four hours and in this context, initial destinations will be key cities in Australia, China, India, the Middle East and eventually Europe.
In January, Datuk Tony Fernandes, founder and major shareholder of AirAsia, announced that FAX will operate a service called AirAsia X, with the tag line, "Now everyone can fly x-tra long" ("x-tra long" being the addition to AirAsia's shorter slogan).
FAX, originally Fly Asian Xpress, was set up last year to take over rural air services previously operated by Malaysian Airline System Bhd under a hotly disputed rationalisation of the domestic sector, which saw MAS being restricted to key domestic trunk routes.
Currently, FAX is in the midst of giving the rural air services back to MAS, a sort of a mini-blow to Fernandes and FAX who believed they could make the service work. On top of allegations of missing engines and other parts, there were many delays.
But giving up the rural services puts FAX firmly on its main path and destiny — low-cost, long-haul. AirAsia itself is slated to take a stake of around 20% in FAX, with an option to purchase 10% later. Other stakeholders in FAX include Fernandes himself and associates while Sir Richard Branson, the flamboyant owner of the Virgin Group and a someone whom Fernandes admires and, some say, emulates, is expected to take a 20% stake next month. Branson runs low-cost and full-service airlines and a gamut of other businesses as well.
When Fernandes made his announcement in January, he said services to London would begin in July, but obviously that has not materialised and no new date for the London service is available.
FAX's CEO of about a month, Azran Osman-Rani, pinched from Astro All Asia Network plc, figures that Australia might be the first destination for AirAsia X.
But even before AirAsia X takes to the skies come September, the imminent entry of another long-haul budget carrier, Jetstar Airways — the low-cost subsidiary of Qantas Airways — is giving the local budget carrier a run for its money, at least as far as Australia is concerned.
Jetstar stole the thunder from AirAsia X when it started selling the KL-Sydney route online last Tuesday for as low as RM88 one way, excluding taxes and surcharges, for travel in September and February. Furthermore, Jetstar pledges to "double the difference" if its fares were under cut on any similar flight.
It will be interesting to see how AirAsia X plans to take on Jetstar, which has basically beaten it to an inaugural low-cost flight announcement to a city in Australia from Kuala Lumpur. FAX is yet to announce its choice of destination to Australia or anywhere else.
Pricing is likely to be the key determinant for customers, but one cannot discount comfort and convenience. For example, Jetstar is offering direct flights from KL to Sydney and it flies from the Kuala Lumpur International Airport (KLIA), a full-service international airport.
Assuming AirAsia X decides to tap into the Sydney travel market, it will have to pick the cheaper Newcastle airport, which is some 1½ hours by road from Sydney. The point is, will passengers be enticed to fly with AirAsia X to Newcastle to get to Sydney?
Consider this: If passengers were to take AirAsia X, there is the extra transport cost from Newcastle to Sydney and the inconvenience and discomfort of a 1½-hour road journey into Sydney.
If this is no longer feasible, then AirAsia is left with the Gold Coast airport (near Brisbane) and Avalon airport (near Melbourne) in Victoria to fly to. Essentially, this will mean AirAsia X will not compete with Jetstar for the same route, this time round. This will mean one less route for FAX.
The question is, will AirAsia X be able to fill its planes on other routes? Long-term plans are to fly to destinations in China and India in addition to Australia in Asia-Pacific and eventually to the Middle East, London and other European destinations.
There may be a slight setback in Australia, but Azran is confident the model they are planning will enable AirAsia X to take on the challenge of running low-cost, long-haul operations.
In an interview with The Edge, he stresses that the key to making the airline a success is its ability to maximise plane utilisation. "Utilisation will make or break our model," he says.
Azran explains that the main difference between full-service and budget carrier is plane utilisation. On average, he says, AirAsia X will be flying about 17 to 18 hours compared to full-service carriers, which fly about 11 to 12 hours.
"In terms of utilisation, that is about a 50% difference," says Azran.
Since AirAsia X's targeted demographics are leisure travellers, it will be able to schedule its flights such that it maximises plane utilisation. Unlike full-service carriers, AirAsia X planes could take off in 90 minutes — as soon as refuelling is done.
For typical full-service carriers, planes sit at airports for several hours to make their schedule convenient for business travellers but this is unnecessary for budget travellers.
Besides utilisation, he says, AirAsia X's 15 Airbus A330 planes will be custom-made to put in close to 400 seats, which is some 40% more than a full-service carrier's configuration of 280 seats. "There is a lot more seat kilometres per aircraft," adds Azran.
Like any airline business, especially for a low-cost operator, the ability to keep costs to the minimum will ensure the viability of the business. One major advantage AirAsia X has is Fernandes' reputation to negotiate the best deals from airports, aircraft manufacturers, fuel suppliers and bankers.
Azran says AirAsia X aims to run its operations at a cost of two US cents per available seat kilometre (ASK), the lowest cost structure in the industry. He expects to make money by consistently charging passengers three US cents per ASK.

Cash positive, break even in two years
Azran anticipates that AirAsia X will be able to break even within two years but, more importantly, it will be cash positive within its first year of operations. "On a cash basis, based on forward booking, we get cash upfront. For a start-up, it is important to have working capital cash."
However, it is also important to have a contingency plan. Azran reveals that it has a "secret weapon" — a sale and leaseback plan, should business take a nosedive, and even aircraft sales to increase cash flow and lock in profits.
It is interesting to note that many airlines are showing high profit growth from the sale of aircraft. Trends in global aviation today indicate that airlines are able to fetch high prices for their aircraft due to high demand for planes as passenger traffic grows. Likewise, aircraft leasing companies are facing good times as leasing rates become sky-high.
Azran believes that the faith shown by shareholders, comprising enterprising individuals as well as institutional funds, is a good start for the business. Other than Fernandes, another notable figure, Sir Richard Branson, is expected to take up a 20% stake via Virgin Group in FAX in the next two weeks. This has already created much excitement among investors and an international banker has tagged FAX with a valuation of US$300 million (about RM1 billion).
There are other long-haul, low-fare airlines in Asia, such as Oasis, which flies from Hong Kong to London, while Jetstar has announced a Hawaii-Australia route and already operates a subsidiary called Jetstar Asia (which merged in 2005 with Singapore rival Valuair) that flies to destinations such as Bangalore in India from Singapore.
That spells competition but the demand for travel in Asia is still expected to be robust, offering opportunities for the right kind of low-cost, long-haul airline.
Frost & Sullivan aerospace and defence consultant Mohamed Haris Izmee tells The Edge that the chances of success for a low-cost, long-haul model are good as Asia is experiencing rapid urbanisation. This means that the middle class is on the rise, along with rises in disposable income. Hence, the hunger for cheaper long-haul travel in Asia.
"The revenue growth rate of low-cost carriers (LCCs) is generally higher than legacy carriers', allowing them to expand their fleets faster than most airlines, thus providing greater opportunity to increase RPK (revenue per available seat kilometre).
"Furthermore, long-haul LCCs may opt for strategic partnerships for cargo business as they may have available cargo capacity in the aircraft belly and this is already commonly practised among legacy carriers," says Haris.
While AirAsia X claims to be the first true low-cost, long-haul operator, Frost & Sullivan believes that in principle, there is no difference between AirAsia X and other long-haul carriers as the business models are similar.
"The major difference would be in terms of brand equity, level of ser-vice and pricing strategy. Depending on how AirAsia X strategises itself, these elements would make AirAsia X stand out from its competitors," says Haris.
He believes that low-cost, long-haul carriers will create another revolution in the air transport industry by providing alternatives to travellers.
So, will AirAsia X succeed? Considering that older sister AirAsia has and phenomenally at that, and that there is a market out there which is growing, most would bet that it would. But it is not going to be as easy as it was for AirAsia because the competition this time round is already out there and flying. And AirAsia X is not — yet.

The Inquisitor

We'll see, obmar.

Jet Blue has a similar history, and it found that certain events can really dictate policy, even events beyond their control. A few months back, Jet Blue left thousands of passengers stranded in several cities here in the US, and the scandal caused the CEO of the company to resign.

Good luck with Air Asia. It looks like a very promising airline.

obmar

the owner was formerly from the music industry.

It is notebly one of the success stories here.
its wing soan to cover thailand, indonesia, parts of china, vietnam, laos, cambodia brunei and philipines.

Now this.

www.airasia.com

The Inquisitor

Wow,

That's sounds very similar to Virgin Atlantic's story. I think they first had Virgin Records and then launched the airline. I wish the airline all the success.

obmar

a successful venture indeed/

at least for now

obmar · good for them

AirAsia X gets big boost with Branson’s 20pc stake
By Kang Siew Li
siewli@nst.com.my

August 11 2007

FLAMBOYANT British billionaire and owner of the renowned Virgin brand Sir Richard Branson is to be a shareholder in AirAsia X, signalling confidence in Malaysia’s first long-haul budget airline’s prospects.

The Virgin Group chairman and founder yesterday said he has bought a 20 per cent stake in Fly Asian Xpress Sdn Bhd (FAX), the operator of AirAsia X, for an undisclosed amount.

“Virgin will spend whatever is necessary to make AirAsia X a success,” he told a news conference in Putrajaya when announcing the purchase at a ceremony witnessed by Second Finance Minister Tan Sri Nor Mohamed Yakcop.

Following Branson’s stake acquisition, the remaining 80 per cent of FAX will be held by Aero Ventures Sdn Bhd.

Aero Ventures is owned jointly by FAX founder and director Datuk Tony Fernandes and his partner Datuk Kamarudin Meranun, FAX chairman Datuk Seri Kalimullah Hassan and businessman Lim Kian Onn.

Fernandes, the founder and group chief executive officer of Asia’s first low-cost carrier AirAsia and who used to work for Branson at Virgin, declined to indicate the value of the stake sale.

But he did say that Branson was offered shares in FAX “at par”. FAX’s market capitalisation now stands at US$40 million (RM139 million).

Money raised from the stake sale would be used as working capital and to fund new aircraft purchases, he said.

Kalimullah said: “Virgin’s investment in AirAsia X is a sign of confidence in a Malaysian-initiated venture and in the investment climate in the country.” Virgin’s shareholding will provide AirAsia X with greater global credibility and visibility across its markets and assist in negotiations with various airports, regulatory authorities and governments, he added.

“In addition, it will provide AirAsia X’s management team access to a wealth of resources to draw upon.”

After two postponements due to issues surrounding landing rights and the leasing of planes, AirAsia X will take to the skies at the end of September or early October to the Gold Coast in Australia with subsequent destinations being Hangzhou in China, India and Northeast Asia.

Fernandes said AirAsia X would initially operate with one Airbus A330, but has ordered 15 A330s with an option for 10 more.

In the meantime, AirAsia Bhd’s 60-odd A320s will support the long-haul carrier’s services.

AirAsia X will fly the Kuala Lumpur-Gold Coast route four times weekly and will operate from the low-cost carrier terminal in Sepang.

Fernandes said fares would range from as low as RM90 to an average of RM1,900 return including taxes.

“Although not alone in the long-haul budget airline industry with Oasis Hong Kong and Australia’s Jetstar Airways already flying long-haul, we believe AirAsia X has a fighting chance of turning prof itable,” OSK Research Sdn Bhd senior manager Chris Eng said in a note to clients yesterday.

“Our own view is that if any airline can succeed in bringing down its costs low enough to make it work, it will be AirAsia X,” said Eng, maintaining his “buy ” rating, but taking down his price target slightly from RM2.40 to RM2.20.

obmar

AirAsia X goes the distance

good for them