By B.K. SIDHU
Open-skies are bringing air fares down rapidly in Asean which is good news for consumers but worrisome for airlines as margins are squeezed in the battle for market share.
AFTER years of travelling back to Kuala Lumpur from Singapore by coach and car, Rita Kaur decided to take her family to the skies. She checked out the cheap fares to Kuala Lumpur in the Singapore newspapers and found what she wanted. Last Monday, she flew into KL with her husband, two daughters and their domestic helper at just S$150 (RM360).
“I think it is a pretty good price to pay for five people. My daughters enjoyed the trip. In fact, they were thrilled to be flying back to Kuala Lumpur rather than sitting for hours in a car or bus. We flew AirAsia,’’ she says.
Rita is a Malaysian and her husband a Singaporean. She comes back to visit her parents at least eight times a year. She is used to travelling by coach and pays S$30 (RM72) to S$50 (RM120) for a one-way trip per person.
"It was a promotional fare and a good offer because we pay about the same amount by coach. Time makes all the difference as we are in KL in 45 minutes," she says.
She is not alone. Anna Lai was one of the passengers on the AirAsia flight AK 131 from Singapore to KL on Dec 2. She paid RM90 for a one-way trip with her son.
They are examples of how air travel is being revolutionised by a convergence of factors that are increasing competition within Asean. First, there was the advent of low-cost airlines. That was followed by the opening up of the skies and increased capacity coupled with potentially declining demand for air travel.
All of that, and the looming impact of lower oil prices, will have the effect of bringing prices down and making competition intense, a great advantage for consumers but a worrisome development for airlines in the region.
The latest round of competition comes from the recent opening up of the much-protected KL-Singapore route on Dec 1. And it will heat up even more as the date draws closer for the Asean capital cities’ air liberalisation by the target date of Dec 31. The focus will be on the KL-Singapore route first as problems are ironed out for the liberalisation of air-travel between Asean capital cities.
In both instances, low-cost carriers or LCCs are expected to be the big beneficiaries because the full-service airlines have had more access to these routes before. New entrants are going to slash prices to win customers.
Among the most successful of the LCCs is Malaysia’s own AirAsia Bhd, which has been on an aircraft buying binge. It is buying 175 planes up to 2013 of which it has taken delivery of 50. A crucial part of its success in the future would be its ability to fill up these planes as they are delivered. While the number of passengers it carried has increased, the load factor – a measure of capacity usage – has been decreasing.
AirAsia group chief executive officer Datuk Seri Tony Fernandes is optimistic. “It is the pent-up demand that we are serving. The KL-Singapore route has been worst in terms of undeveloped routes for years. There is a lot of affinity between Malaysia and Singapore and this is a new beginning. We have not seen the peak (in load factors) yet.’’
From the 20 daily flights shared between Malaysia Airlines (MAS) and Singapore Airlines (SIA) in the previous duopoly, this route is now served by nearly 30 flights daily. Consumers have more choices and fares have dropped from the steep RM840 for a round-trip to as low as under RM100 for one-way trips. Fares will come under greater pressure as the carriers battle for market share.
Singapore-based Tiger Airways chief executive Tony Davis said in an interview in Singapore recently that flights are a good alternative to coaches and trains as fares come down.
“We see the KL-Singapore route in the same vein as the Los Angeles-San Francisco or the Sydney-Melbourne routes,”he said.
The hot route
MAS flies seven to eight times daily on this route, while SIA and its sister company, SilkAir, will do eight flights jointly. AirAsia has planned for seven flights and Tiger up to five and Jetstar three for now. SilkAir is the new bird plying this route since Dec 1.
Asean capital cities may open their skies to more carriers by Jan 1 and see capacity increase but the KL-Singapore air sector will remain a hot route.
“The excitement is really on the KL-Singapore route for the time being and that is what the low-cost carriers are focusing on,’’ Standard & Poor’s Equity Research analyst Shukor Yusof says from Singapore.
For that reason, even the smallish carrier FireFly wants to be part of the action. Its managing director Eddy Leong is counting the days when the government will give him the freedom to fly the Subang-Singapore route. He says the route will fit nicely into the carrier’s network plan and provide the connectivity its passengers need.
Both Fernandes and Davis say their airlines enjoyed load factors of over 60% in the first week of the opening of the KL-Singapore sector for the prized route and their “forward booking numbers look good.’’
Their target are the holiday-makers. The political upheaval in Bangkok has forced many holiday-makers to change their destinations and both Malaysia and Singapore are benefiting from that.
Even many Singaporeans have re-routed their plans to fly into Malaysia instead of Thailand, says Shukor.
He believes that despite the many carriers, the major winners on the KL-Singapore route will be MAS and AirAsia.
The opening up of the KL-Singapore sector is part of a bigger plan to liberalise Asean skies for a unified air services market by 2015.
The Asean Roadmap for Integration of Air Travel Sector stipulates timelines when markets will open to competition. The capital cities’ liberalisation is the first step in that direction which comes into effect by Dec 31.
Malaysia and Singapore are in the forefront of the liberalisation and have fast-tracked the opening of the KL-Singapore route to Dec 1 from Dec 31.
For decades, MAS and SIA enjoyed a duopoly on the KL-Singapore route. This was one of the most expensive routes in the world for a 45-minute flight. Return fares were as high as RM840 and the airlines raked earnings of RM400mil each year. In February, the route was partially opened to competition to allow three low-cost carriers to ply it.
“The opening of the KL-Singapore sector is a major milestone in the roadmap. I believe this route will be the trend-setter and it would be the most lucrative route among the capital cities,’’ Shukor says.
The Asean playground
The next date to watch out for is Jan 1 when routes connecting Asean capital cities are fully opened for competition. All the major full-service carriers are already plying these routes while the LCCs have limited capacities on most of these.
One thing that is pending is the green light to begin plying the route. Unlike the other capital cities, KL and Singapore told their carriers well in advance that the route was to open on Dec 1. The carriers took advantage of that to plan their marketing blitz.
“There is not going to be any Big Bang come Jan 1,’’ Shukor says. And Davis agrees.
What is holding back this grand opening?
The multilateral agreement on air services signed by nine of 10 Asean Transport Ministers in Manila on Nov 6 is yet to be ratified. Thailand did not sign the agreement because it needed to take it to parliament first. Given the current political upheaval, it is unclear at what stage this process is in. The Asean Secretariat did not respond to queries.
The nine countries that signed the accord are Malaysia, Singapore, Indonesia, Brunei, the Philippines, Myanmar, Vietnam, Laos and Cambodia.
The Association of Asia Pacific Airlines director-general Andrew Herdman says the process may take some time.
“Assuming the agreements are not ratified by Dec 31, the bilateral agreements between countries remain,’’ Herdman says. “This means airlines cannot mount flights freely.”
“We support the liberalisation. It is a right approach to have a roadmap as it gives confidence to the marketplace. But we hope the timeline can be met.”
Davis of Tiger says: “Up to now, we have not received word from the authorities to add more frequencies to the capital cities. We would like to do that.”
Jetstar chief executive officer Chong Phit Lian says that until she gets the take-off signal she is not planning to add new capacity to what is already in the system.
“It really depends on the landing slots we can get. We would not mount flights (immediately) and whatever we do will depend on the country and the opportunities there,’’ Chong adds.
It may be a technical glitch but Malaysia’s Transport Minister Datuk Seri Ong Tee Keat is of the view that the timeline “is still intact’’.
“It is subject to the member countries ratifying the agreements before Jan 1, 2009. The ratification is based on the ‘Asean minus X’ principle where a minimum of three Asean member countries are needed for the arrangements to be effective among the ratified Asean countries.’’ Ong said in an e-mail response.
To Ong, the signing itself “marked the opening of the Asean capital cities by 2009.’’
Whether it is Jan 1 or a little later, Asean skies will get busier and Shukor believes that airlines will add capacity if they can make money. They will even slash rates and competition will intensify over time.
Historically, this air sector has been highly regulated where issues of national ownership and protectionist policies persisted. Getting landing rights had been a big hurdle for many carriers with huge ambitions.
The liberalisation provides opportunities to expand markets and, at the same time, it is a threat to carriers’ existing markets. There will be winners and losers. But with the competition, airlines that are efficient, flexible and responsive to customer needs are best placed to benefit regardless of their size.