Airlines get aggressive

THE year ahead will see local airlines expanding aggressively, be it through adding new routes or increasing flight frequencies, as airline chiefs are optimistic about the growth of their respective carriers against a backdrop of improving passenger demand.

AirAsia X chief executive officer Azran Osman-Rani says revenues, yield and passenger traffic will bounce back. “Whether or not margins grow proportionately depends on jet fuel prices, which have started to increase quite a bit in the last quarter of 2010,” says Azran.

FlyFirefly Sdn Bhd managing director Datuk Eddy Leong says the company is upbeat about the year due to strong economic forecasts for the domestic and regional markets it serves.

“The general consensus is that Asia-Pacific will lead growth, with the United States and Europe lagging behind due to unsettling economic issues. Extrapolating from current trends, we see comparatively stronger load factors this year with clear opportunities to raise yield through aggressive revenue management,” he says.

In November last year, Firefly announced plans to move into jet aircraft operations and ply routes from the KL International Airport (KLIA) to east Malaysia starting this year.

It will operate six B737-800 aircraft from KLIA, on top of its turboprop aircraft operations for domestic and regional routes out of Subang airport.

Leong says Firefly's expansion will complement Malaysia Airlines' (MAS) strategy to grow the group's business in a targeted manner.

On whether he expects a price war between both budget carriers, Leong says he does not expect competition to be any less than that experienced in 2010 as the aviation sector continues to be liberalised.

He says the biggest challenge for Firefly, like other airlines, will continue to be the volatility experienced in the airline industry and the fluctuation of fuel prices as seen over the last decade.

National carrier MAS managing director and chief executive officer Tengku Datuk Seri Azmil Zahruddin says the airline is poised for profitable growth this year as it takes on a new fleet, adds new growth areas and looks to maximise revenues through aggressive sales and yield management. MAS will concentrate on new routes within Asia as the region is poised for strong growth rates in the next decade or two.

Tengku Azmil says there is also a clear segmentation between MAS and Firefly, with MAS competing with full-service carriers while Firefly is looking to be a value carrier.

For 2011, MAS' strategy will be to maximise yield by increasing front-end seat factor, increasing pricing competitiveness, introducing revenue management by origin and destination, and leveraging on interline and code share agreements.

Tengku Azmil says that revenue management by origin and destination will allow MAS to forecast the estimated seat factor for flights.

The airline achieved its highest seat factor in 15 years at 79% for the third quarter ended Sept 30, 2010 despite adding some 4% in capacity. Its yield stood at 24 sen.

As the local airline industry sees aggressive expansion this year, industry observers are quick to point out that yields (average revenue earned per passenger per kilometre flown) are likely to come under pressure and high load factors may not be sustainable.

However, Azran says the overall expansion plan to be seen in the local airline industry is not an issue.

“Malaysia still suffers from chronic under-capacity. We have so few direct flights to many cities compared with Singapore and Bangkok, plus some of the new capacity coming online is replacement capacity,” he says.

Asked about AirAsia X's proposed initial public offering that may happen in the second half of the year, Azran says there is no update.

“The board will review it in the first quarter of this year after looking at the final 2010 results and capital markets outlook,”he says.

The fact that all local airlines MAS, Firefly, AirAsia and AirAsia X will be taking delivery of new aircraft is not unique to Malaysia, but is part of a global trend.

The International Air Transport Association (IATA) says the challenge for 2011 will be to boost and sustain asset utilisation in the face of slowing market demand and a surge in new aircraft deliveries.

AirAsia Bhd group chief executive officer Datuk Seri Tony Fernandes says the economic position of the world currently instils confidence in the overall airline industry.

AirAsia, which recorded a 78% load factor for its third quarter ended Sept 30, 2010, aims to achieve stronger load factors of between 80% and 85% as its routes mature.

The airline will concentrate on adding more frequencies for domestic routes, such as from Kuala Lumpur to Kota Kinabalu, Kuching, Miri and Sibu while it hopes to start flights to Maldives.

Fernandes says that Thai AirAsia will be more aggressive in its expansion between Thailand and India while Indonesia AirAsia focuses on international routes and strengthens hubs like Bali and Surabaya.

He remained unperturbed when asked if the pricing war between value carriers will intensify this year with Firefly expanding into jet aircraft operation.

“There has been a price war since we started 10 years ago. We have been competing with much stronger players like Singapore Airlines, Jetstar and Japan Airlines (for selective routes). Therefore, we are not overly concerned about Firefly,”he says.

However, a key concern for AirAsia and long-haul sister airline AirAsia X is the liberalisation of air-traffic rights and the undoing of protectionism for national carriers, says Fernandes.

Azran says that AirAsia X has yet to secure approvals for Sydney and Jeddah, and is banking on receiving these approvals this year.

Fernandes says another area of concern is the lack of emphasis on building low-cost carrier terminals (LCCTs) in other locations such as Penang, Langkawi and Kuching given Malaysia's present lead in this space.

“We see tremendous opportunity for LCCTs to be built all over Malaysia. There is an amazing appetite in other countries like Thailand, the Philippines and Indonesia in wanting to build terminals for LCCs,” he says.

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