Malaysia Airlines

MAS should reconsider LCC strategy as losses continue while AirAsia reports more leading profits

Malaysian low-cost carrier AirAsia has reported another highly profitable quarter, including the highest operating margin among publicly traded Asian airlines (both LCCs and full service carriers) while restructuring flag carrier Malaysia Airlines (MAS) remains one of Asia’s most unprofitable carriers. The outlook for AirAsia Malaysia is bright, particularly if MAS fails to adjust its strategy following the unbundling earlier this month of the equity swap with AirAsia. The MAS outlook remains bleak as the group continues to push on with its new business plan, which focuses entirely on the challenging premium market just as nearly every other major airline group in Asia is investing significantly in the budget sector.

AirAsia Malaysia is the only publicly traded LCC in Southeast Asia to record an improvement in profitability for 1Q2012. The carrier reported a pre-tax net profit of MYR212 million (USD67 million), an improvement of 5%, while its after tax net profit improved by less than 1% to MYR172 million (USD54 million). Revenues at AirAsia Malaysia increased by 11% to MYR1.17 billion (USD371 million) as passenger traffic and seat capacity both increased by 12% to 4.8 million and 6.1 million, respectively.

As AirAsia X switches from Tianjin to Beijing, Asian alternative airports face uncertain future

AirAsia X has received final clearance to move its five weekly flights from Tianjin to more centrally located Beijing Capital International Airport, only 30km from the city compared to 80km at Tianjin. The move from Tianjin, considered an alternative airport to Beijing Capital, leaves Scoot as the sole foreign LCC at Tianjin. When the move is made on 22-Jun-2012, AirAsia X will join fellow low-cost, long-haul competitor Jetstar at Beijing.

The move raises the matter if it is in a carrier's financial interest to serve a cheaper yet less convenient airport but possibly forgo revenue by alienating some passengers and reducing options for connectivity, which is increasingly becoming common as carriers pursue hybrid paths. Demand in the region is still relatively strong, eliminating the need to incentivise the market by passing on savings from alternative airports. What the region's LCCs do want are low-cost terminals, which Tokyo Narita and Melbourne Tullamarine will soon offer, while Kuala Lumpur and Singapore Changi will construct new ones.

MAS adjusts short-haul strategy again as plans for separate premium brand are dropped

Malaysia Airlines (MAS) has dropped plans to establish a new short-haul premium brand, which was slated to take over the carrier’s regional routes and had been a major component of its new business plan. The ongoing restructuring at MAS, which is aimed at restoring profitability at the flag carrier by next year, will now focus primarily on the long-haul operation. By and large it will be business as usual for the flag carrier’s short-haul operation although it will still be separated out as a new division. As part of this separation, MAS will stop entirely the use of widebodies on short-haul routes, which is a common practice in Asia where regional routes are often thick enough to support large aircraft that otherwise sit idle between long-haul flights.

The reversal of last year’s decision to establish a new company and brand for the full-service short-haul sector, under what MAS had called Project Sapphire, raises some questions about the long-term viability of the group’s short-haul operation. But rapid renewal of the MAS narrowbody fleet, network adjustments and anticipated coordination with AirAsia could still lead to the financial improvements required for the new short-haul division to become profitable.

End of line carriers increasingly relying on partners to serve China

Air New Zealand's decision to end Auckland-Beijing services in favour of a one-stop service on its Shanghai flight with onward connections by partner Air China is the latest example of the difficulties 'end of line carriers' in Australia and New Zealand are having serving China, which is a top trading partner for both.

Ending services to Beijing is not a light decision given how coveted Beijing slots are, but Air New Zealand's move is not unprecedented. Qantas in 2009 made the exact same move, ending Beijing service in favour of a one-stop partner connection. Qantas also bolstered its Shanghai schedule, which Air New Zealand is doing too with progressive daily service.

Qantas may say Malaysia Airlines negotiations are over, but many more chapters still to be written

Qantas CEO Alan Joyce has announced the carrier has ended strategic negotiations with Malaysia Airlines (MAS) as the two were unable to reach mutually agreeable commercial terms. This is less an ultimate ending than a very public pause for an undoubtable further round of negotiations and follows MAS’ announcement that it was proceeding with its own premium airline.

Qantas had two primary strategic objectives. The first, a planned premium carrier to be based in Asia, was from the start high-profile but also faced large challenges to establish. The second, a general codeshare or further alliance to coincide with MAS joining Qantas in oneworld, was less high-profile but still strategically desirable, especially as MAS and Qantas' main local competitors, Virgin Australia and Singapore Airlines, have implemented their own tie-up.

Mr Joyce says Qantas will continue to explore joint-ventures and alliances while favouring "capital-light" options, as well as only making investments in sectors that return their cost of capital.

AirAsia X route changes spotlight ownership complexity post MAS deal, but also growth opportunities

Doomsayers will be quick to look at a series of route cancellations from Malaysia-based AirAsia X and proclaim the demise of the modern low-cost long-haul model AirAsia X pioneers. The context for the changes – ending service to London Gatwick, Mumbai, New Delhi and Paris Orly – expands beyond fuel costs, rising taxes in Europe and new visa restrictions in Malaysia. AirAsia X was already struggling in Europe and particularly in India. The recent cross-ownership deal between Malaysia Airlines (MAS) and the AirAsia Group was also clearly a big factor.

That is not to suggest AirAsia X's changes are simply a matter of submission to MAS. The biggest advantage, besides brand awareness, of the high profile London and Paris routes was their ability to put passengers on multiple AirAsia short-haul flights as they travelled around southeast Asia. MAS' deployment of the A380 later this year will lower unit costs to London, narrowing the gap with AirAsia X, currently using more fuel-thirsty A340s. With the AirAsia-MAS partnership, and plans for the two to facilitate passenger transfers, the AirAsia group can still gain feed on its short-haul network while AirAsia X will benefit from redeploying capacity in Asia Pacific and, notably, China.