Wirraway
31st Jan 2004, 01:33
Bloomberg
All's fare in no-frills war but cost is the real foe
By Bloomberg
Budget Airlines - For Tony Fernandes, who started a no-frills airline in Malaysia two years ago, vindication arrived last month when Singapore Airlines announced it would begin its own budget unit.
"I felt a sense of pride that an airline such as ours could cause a giant like Singapore Air to relook at the budget model," says Fernandes, now chief executive of AirAsia, Asia's latest low-cost carrier to expand outside its domestic market.
Singapore Airlines, the world's second-largest carrier by market value, isn't the only one keen to start a discount arm.
As Fernandes, who undercuts major airline fares by as much as 60 percent, prepares for a $300 million share sale, Australia's Qantas Airways and Thai Airways International also say they will start budget carriers.
Hong Kong's Cathay Pacific Airways is weighing its options.
The moves may backfire. Full-service airlines risk cannibalising their established businesses. In the rush to compete, other no-frills airlines may fare little better.
"There is a real risk of a shakeout, even among the low-cost carriers that are entering the game," says Peter Hilton, head of research for Credit Suisse First Boston in Hong Kong.
Indonesia's low-fare Lion Airways also began regional flights in 2003 and four more plan to follow this year. US billionaire Richard Branson, whose Virgin Blue Holdings no-frills airline has gained 30 percent of Australia's domestic market, is discussing one more.
"A business plan of competing with Singapore or Cathay might be sound if there is one of you," says Hilton. "But if there are five of you, it might be infinitely less sound."
When AirAsia started as a Malaysian domestic competitor against state-controlled national carrier Malaysian Airline System in December 2001, only one low-fare fleet was flying internationally: Manila-based Cebu Pacific Air, which shuttles tourists from Hong Kong and Seoul to resorts on Cebu island in the Philippines.
That changed after severe acute respiratory syndrome (Sars) devastated east Asia's tourism industry last year.
Governments that had discouraged competitors in favour of their own national carriers let in more traffic to try to boost tourism.
"Post-Sars, it's all about promoting tourism," says Mark Tan, an investment analyst at UOB Asset Management in Singapore.
The success of no-frills airlines in Europe and the US is spurring Asian operators.
Low-cost airlines account for a quarter of domestic traffic in the US and almost 10 percent of European traffic, according to the International Air Transport Association. Dallas-based Southwest Airlines and Dublin-based Ryanair Holdings are now the world's number one and number five largest carriers respectively by market value.
Southwest has grown from a Texas-only airline in 1971 to the US's fourth-biggest carrier by passenger numbers, flying 64 million people a year to 58 cities, according to its website.
While bigger US airlines lost $11.3 billion in 2002, Southwest hasn't had a quarterly loss in more than 10 years. Sales have gained 7.7 percent on average for the past five years.
"The budget airline revolution is inevitable, and will wash over every single market," says Chris Sanda, associate director at DBS Vickers Securities (Singapore). "Some Asian airlines will see their margins cut significantly."
Fernandes last year set up a Thai subsidiary, AirAsia Aviation, with Shin Corporation, Thailand's biggest cellphone company, controlled by the family of Prime Minister Thaksin Shinawatra.
Known as Thai AirAsia, it covers domestic routes in Thailand and will start regional flights later this year. Currently, Fernandes offers a $109 return fare from Kuala Lumpur to Bangkok, compared with about $414 from Malaysian Airlines.
A Singapore government investment unit, Temasek Holdings, which owns 57 percent of Singapore Airlines, is in talks with Fernandes to invest in his Malaysian airline - even as he considers a new Singapore subsidiary for AirAsia
.
AirAsia had second-half net income of $10.8 million in 2003, double the profit of the previous four quarters, Fernandes says. He plans to add an Indonesian route by April.
"We're the only company that you can actually say: Here's AirAsia, here's their financials, here's what they do, here's the markets they are going to," he says.
Not quite. Virgin Blue, which started with two planes three years ago, sold $491 million in an initial public offering in December. A new unit is due to add routes to New Zealand this month.
Branson also is talking to Fernandes about a more regional tie-up, Fernandes says.
"AirAsia and Virgin Blue have a good chance to survive," says Franki Chung at TAL CEF Global Asset Management in Hong Kong. "But as an investor, you may not get good money till the market consolidates."
Japan's low-fare domestic carriers, Hokkaido International Airlines and Skymark Airlines, have struggled since larger rivals started matching their prices.
"There's a few low-fare carriers in Asia, but not low-cost carriers," says Richard Stirland, director-general of the Association of Asia Pacific Airlines, based in Kuala Lumpur.
Hokkaido International is now under court rehabilitation after filing for bankruptcy in 2002. Skymark this year forecast its first profit since it opened in 1996.
"This is a business where you have to get everything right," says Conor McCarthy, a former director of flight operations with Ryanair and now a consultant to AirAsia. "The business is all about delivering low costs."
Qantas is spending $1.15 billion to set up what it says will be a domestic carrier, JetStar, due to be operating by May.
Singapore Airlines will plough an undisclosed amount into Tiger Airways to start regional flights in the last quarter of 2004. It recognises "there is a market for an effective low-cost regional carrier", says its spokesperson.
If Tiger can gain significant market share, Singapore Airlines - with the sixth-worst performing stock in the city-state last year - could be hurt, says Sanda at DBS Vickers.
Still, "by owning half of Tiger Airways, which should have higher profit margins, Singapore have hedged their bets," Sanda says. "That means Tiger is not a threat, it's an opportunity."
Singapore Airlines and Cathay Pacific already operate regional carriers separately from their main businesses.
Some investors say big airlines don't belong in the budget business. They "are too complex to run something as simple and focused" as a discount airline, says Pieter van Putten of APS Asset Management in Singapore.
British Airways, Europe's largest carrier, sold its no-frills German airline Deutsche BA last year for E1 (R8.72). KLM Royal Dutch Airlines sold its unprofitable discount unit, Buzz, to Ryanair in April.
Delta Air Lines, the third-largest US airline, had a net loss of $733 million last year, partly attributable to costs at its new cut-price unit, Song.
"Unless you have deep pockets or offer something really special, you're going to struggle," says Tim Ross, head of transport research at UBS Securities Asia in Auckland.
Thai Airways faces risks on all fronts. The state-owned carrier and five Thai partners, including the government pension fund, will spend as much as $12.8 million to start a low-cost subsidiary in the second quarter this year.
Ross says Thai needs to start a low-cost carrier because about 20 percent of its flights are regional, compared with about 12 percent for Singapore Airlines.
"Thai Air definitely has the greatest concern," he says. "In the worst-case scenario, Singapore can walk away."
That looks unlikely for now. Singapore Airlines has roped in Charlie Clifton, a former Ryanair operations director, as interim chief executive of Tiger Airways.
"There are no sacred cows - it's all about making money," says Clifton. "The fares will go as low as they can."
==========================================
All's fare in no-frills war but cost is the real foe
By Bloomberg
Budget Airlines - For Tony Fernandes, who started a no-frills airline in Malaysia two years ago, vindication arrived last month when Singapore Airlines announced it would begin its own budget unit.
"I felt a sense of pride that an airline such as ours could cause a giant like Singapore Air to relook at the budget model," says Fernandes, now chief executive of AirAsia, Asia's latest low-cost carrier to expand outside its domestic market.
Singapore Airlines, the world's second-largest carrier by market value, isn't the only one keen to start a discount arm.
As Fernandes, who undercuts major airline fares by as much as 60 percent, prepares for a $300 million share sale, Australia's Qantas Airways and Thai Airways International also say they will start budget carriers.
Hong Kong's Cathay Pacific Airways is weighing its options.
The moves may backfire. Full-service airlines risk cannibalising their established businesses. In the rush to compete, other no-frills airlines may fare little better.
"There is a real risk of a shakeout, even among the low-cost carriers that are entering the game," says Peter Hilton, head of research for Credit Suisse First Boston in Hong Kong.
Indonesia's low-fare Lion Airways also began regional flights in 2003 and four more plan to follow this year. US billionaire Richard Branson, whose Virgin Blue Holdings no-frills airline has gained 30 percent of Australia's domestic market, is discussing one more.
"A business plan of competing with Singapore or Cathay might be sound if there is one of you," says Hilton. "But if there are five of you, it might be infinitely less sound."
When AirAsia started as a Malaysian domestic competitor against state-controlled national carrier Malaysian Airline System in December 2001, only one low-fare fleet was flying internationally: Manila-based Cebu Pacific Air, which shuttles tourists from Hong Kong and Seoul to resorts on Cebu island in the Philippines.
That changed after severe acute respiratory syndrome (Sars) devastated east Asia's tourism industry last year.
Governments that had discouraged competitors in favour of their own national carriers let in more traffic to try to boost tourism.
"Post-Sars, it's all about promoting tourism," says Mark Tan, an investment analyst at UOB Asset Management in Singapore.
The success of no-frills airlines in Europe and the US is spurring Asian operators.
Low-cost airlines account for a quarter of domestic traffic in the US and almost 10 percent of European traffic, according to the International Air Transport Association. Dallas-based Southwest Airlines and Dublin-based Ryanair Holdings are now the world's number one and number five largest carriers respectively by market value.
Southwest has grown from a Texas-only airline in 1971 to the US's fourth-biggest carrier by passenger numbers, flying 64 million people a year to 58 cities, according to its website.
While bigger US airlines lost $11.3 billion in 2002, Southwest hasn't had a quarterly loss in more than 10 years. Sales have gained 7.7 percent on average for the past five years.
"The budget airline revolution is inevitable, and will wash over every single market," says Chris Sanda, associate director at DBS Vickers Securities (Singapore). "Some Asian airlines will see their margins cut significantly."
Fernandes last year set up a Thai subsidiary, AirAsia Aviation, with Shin Corporation, Thailand's biggest cellphone company, controlled by the family of Prime Minister Thaksin Shinawatra.
Known as Thai AirAsia, it covers domestic routes in Thailand and will start regional flights later this year. Currently, Fernandes offers a $109 return fare from Kuala Lumpur to Bangkok, compared with about $414 from Malaysian Airlines.
A Singapore government investment unit, Temasek Holdings, which owns 57 percent of Singapore Airlines, is in talks with Fernandes to invest in his Malaysian airline - even as he considers a new Singapore subsidiary for AirAsia
.
AirAsia had second-half net income of $10.8 million in 2003, double the profit of the previous four quarters, Fernandes says. He plans to add an Indonesian route by April.
"We're the only company that you can actually say: Here's AirAsia, here's their financials, here's what they do, here's the markets they are going to," he says.
Not quite. Virgin Blue, which started with two planes three years ago, sold $491 million in an initial public offering in December. A new unit is due to add routes to New Zealand this month.
Branson also is talking to Fernandes about a more regional tie-up, Fernandes says.
"AirAsia and Virgin Blue have a good chance to survive," says Franki Chung at TAL CEF Global Asset Management in Hong Kong. "But as an investor, you may not get good money till the market consolidates."
Japan's low-fare domestic carriers, Hokkaido International Airlines and Skymark Airlines, have struggled since larger rivals started matching their prices.
"There's a few low-fare carriers in Asia, but not low-cost carriers," says Richard Stirland, director-general of the Association of Asia Pacific Airlines, based in Kuala Lumpur.
Hokkaido International is now under court rehabilitation after filing for bankruptcy in 2002. Skymark this year forecast its first profit since it opened in 1996.
"This is a business where you have to get everything right," says Conor McCarthy, a former director of flight operations with Ryanair and now a consultant to AirAsia. "The business is all about delivering low costs."
Qantas is spending $1.15 billion to set up what it says will be a domestic carrier, JetStar, due to be operating by May.
Singapore Airlines will plough an undisclosed amount into Tiger Airways to start regional flights in the last quarter of 2004. It recognises "there is a market for an effective low-cost regional carrier", says its spokesperson.
If Tiger can gain significant market share, Singapore Airlines - with the sixth-worst performing stock in the city-state last year - could be hurt, says Sanda at DBS Vickers.
Still, "by owning half of Tiger Airways, which should have higher profit margins, Singapore have hedged their bets," Sanda says. "That means Tiger is not a threat, it's an opportunity."
Singapore Airlines and Cathay Pacific already operate regional carriers separately from their main businesses.
Some investors say big airlines don't belong in the budget business. They "are too complex to run something as simple and focused" as a discount airline, says Pieter van Putten of APS Asset Management in Singapore.
British Airways, Europe's largest carrier, sold its no-frills German airline Deutsche BA last year for E1 (R8.72). KLM Royal Dutch Airlines sold its unprofitable discount unit, Buzz, to Ryanair in April.
Delta Air Lines, the third-largest US airline, had a net loss of $733 million last year, partly attributable to costs at its new cut-price unit, Song.
"Unless you have deep pockets or offer something really special, you're going to struggle," says Tim Ross, head of transport research at UBS Securities Asia in Auckland.
Thai Airways faces risks on all fronts. The state-owned carrier and five Thai partners, including the government pension fund, will spend as much as $12.8 million to start a low-cost subsidiary in the second quarter this year.
Ross says Thai needs to start a low-cost carrier because about 20 percent of its flights are regional, compared with about 12 percent for Singapore Airlines.
"Thai Air definitely has the greatest concern," he says. "In the worst-case scenario, Singapore can walk away."
That looks unlikely for now. Singapore Airlines has roped in Charlie Clifton, a former Ryanair operations director, as interim chief executive of Tiger Airways.
"There are no sacred cows - it's all about making money," says Clifton. "The fares will go as low as they can."
==========================================