Virgin In Asia

[Bill Smith]

Virgin in Asian talks
By Michael Sainsbury and agencies
June 14, 2004


VIRGIN BLUE is keen to follow domestic rival Qantas into the developing low-cost Asian market and has already held talks with a number of prospective partners.

"We do want to have a look in this part of the world," Virgin Blue chief executive Brett Godfrey said.
Qantas announced in April that it would invest $40 million for a 49 per cent share in a low-cost Asian airline with Singapore's state-owned investment company Temasek Holdings, and two businessmen, which has been dubbed Jetstar Asia.
Mr Godfrey said: "I have spoken to many airlines and carriers but we are particularly fussy as to what interests us.
"So it may not be today, it may not be next year. It may be within two or three years but I would like to think there are opportunities for us here."
According to International Air Transport Association statistics, the market share of budget carriers in the Asian market is only 2 per cent, compared with 16 per cent in Europe and 23 per cent in North America, indicating a lot of room for growth.
Officials of Malaysia's no-frills carrier AirAsia confirmed discussions with Virgin Blue.
Singapore has become a focal point for low-cost airlines this year this year, with Singapore-owned ValuJet Thai planning to launch ValuJet Singapore and Singapore Airlines laying plans for its own low-cost carrier, called Tiger, later this year.
Qantas will have a head start on Virgin Blue as it is aiming to begin commercial flights by the end of this year.
But Mr Godfrey said "a head start in the airline business never lasts you too long".
"Most of the markets which we would ultimately serve probably don't exist yet because there is no airport, or there is no one that lives there that can afford to fly, but that's all changing."
He said the economies of China, India and other Asian countries were growing at such a rate that people who now cannot afford the cost of a budget airline ticket would be able to do so in five or 10 years.

[Wirraway]

Dow Jones
Monday June 14, 4:15 PM (S/Pore)

INTERVIEW: Asian Airlines Ready For Budget Battle
By Carolyn Lim
Of DOW JONES NEWSWIRES

KUALA LUMPUR (Dow Jones)--Asian full-service airlines have several advantages over their U.S. and European peers that will allow them to better withstand the onslaught of budget carriers, a senior industry executive said.

Association of Asia Pacific Airlines Director General Richard Stirland said established airlines in Asia generally have lower cost structures, thanks primarily to lower wages, and also manage to wring extra benefits from the larger planes they tend to fly. AAPA's membership comprises 17 full-service airlines in the region, including Japan Airlines System Corp. (9205.TO), Cathay Pacific Airways Ltd. and Singapore Airlines Ltd.

Until recently, Asian airlines didn't have to worry about the budget threat. While low-cost carriers like Southwest Airlines Co. have been operating in the U.S. for decades, it's only been in the past year that budget airlines have cropped up in Asia. In May, Valuair began flying to Bangkok from Singapore and recently added flights to Hong Kong. Malaysia-based AirAsia Sdn. Bhd. has started no-frills flights to Singapore and Macau, among other destinations.

Still, Stirland said his member airlines are ready.

Unlike U.S. and European carriers, which fly mostly small narrow-body aircraft and some jumbo jets, Asian full-service airlines fly mostly wide-body planes. That allows them to pack more passengers on each flight, and also generate extra revenue from hauling cargo.

Cargo can contribute 20% to 25% of a full-service airline's revenue, Stirland told Dow Jones Newswires in a recent interview, and helps insulate the carriers from an abrupt drop in passenger volume.

In comparison, budget airlines typically fly narrow-body planes, with cargo contributing 6%, at most, to revenue, he added.

Asian full-service airlines have also been more successful in filling their premium-revenue seats in first and business class. Stirland said more flyers in Asia opt to travel in the front of the plane due to the comparatively longer flying times in the region.

"Asia's geographical nature means that travel tends to be more long-haul than in say, Europe," said a Hong Kong-based regional aviation analyst at a European securities firm, who declined to be named. "Longer flights mean a lot of travelers would prefer business, or even first-class seats."

Airlines are reluctant to reveal how much profit they derive from first- and business-class seats, but approximately 10% to 20% of full-service airlines' seats are non-economy class and premium fares are at least two to three times that of economy seats, depending on the route and seat configuration.

"That premium revenue at the front-end of the aircraft, plus the cargo revenue, give them an enormous cushion in which they can afford to discount their economy class seats, or a portion of the seats, very severely," Stirland said.

And that's exactly what Asian airlines are doing to counter the threat from low-fare upstarts.

Singapore Airlines more than halved round-trip fares to Bangkok in early May, to S$168 versus Valuair's S$138. Similarly, Cathay Pacific has started offering a S$300 round-trip economy class fare from Singapore to Hong Kong, matching Valuair's budget price.

Stirland said Asian carriers can continue to offer those prices thanks not only to the hefty front-of-plane profits, but also to low crew costs.

"Wages are also relatively lower in Asia because most crew here aren't unionized, at least not as much as in the U.S.," said the Hong Kong-based analyst.

Some full-service airlines are even joining the low-cost game. Qantas Airways Ltd. and Singapore Airlines, with other investors, will launch their own budget carriers later this year.

However, Stirland pointed out one trend that will be a boon for all airlines in the region: rising passenger volume.

"Barring unforeseen circumstances, it's going to be a very good year," he said.

In April 2004, AAPA's 17 member airlines flew 10.3 million people, more than twice the number a year ago when an outbreak of severe acute respiratory syndrome, or SARS, curtailed travel around the region.

"That is sort of in line with the historical growth in this region, which means the whole effect of SARS in terms of traffic growth, has certainly been overcome," Stirland said.

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