Monday, July 14, 2008

Low-cost Asian airlines thriving on silver linings

Sunday, July 13, 2008

SINGAPORE: Tony Davis, the chief executive of Tiger Airways, based in Singapore, readily admits that he is much happier running an Asian-based low-cost airline right now than he would be running one in Europe or the United States.

For one thing, the significant strengthening of Asian currencies against the dollar in recent months has helped mitigate some of the effects of the ever-rising price of oil, traded in dollars, while historically low interest rates have made paying for new aircraft less expensive.

"There are some benefits to being outside of a U.S.-denominated revenue area, and we're certainly taking advantage of those," Davis said in a recent interview.

But maybe most important, there is still very high demand for air travel in the region and no easy alternative in a region that mostly lacks sophisticated railroad systems or road infrastructure. "It would take days for someone to drive from Singapore to Cambodia," Davis noted.

Asian national carriers have not been immune to the sharp rise in the price of oil and the global economic slowdown, and several have had to pare down capacity on some routes. China Airlines, the largest carrier in Taiwan, has canceled about 10 percent of flights, mostly to the United States and Asia, and Thai Airways has canceled its nonstop services to New York and reduced its frequency to Los Angeles. Asiana Airlines, based in Seoul, and Qantas, in Australia, have also cut several routes or reduced capacity.

Still, the gloom that has descended on much of the world's aviation industry is far from affecting everybody, and some Asian low-cost airlines are drawing up expansion plans, looking at opportunities where others see losses.

Jetstar Australia has been picking up routes to Japan from its parent, Qantas, and recently announced that it would use Perth, the capital of Western Australia, as a new base, starting services from there in October to Bali and Jakarta in Indonesia. A new Sydney-Darwin-Ho Chi Minh City service is also in the cards for September.

Jetstar Asia, based in Singapore but also partly owned by Qantas, will add new flights to Siem Reap and Phnom Penh in Cambodia later this month.

Tiger Airways, which is 49 percent owned by Singapore Airlines, has announced the suspension of its twice-daily service to Newcastle, Australia, and a reduction of flights from Darwin; but it is in talks with the Australian government to add international routes to its network, and it is pushing ahead with plans to start a new unit in Korea, in a joint venture with the Incheon city government, which will be called Incheon Tiger Airways, Davis said.

The Malaysian airline AirAsia, the biggest low-cost carrier in Southeast Asia, measured by fleet size, is also pressing ahead with an ambitious route expansion program. It recently introduced four new destinations - Kuantan in Malaysia, Haikou in China, Makassar in Indonesia and Hong Kong - and its chief executive, Tony Fernandes, says it will fly to southern India by the end of this year.

"We will continue to put on new routes," Fernandes said last month. "As long as we can make a profit from our operations, we will not hold back our growth plans."

AirAsia's net profit in the first quarter of this year leapt 86 percent over the same period last year to 161 million ringgit, or $50 million. Fernandes was recently quoted in the Malaysian press as having said that his airline could still make a sustainable profit if crude oil rose as high as $200 a barrel.

Peter Harbison, executive chairman of the Center for Asia Pacific Aviation, a publisher of aviation market information, says that AirAsia could emerge from a 12-to-18-month downturn looking "relatively much, much stronger than most of its competition."

"AirAsia is very well placed to benefit from the double-edged sword of very high external costs with the rise of oil prices, and the revenue side damage that is caused by the sliding economies," Harbison said.

Among its advantages is its dispersed regional structure with bases in Thailand and Indonesia through joint-venture operations, as well as Malaysia. This allows it both to shift administrative activities to the lowest-cost environment and to connect point-to-point more efficiently. Thai AirAsia has just opened a new office in Chiang Mai.

"Their basic costs are very low, and they also have a large amount of aircraft coming in that were negotiated at very good prices and are very fuel efficient," Harbison said. "That places them well to offer to the market continuing cheap fares that presumably will continue to attract business." The airline has so far received 67 new A320s to replace its fleet of Boeing 737s and has agreed to buy a total of 175 aircraft.

Davis said: "What you will see is budget airlines, like Tiger, looking to expedite our growth by taking advantage of any opportunity that comes out of this situation."

He added: "A lot of parallels are being drawn between budget carriers and discount retailers like Wal-Mart, and I think that parallel is appropriate. Certainly, from our perspective, as much as the current uncertainty on oil prices causes us to refocus on cost and ensure we're doing everything we can to manage our operation efficiently, it also creates opportunities, as competitors around us who are not as well structured to cope with the challenges do start putting down services, grounding aircraft and withdrawing from markets."

Davis predicted: "We would expect over the coming weeks to be increasing our capacity rather than contracting it."

Despite the current business environment, which many might consider hostile to start-ups, plans are going ahead for a new low-cost Australian carrier, VivaJet, which could start domestic passenger and cargo services in November, using Embraer E-170 and E-190 regional jets, ATR-72 turboprop aircraft and Airbus A300F cargo planes.

According to a report by Harbison's center, VivaJet, based in Melbourne, plans an extensive network of routes to Sydney, Brisbane, Canberra, Adelaide, Hobart and the Australian Gold Coast and has already received slot allocations for all destinations.

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