IN FOCUS: Long-haul, low-cost at home in Southeast Asia

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When Oasis Hong Kong Airlines's chief executive Steve Miller put the business into liquidation on 9 April 2008, many thought it was the beginning of the end for the long-haul low-cost business model in Asia.

Yet, four years later, it is well and truly alive - and about to get more competitive - in Southeast Asia, where no less than four airlines will soon be competing based on a business model that still has many doubters.

The persistence of the long-haul low-cost model has a lot to do with AirAsia X, which is partly owned by Malaysia's AirAsia and its founder and chief executive Tony Fernandes.

Starting with Airbus A330 services between Kuala Lumpur and Australia's Gold Coast on 2 November 2007, a year after Oasis, its network grew to include points in Europe, India, China, Japan, South Korea, the Middle East and other cities in Australia. The fleet grew as well, with Airbus A340s joining the A330s, and A350s on the way.

Almost five years later, however, chief executive Azran Osman-Rani admits that profitability is still tough. Over the past year, AirAsia X has scaled back its network and suspended its London, Paris, Christchurch, Abu Dhabi, New Delhi and Mumbai services.

Rising fuel costs, he said, had "compromised" the carrier's ability to offer low fares in many places. Weak European economies led to falling demand, and taxes were a factor in the withdrawal from London and India. Speaking after the Christchurch withdrawal, Azran said that the airline would consolidate its network in "core markets" such as Australia, China, Taiwan, Japan and Korea where it has "built up stable, profitable routes".

Competition from Gulf carriers such as Emirates on services to London and Paris were also a factor, which has led to AirAsia X concentrating on areas where it does not have to face them directly. That is exactly what Scoot, the Singapore Airlines long-haul low-cost subsidiary that will begin operations in June with Boeing 777-200s, will do. It will start with services to the Gold Coast, Sydney and Tianjin, and is looking at Northeast Asia, Australia and possibly West Asia for routes.

SIA has given Scoot's management the latitude to make the decisions that it needs in order to be successful. The plan, said its chief executive Campbell Wilson, is to complement SIA instead of cannibalising its services. SIA is also giving Scoot the space as it has, over the past few years, concentrated on the premium side of the business, moving away from the Singaporean and Southeast Asian leisure and mass market.

This allowed other full service carriers in the region - as well as AirAsia X - to try to fill the gap. Scoot is SIA's attempt to rectify this. The fact that both SIA and Scoot will fly to Sydney hinges on the thinking that there can be demand from two different market segments on the same route, says Wilson.

"Our position is to grow new traffic for the group, so for routes where we can bring in new market segments we can operate parallel [services]. Otherwise, we'll look at routes the group does not currently serve," he says.

It will face competition from Philippine low-cost carrier Cebu Pacific, which will launch long-haul operations in the third quarter of 2013. It plans to lease up to eight A330-300s and offer services to Australia, the Middle East, parts of Europe and the USA with fares that will be up to 35% lower than other airlines.

Its focus is on the 11 million Filipinos who are working abroad. More than half of those residing in Europe, the Middle East, Oceania and the USA make multiple stops - with Singapore and Kuala Lumpur popular hubs - to take connecting flights home because no local carriers have non-stop flights to these destinations.

Separate teams

"There is a significant market and they are underserved," says Cebu Pacific chief executive Lance Gokongwei, who adds that the long-haul operations will have a separate management team to avoid "taking its eyes off short-haul".

The fourth player in the region is Australia's Jetstar and its Singapore-based affiliate Jetstar Asia. The Qantas subsidiary has been operating from points in Australia to Osaka and Tokyo in Japan, Bangkok, Honolulu, and Singapore for several years. From Singapore, it also goes on to Beijing.

Jetstar Asia, in which Qantas has a 49% stake, also flies from Singapore to Auckland and aims to offer services to Japan as well. Jetstar plans to base three widebody aircraft on to Jetstar Asia's air operator's certificate in Singapore, says its chief executive Bruce Buchanan.

"Strengthening the long-haul capability of the Singapore hub is key to tapping into growing markets across Asia and linking to our other networks, like Jetstar Japan," he adds.

His point is that the success of the long-haul operations depends, to a large extent, on the short-haul feed. That means linking the long-haul services from Australia and Singapore to the short-haul services in those cities, and places like Japan where there are other Jetstar affiliates.

Scoot needs that in Singapore, and there are suggestions that it could work more closely with Tiger Airways - in which SIA has a 33% stake - and other low-cost carriers that account for around a quarter of the traffic at the city's Changi international airport. AirAsia X certainly has that with AirAsia's existing Malaysian, Thai, Indonesian and Philippine short-haul operations, and an upcoming one in Japan.

Azran points out that the key to success in the long-haul low-cost business is to maintain high aircraft utilisation and load factors to bring down unit costs. AirAsia X's unit cost per available-seat-kilometres (ASK) last year was 3.5 cents, much lower than the nine cents legacy carriers typically operate at, with 80% average load factors.

"That's a huge unit cost advantage," he says. "As long as you can beat the load factor of a full-service carrier, that's when it [the advantage] kicks in. And that ability to drive that volume - this is where the critical difference to me is being part of that AirAsia brand and network. It's very hard to do that as a stand-alone airline with a completely new brand without a feeder network. If we were only to rely on point-to-point traffic, there's no way you can get an 80% load factor."

LESSONS LEARNT

Azran believes that Scoot and Cebu Pacific, in particular, will not yet have a big impact on AirAsia X, pointing out that his airline's earlier start has given it the advantage of learning what works and what does not.

"There's a lot that went into four years of figuring out how to make this work operationally. It's not something that is easily replicable. You can copy our flight schedule and seat density but there's a lot more to it that makes the model work," he says. "I think a lot of people will have to go through a steep learning curve."