The long-haul, low-cost segment of the airline industry is going through a period of turbulence, but AirAsia Group chief executive Tony Fernandes remains confident in the business model's viability.
Speaking with FlightGlobal in New York on 4 March, Fernandes said the trick to a sustainable long-haul, low-cost operation was the combination of using the right equipment, squeezing ancillary revenues from customers, and reducing costs via investment in technology.
"We were the pioneers in it, but because the kit wasn't there, we became a medium-haul [carrier] – six or seven hours," says Fernandes, noting that profitable low-cost long-haul operations are more practical with the A330neos and 787s.
Cirium's Fleets Analyzer shows that long-haul operator AirAsia X has 47 A330neos on order over the next decade and will take its first in October this year.
The Malaysia-based carrier plans to operate the A330neo on its first route to the US West Coast.
It started serving its first US destination in 2017, operating from Kuala Lumpur to Hawaii via Osaka. Fernandes confirms that the carrier is waiting to obtain fifth-freedom rights to operate to the West Coast and is aiming to operate A330neos to Californian cities Los Angeles and San Francisco by 2020.
"We've had a fantastic experience in Hawaii and people like our product," says Fernandes, confident that the California routes will be successful. "We see a huge Asian community in Los Angeles which gives us more confidence."
He adds: "At some point it would be great to go to the East Coast."
Fernandes also reconfirmed that Thai Air Asia continues to work on approvals for routes to Scandinavia and eastern Europe. He specified Vienna, Prague and Budapest as targeted European destinations.
High fuel costs remain one of the largest obstacles to healthy profits for the low-cost segment of the airline market.
AirAsia Group profits fell in 2018, with the company reporting an operating result of MYR1.21 billion ($298 million), a fall of 44% from 2017.
"Our business has always suffered from oil prices…At the low-cost level, you need a low fare to stimulate the market," says Fernandes, noting that low-cost carriers cannot pass down higher fuel costs to budget-sensitive customers.
In the fourth quarter, AirAsia incurred an operating loss of MYR188 million, having made an operating profit of MYR696 million in the same period of 2017. Fuel costs jumped 48% to exceed MYR1.1 billion.
AirAsia is investing in technology and the consumer experience as it seeks to reduce the impact that oil price fluctuations have on the company's bottom line. In fact, AirAsia is looking to expand its footprint by leveraging technology to develop a travel ecosystem.
Fernandes was in New York to celebrate the launch of a new venture RedBeat Capital which will partner with venture capital firm 500 Startups to invest in businesses that will enhance AirAsia's ancillary offerings.
Fernandes says that AirAsia has already invested over $10 million in the venture, which will invest in digital technology related to travel and lifestyle, logistics, and finance.
"One of the reasons we're doing what we're doing is because you can't survive long-haul low-cost purely on an airfare, so there are lots of ancillary streams to supplement that," he told FlightGlobal at the event.
Part of the strategy is to invest in technology that makes operations more efficient, thereby reducing the costs to the airline, but also to increase profits with revenue streams that aren't as vulnerable to market fluctuations, like oil.