Budget airlines are big business in Asia.
You're landing in London after paying penalties for carrying too much luggage. You've also forked out for the on-board food and drink. The seats are small and there are no movies.
Ryanair (LSE: RYA)? EasyJet (LSE: EZJ)?
No, this is Malaysia-based AirAsia X, most successful of a booming new breed of discount airlines in the Asia-Pacific. My partner and I have flown from Australia to Stansted via Kuala Lumpur for a combined £932, less than half the price of the full-service competition, which probably explains why the plane is packed. Welcome to the new age of austerity aviation.
An airline reborn
AirAsia was launched on a wing and a prayer in 2001 by Tony Fernandes, an accountant who once worked for Richard Branson's music division in London but knew practically nothing about airlines. Or rather, AirAsia was re-launched because it had collapsed under previous owners. Fernandes bought it for one ringgit, or 20p, which gave him two planes and £8m ringgit worth of debt.
Because Asian aviation was dominated by full-service flag-carriers with access to authority, Fernandes wasn't given a chance. He immediately proved the critics wrong, tapping a massive demand within South-East Asia for cut-price, no-frills flying of five hours or less and posting a profit within the first year.
In 2007, he added the long-haul subsidiary -- the already profitable AirAsia X flying to UK, MidEast and Australia. AirAsia's gross profit from operations for the first quarter of 2010 was 342.5m ringgit [£69m]
"Long haul, low cost is transforming the whole aviation landscape in Asia," K. Ajith, an analyst at UOB-Kay Hian Research in Singapore told Bloomberg. "Budget carriers may be a force to reckon with in the future because if they have a strong network and are viable, they can potentially lure passengers from established carriers."
The competition is increasing
Imitation being the sincerest form of flattery, other discount airlines are taking to the skies. In early August flag-carrier Thai International Airways and Singapore's Tiger Airways Holdings announced they will launch budget airline Thai Tiger. "The low cost market is growing very fast," Thai Air President Piyasavasti Amranand told a news conference. "This is a chance to help fill the hole before we lose more opportunities to rivals." Over the last few years Thai Air has taken a belting from the discounters, with its regional market share dropping from 42 per cent to 33 per cent.
But those holes are filling up fast. Japan's All Nippon Airways plans to launch a discount carrier next year with fares at half the price of full-service carriers. The Philippines's Cebu Pacific has expanded right through the financial crisis. And Qantas's Jetstar, launched six years ago, is now more profitable than its mainline business.
Things are so good that Asia's budget airlines have booked another 500 aircraft over the next five years, which adds up to a capacity increase of 15 per cent.
Asia is now the largest single market for Boeing and Airbus, with a long way to go yet. "The competition in Asia is still very small compared to Europe and the US," says Tiger's chief executive Tony Davis. "The market will be six times bigger than Europe, but with very few local airlines. It's far from saturated."
Picking winners
But there have been failures in the no-frills business so how do you pick the winners? Occupancy rates are certainly where it starts -- AirAsia X gets a third more seats onto its planes than full-service rivals -- but for budget airlines the key number is cost per available seat kilometre.
The latest figures show AirAsia X's is $0.028 and JetStar's $0.057. Air Asia's number is less than half that of a full-service carrier, which neatly explains why it can charge less than half the price.
AirAsia X gets this benchmark number low by the kind of ruthless attention to costs you'd expect, but without making the flying experience an ordeal. It owns its terminals, which are streets ahead of Ryanair's, and the cabin staff are ten times more interested.
Some of the biggest economies come from flying light planes. They carry limited stocks of food and drink, apply penalties on extra luggage that deter passengers from bringing the kitchen sink, and use light-weight equipment and (no kidding) light-weight cabin staff. Although Malaysians are generally smaller in stature than Europeans, the airline needs only half the attendants because it's not full-service. AirAsia also works its fleet hard, turning flights around in an average 25 minutes.
But the key, say industry insiders, is to have partners who can pass on passengers. AirAsia X taps into its parent's bookings while Jetstar code-shares with Qantas and Tiger will do the same with its two parent companies. Failures like Oasis Hong Kong, which flew to London and Vancouver, didn't have this kind of support.
I wouldn't predict the demise of Asia's flag-carriers but I would certainly say they've got a fight on their hands.
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