The Asian passenger air transport marketplace will stable and growing rapidly. The latest Airbus Global Market Forecast (GMF), released in December 2010, shows that key drivers for the marketplace are the replacement of aircraft for newer more eco-efficient models in mature markets, dynamic growth in new emerging markets, the further growth of low-cost carriers – particularly in Asia-Pacific and Europe, further market liberalisation and capacity growth on existing routes.
In 2010, views on whether low-fare airlines would continue to flourish in Asia varied. Three factors regulation, population demographics, and socioeconomic trends -drove this calculus. Although the target consumer base for AirAsia was enormous -more than 500 million people lived within three hours of AirAsia’s hubs in Kuala Lumpur and Bangkok, more than Western Europe’s entire population -the failure of Asia’s regulatory environment to keep pace and the uncertain demand for low-fare services created uncertainty.
Those who sold airplanes, airports or advice tended to be of the opinion that low-fare carriers would redraw Asia’s socioeconomic map, offering affordable international travel to millions and thereby fostering the integration of a region divided by water, politics, and poor infrastructure. Analysts who saw a large and growing market predicted that budget airlines would tap pent-up demand among less affluent Asians, who typically travelled by bus and hardly expected attentive service.
Since the global economy peaked in the second half of 2006 and even during the recession of 2008-2009, Asian carriers had seen increased success. “We’re seeing that people in Asia travel as soon as they have some extra money in their pocket,” said Don Birth, president and chief executive officer of Abacus, a distribution services provider”) Although average incomes were lower in Asia than in Europe, Timothy Ross, an analyst for UBS, said that the region’s lower average incomes should boost rather than constrain demand for cheap fares.
Other analysts argued that there had traditionally been too few bilateral agreements that allowed new low-fare carriers to fly between countries and too few of the satellite airports that the airlines needed to keep costs low. In that vein, budget airlines such as AirAsia were hoping for increased cross-border travel in the wake of the December 2008 Asean open skies agreement. The agreement allowed carriers based in the region to make unlimited flights between all 10 Asean member states. Although it would be 2015 before the agreement was fully implemented, it was a positive step forward.
For instance, in January 2010, the Indonesian Transportation Ministry announced it was gearing up for the country’s full participation in the Asean air transport liberalization plan and intended to inc1ude five of Indonesia’s twenty-seven international airports in the implementation. ” Although this was only a small proportion, it was a symbolic start. “Liberalization tends to be infectious, and the germs of change are in the air,” concluded Peter Harbison, the executive chairman of the Centre for Asia Pacific Aviation. ‘
As more and more countries opened their skies, AirAsia was quick to start cross-border joint ventures, most notably in Thailand and Indonesia. AirAsia prompted increased passenger travel with its 2007-2008 “To Malaysia with Love” campaign. The campaign celebrated 50 years of nationhood for Malaysia, and offered travelers affordable fares “starting from MYR0. 50 (about 15 cents), available for all destinations to/from its Malaysian hubs. ,,36 Cheaper airfares were also made possible by the low-cost carrier terminal at Kuala Lampur Airport, with a throughput of about 10 million passengers annually.
Even though, external, industry-wide challenges -particularly the escalating cost of fuel -also posed a threat to AirAsia. As the lowest cost carrier in the world, the company suffered more from high fuel prices, as they were a higher percentage of total costs, than any other airline (assuming similar equipment and seat density). Surcharges and baggage fees covered some of this but the airline was conscious that if it loaded on the full charge, it might find no demand on some flights due to a high base price (e. g. inimum or zero fare plus taxes, fees and surcharges).
To offset this eventuality, AirAsia did a lot to improve operations and efficiency and also saw the benefits of the fuel efficient Airbus 320 help to maintain its low-fares brand position. To retain its cost advantage in the wake of the global recession, AirAsia entered into an alliance in January 2010 with Jetstar, the low-fare subsidiary of Australia’s flag carrier, Qantas. This was the first time two leading budget airlines had collaborated in this fashion.
The alliance allowed the companies to explore joint aircraft purchasing, passenger and ground handling services cooperation and the transportation of each other’s passengers in the event of a disruption. Assuming the focus of the alliance was on cost sharing for services and aircraft procurement, it might prove effective. AirAsia had played the game very well and had ambitious growth plans to keep ahead of the pack. Time would tell if Fernandes and his team could maintain the company’s position as Asia’s -or perhaps the globe’s -most successful budget airline.
But what were the business implications for AirAsia if oil prices remained above $100 a barrel for the foreseeable future? Little possibility. Between slim and none The pattern in other regions suggested that once rules start to relax, growth follows. In the United States, the upsurge of budget carriers saw passenger numbers rise nearly 50 per cent in the five years following deregulation, compared with four per cent for traditional airlines. In 2010, low-fare carriers now had more than a third of the market. In Australia, Virgin Blue took only three years to win a 30 per cent market share.
The growth of low-fare carriers had great potential to spill over into the broader tourist and business travel economy: having more air passengers generates higher demand for hotel rooms. This connection had been seen in Australia, where Virgin Blue took nearly one-third of the domestic market from Qantas Airways (which responded in part by setting up Jetstar). This resulted in a sharp upturn in demand for economy hotels, such as Accor. “In many cases, it’s entirely new business that wouldn’t have happened if it weren’t for cheap air tickets,” commented Peter Hook, general manager for communications at Accor Asia Pacific
. In addition, low-fare carriers might offer options for Asian travelers to mix business with pleasure, as many North American and European business travelers did, by extending trips or bringing family members to accompany them. Ultimately, Fernandes pointed out, budget airlines in Asia had an advantage in that Asia had almost no interregional highways and no high-speed international rail. “There’s a lot of sea in between,” he said. “Air travel is the only way to develop interconnectivity in Asia. ”
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