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AirAsia-MAS alliance could lead to more strategic changes across Asia

A GROUNDBREAKING TIE-UP BETWEEN AIRASIA AND MALAYSIA AIRLINES (MAS) could usher in an era of unprecedented consolidation in Asia and more strategic movements across an industry which has already been evolving at breakneck speed. Tune Air, AirAsia’s part parent, forged a landmark agreement in Aug-2011 with Khazanah Nasional, a Malaysian-government controlled investment company which has a 70% stake in MAS. The deal gives Tune Air a 20.5% stake in MAS and Khazanah a 10% stake in AirAsia through a share swap.

For AirAsia, which in its short 10-year history has overtaken MAS to become Malaysia’s largest carrier based on passengers, the deal potentially opens a whole new world beyond its core market. Regulatory hurdles, which have always been AirAsia’s biggest challenge to growth, will also be eliminated as AirAsia benefits from its new link with a government-owned investment firm.

The deal could prove even more beneficial to MAS and invigorate the flag carrier, which has seen its shares drop significantly over the past several months, reaching a nine-year low in May-2011. Cooperation between the two Malaysian carriers, which at the very least will include coordinated route networks, should instantly improve MAS’ profitability.

AirAsia founder and group CEO Tony Fernandes says the tie-up with MAS “is really a growth story” as both airlines will be able to grow faster by focusing on their core competencies. There will be no more “wasted energy” that comes with competing in the same sectors of the market. Significant cost savings are also envisioned for both companies as they look to work together in areas such as maintenance, cargo, ground handling and aircraft procurement.

The stock swap could also be the first step towards a merger between the two Malaysian airline groups. Dato’ Sri Fernandes was granted a seat on the MAS board along with AirAsia Group deputy CEO Kamarudin Meranum. Dato’ Sri Fernandes immediately started a review of MAS’ new strategic plan and quickly put his stamp of approval on the carrier’s Jun-2011 decision to join the oneworld alliance. MAS’ new board will also need to appoint a CEO to replace Azmil Zahruddin, who has resigned to assume a position at Khazanah.

If MAS goes forward with its planned membership in oneworld, a potential four-way alliance involving Qantas, Jetstar, AirAsia and MAS could theoretically emerge. Qantas is sponsoring MAS’ entry into oneworld while AirAsia and Jetstar have had, since Jan-2010, a loose alliance that focuses on joint purchasing opportunities. A stronger alliance and the possibility of an equity swap would further widen the gap between AirAsia/Jetstar and other LCC carriers in the region. AirAsia and Jetstar are already by far the two largest LCC groups in Asia Pacific and combined control almost 40% of the region’s fast-growing LCC market, which they expect to maintain as a result of their large orders for the A320neo.

Strong Qantas-MAS and Jetstar-AirAsia relationships, with the possibility of an equity tie-up later, would reshape the dynamics of the entire Asian marketplace. Such a tie-up would be the biggest step yet towards consolidation in a region that has not seen the consolidation that has reshaped the industry in Europe and North America, due primarily to regulatory restrictions. Other airline groups in the region such as Singapore Airlines (SIA) could be compelled to make similar moves.

Qantas previously looked at acquiring a stake in MAS but concluded against an equity tie-up. It also looked at basing its planned Asian full service carrier in Kuala Lumpur but is now leaning towards selecting a Singapore base. The new carrier will launch services next year, operating 11 A320s in a low-density configuration comprised of lie-flat business and premium economy seats. MAS should welcome Qantas’ expected decision to put the new carrier in Singapore as that means the new carrier will not compete directly against MAS’ full service regional operation but instead will take on MAS archrival SIA.

In Malaysia, where the AirAsia and MAS groups control about 80% of total capacity, the two companies have committed not to cut capacity. But reduced route competition will almost certainly be one outcome of their agreement. The tie-up will require competition authority approval and come under additional scrutiny from next year, when Malaysia’s new Competition Act is implemented, but is unlikely to be blocked as the two companies will at least for now remain independent.

 

*Based on seats per week for last week of September. AirAsia figure includes flights operated by Malaysia AirAsia, AirAsia X, Thai AirAsia and Indonesia AirAsia. MAS figure includes flights operated by Malaysia Airlines, Firefly and MASwings. SIA figure includes flights operated by Singapore Airlines and SilkAir. Carriers with market shares of less than 1% are included as others. 

AirAsia and MAS will continue to operate side by side on major domestic routes. MAS will focus on the higher end of the market, offering a full service and a connection product to its international routes. AirAsia, which operates out of a low-cost terminal at the opposite end of Kuala Lumpur International Airport (KLIA), will continue to offer a low-fare point-to-point product. If managed properly the AirAsia and MAS products can be complementary, following a similar strategy that the Qantas Group now employs with the Qantas and Jetstar brands in the Australian domestic market and that Garuda uses with the Garuda and Citilink brands.

On long-haul routes, AirAsia X will inevitably compete against MAS in more markets. But if managed properly the two products can become complementary, again using the Qantas and Jetstar example. AirAsia and MAS also expect their deal to open up more network opportunities for both groups as they focus on different sectors of the long-haul market. The tie-up should make both carriers more formidable competitors against rivals that now have larger long-haul networks. For example, more destinations in Europe, where SIA has a much larger network than MAS, could become viable.

While MAS and AirAsia X will continue to compete on several long-haul routes, AirAsia X could be used to take over some underperforming MAS routes and open up leisure markets which MAS could not operate profitably. Access to markets should be less of a challenge for AirAsia X as the two airline groups start to pursue network synergies and stop haggling over traffic rights. A touchstone in this context may be the Kuala-Lumpur-Sydney route, where AirAsia X has been fighting hard for designation from Malaysian authorities over the past two years.

Khazanah at a later stage plans to acquire a 10% stake in AirAsia X, which is not part of the Malaysia-listed AirAsia Group and is planning its own IPO. Dato’ Sri Fernandes says a codeshare or connection product is not planned as part of the new AirAsia-MAS tie-up. But it would make sense, particularly for AirAsia X.

A joint widebody order for AirAsia X and MAS could also be one of the first tangible outcomes of the new tie-up. MAS has been looking at next-generation medium size widebodies and could jointly purchase A350s with AirAsia X as the latter looks to top up its own A350 order. The MAS group operates 126 aircraft – consisting of 49 widebodies, 57 narrowbodies and 20 turboprops – and has 67 more aircraft on order, but only 20 widebodies. AirAsia Malaysia currently has a fleet of 53 narrowbodies, although it is likely to get a relatively small allocation from the 283 aircraft the AirAsia Group has on order. AirAsia X has 11 widebodies with orders for an additional 30.

As part of the deal, MAS has committed to converting its Firefly subsidiary from an LCC into a full service regional carrier. The shift will result in Firefly exiting domestic trunk routes, which it has added over the past year along with B737s, resulting in new LCC competition for AirAsia. Firefly will be left with an all-turboprop fleet, focusing on short domestic and international routes primarily from Kuala Lumpur alternative airport Subang. A merger between Firefly and MASwings, which already follows a full service regional carrier model and only operates turboprops within east Malaysia, is also a possibility.

MAS is planning to move the eight B737s now at Firefly to proposed new full service regional carrier Sapphire, but it is unclear how the Sapphire brand will be differentiated from the MAS brand. Unlike SIA, which uses SilkAir to operate regional routes, and Thai Airways, which plans to hand over from next year its regional routes to new unit Thai Smile, MAS has a large narrowbody fleet that is used for full service domestic and regional international flights.

While AirAsia has continued to be highly profitable despite the rise in fuel prices, MAS has incurred large losses in 1H2011 and expects to end the year in the red. MAS will likely continue to struggle in the near-term, but the flag carrier now finds itself at the forefront of a strategy shift which will likely force a response from other carriers in the region. AirAsia’s outlook was already very bright and on a growth path that would make it one of the world’s largest LCC players.

The tie-up with MAS has huge significance because its home market now is almost guaranteed to be free of significant competition and access challenges. Through joint purchasing and other synergies, both carriers’ ex-fuel unit costs will also undoubtedly be reduced, making MAS a more formidable competitor and further widen the cost gap AirAsia already enjoys over other LCCs.



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