Low Cost, Long Hop

Tony Fernandes comes across as slightly cocky. But then the 42-year-old has earned the right to be. In five short years he's transformed air travel in South East Asia, and if his latest gamble pays off he'll soon be shaking up the aviation scene worldwide. This month, he announced the launch of Air Asia X--sister carrier to his Malaysia-based Air Asia--which aims to apply the budget airline's short-haul business model to transcontinental flights. "There's a real yearning to go further both from Europe and China down to Malaysia and vice versa," Fernandes says. "So over the last year and a half we've been exploring to see whether there's a product that will [apply] the principles of low-cost carriers to this new airline."

Come July, Air Asia X plans to launch its inaugural service between Kuala Lumpur and the United Kingdom with roundtrip fares starting at around $80 for early bookings. The plan is a network of budget routes linking Asia to Europe and eventually North America. Nor is X the only budget carrier pushing the distance envelope. In October Oasis Hong Kong Airlines launched daily low-cost service to London, and over Christmas sold round-trip passages for as little as $300. Its twist on the model is a lavish business class with seats priced two-thirds lower than Hong Kong flagship Cathay Pacific. And it, too, plans new routes to Europe, the United States and Canada.

Not since Freddie Laker pioneered no-frills flights from New York to London back in 1977 have new players attempted anything similar. So why now? Countries like Malaysia, Vietnam and Indonesia have all opened up to airline competition since 2001. Oasis CEO Stephen Miller says that with governments protecting their skies less "rigorously," budget carriers have more opportunity. Another factor is the rise of a new consumer class in Asia, where airline bookings are forecast to rise 5.7 percent a year thru 2010. Last, established airlines, with their huge staffs and costly pension plans, now dominate lucrative long-distance routes but look easy to undercut on a price-per-seat basis. "American low-cost carriers are flying further than before," says Ramanan Vijayaraghavan, an analyst at Frost and Sullivan consulting, "and it seems like a worldwide trend [for budget airlines] to move towards a long-haul, low-cost model."

The budget formula hasn't changed much since Laker Airways took to the skies and changed the industry forever. It slashes overhead by flying one model of aircraft to cut maintenance costs, scheduling quick turnarounds to keep planes in the air longer and ticketing directly to cut out travel agencies. It also means outsourcing everything from catering to cargo. And most low-cost carriers don't offer VIP lounges, in-flight meals or even custodial services (cabin crews tidy up between flights). Essentially, the approach views airliners as buses, not limousines.

Already, budget carriers have reshaped Asia's travel landscape by giving millions of new customers in markets like Indonesia and India their first chance to soar. One of the big winners has been Air Asia. Established in 2001 with just two planes, it now boasts a fleet of 50 aircraft and has 135 more on order; this year it expects to carry 18 million passengers on routes spanning eight Asian countries. That success has made Fernandes, a former music industry executive who eschews Malaysia's traditional business culture built on political connections, Asia's equivalent of British mogul Richard Branson (though he dislikes the comparison, and doesn't do cheerful knitwear, hot-air balloons or goatees). He's an unashamed football fan who engineered a marketing tie with the world's biggest soccer club, Manchester United, plastering his planes with images of its star players.

Fernandes believes the same yearning for affordable travel that underlies his first airline's success will drive demand on long-haul routes as well. In a region where average annual incomes are less than $3,000, he thinks cheap seats mean the difference between traveling and staying home. "We created a new market," he says of his first airline. And once its long-haul cousin is airborne, he adds, "someone sitting in KL who's seen Big Ben on the BBC a million times may have the possibility to go there and see it for himself."

Miller has a different vision for Oasis. Its two 747-400s have large business-class cabins, and its target customers are business fliers who "don't think business class [on traditional carriers] is value for money" and tourists in a category he calls premium leisure. "The idea is that the whole family could now afford to travel business class," he says.

Success is hardly assured. After Laker's Skytrain went bust in 1982 a court ruled that other airlines had illegally priced his airline out of business. His successors must persuade protectionist governments that the threat they pose to flag carriers is offset by the growth they bring to local economies. And they must decide carefully whether to compete on major routes like KL or Hong Kong to London, or fly instead to secondary cities. For Air Asia X, says Ramanan, choosing destinations like Madrid or Manchester--two cities Malaysia Airlines no longer serves--"may prove immensely beneficial" as a strategy. There are also customs and immigration practices in places like India that make it hard to turn a plane around in minutes.

Meanwhile, Air Asia X is hurriedly negotiating with aircraft makers (it has yet to pick between Boeing and Airbus) and with airports over landing slots. Six months isn't long to pull a new airline together but as CEO Raja Mohammad Azmi says, they did it before with Air Asia. "I was telling my staff it's a once in a lifetime experience, but now it's like lightning strikes twice." Flagship airlines may not know what hit them.

Join the Discussion