Quotes of the Day
It's only moments before takeoff when Tony Fernandes, chief executive officer of high-flying budget airline AirAsia, rushes onto a plane destined for the Malaysian resort town of Kota Kinabalu. But there's no plum seat waiting for him. Even top managers at no-frills airlines don't get any frills. Fernandes treks through the crowded plane searching for an empty chair, ending up in one of the last rows. When flight attendants appear with a cart of sodas and instant noodles for sale, he plunks down 80¢ for a can of Milo chocolate drink. Fernandes then spends much of the two-hour journey chatting and shaking hands with each of the 140 passengers on the flight. After the plane touches down, he stands on the tarmac in his trademark red baseball cap, waves goodbye to the departing passengers and helps a team of baggage handlers unload suitcases from the cargo hold.
Fernandes wouldn't have it any other way. "I love it when I struggle to find a seat," he beams. With ticket prices as low as 50¢, seats have often been hard to find. Fernandes expects to fly 4 million passengers this year, twice as many as in 2003. His success heralds a revolution in the airline industry in Asia. Although Americans and Europeans have benefited from low-cost air travel for years, tight regulation, powerful national-flag carriers and a dearth of airports have kept budget airlines at bay in Asia. But finally the region's long-suffering travelers are joining in. Five years ago, Asia had only one low-cost airline; today there are 13 either already in the air or due to launch later this year. The boom is lowering airfares across the region, increasing competition for major airlines and making air travel accessible to tens of millions who could never otherwise have afforded to fly.
Fernandes, a fast-talking, 40-year-old Malaysian, has become the poster child for the new movement. A 12-year veteran at Warner Music in Asia, Fernandes sold his pricey AOL Time Warner stock options and in 2001 bought into a sleepy two-plane airline in Kuala Lumpur. He now has 18 planes and is looking to buy 80 more over the next eight years. From starting with only 12 flights a day, AirAsia currently has a hundred. On July 1 alone, AirAsia launched its first flight from Kuala Lumpur to Jakarta, added a second to Bangkok and announced two more to Malaysian cities. Four days later, Fernandes was on AirAsia's first flight from Bangkok to the gambling mecca of Macau. Upcoming in August: flights to Bali. He's also eyeing China and India. Fernandes boasts, "We have transformed the way people think about flying."
The cheap fares are luring Asians away from rickety buses, inefficient trains and traffic-choked highways and convincing many to travel more often. Laykha Boonlerd, a 26-year-old bank employee in Kuala Lumpur, could never before afford to fly to Bangkok to see her family and instead made an excruciating 24-hour pilgrimage by bus and train. But with a one-way ticket on AirAsia costing only $26—much less than the price she says she was quoted on national-flag carrier Malaysia Airlines—she decided to fly to Bangkok for the first time in July. "I will travel much more with AirAsia," she says. Omar Jaafar, a 51-year-old professor waiting for his AirAsia flight at Kota Kinabalu's airport, says budget travel has belatedly introduced him to the joys of vacations. Before AirAsia, he almost never traveled for fun. But with tickets costing as little as half of what Malaysia Airlines charges, he's heading off to climb Mount Kinabalu—his second leisure trip in the past year. "The temptation to go on vacation is much greater than before," he says.
There are many potential Boonlerds and Jaafars out there to fuel the rise of budget airlines. Fernandes estimates that only 6% of all Malaysians have ever set foot on a plane; in Indonesia, a mere 1% of its 238 million people has. Indeed, about half the travelers on Asia's budget airlines are first-time flyers. As incomes rise steadily around Asia, industry analysts expect air travel to grow more than 5% a year across the region over the next two decades, with growth of more than 8% in China.
The no-frills carriers have also been helped by the changing attitudes of Asian governments. Instead of defending national-flag carriers, officials are clued in to the possibility that budget airlines can invigorate underused airports and attract much-needed tourist dollars. Singapore is considering building an entire new terminal as a hub for budget carriers, and other countries have been wooing no-frills airlines by reducing airport fees. In Kota Kinabalu, AirAsia took over a mothballed terminal, which now buzzes with five flights a day. Fernandes wants to expand the building and turn it into a hub for flights around the region. "The loyalty to national carriers is getting more and more compromised," he says. "There's no more cozy cartel where they can do what they want."
Asia's major airlines will soon start feeling the pinch. Airline analysts and executives expect budget carriers to drag down fares throughout Asia. Though that's good news for consumers, it's not for the big airlines. In Europe and the U.S., budget airlines, led by Dublin-based Ryanair, wreaked havoc on major airlines by slashing fares and stealing customers. Both Singapore Airlines and Hong Kong's Cathay Pacific, Asia's premier airlines, deny that they are cutting prices in response to this new threat. But they have been offering what they call routine special promotions. In May, Cathay Pacific sold round-trips between Hong Kong and Singapore for $128, even less than the $160 fare offered by Singapore-based low-cost carrier Valuair, which started flying that same month. Major airlines "have been advertising prices even lower than ours," says Lim Chin Beng, Valuair's chairman. If they "want to lose money by undercutting us, good luck to them."
What makes the budget carriers such ornery opponents is their relentless cost cutting. Fernandes, who has dreamed up all kinds of ways to save money, claims AirAsia is the world's lowest-cost airline. He pays his flight attendants to clean planes instead of special crews, which not only lowers costs but chops the time spent boarding at terminals to 25 minutes—about half that of the major airlines. His pilots are trained to land at a later point on the runway and at a slower speed to conserve fuel and reduce wear and tear on tires. Half of AirAsia's tickets are sold over the Internet, eliminating travel-agent fees. Passengers pay for their food and drinks. When a professional aviation construction outfit asked for $20 million to build a hanger at Kuala Lumpur's airport, Fernandes asked the small contractor who built his home to do it instead for $500,000. "There is a lot of excess in the airline industry," he says. "The challenge is to change the mind-set of staff so they eat, sleep and breathe costs."
Still, even Fernandes doesn't expect budget airlines to create the same upheaval for big carriers in Asia as they have in the U.S. and Europe. A tighter web of regulation provides established airlines more protection by preventing low-cost carriers hopping from city to city around Asia in the way Ryanair does in Europe. And, with only 2% of airline capacity in the region, the budget carriers have a long way to go to challenge the big boys. Most of all, major Asian airlines have much lower costs than their American and European counterparts, allowing them to compete more easily. In Europe, for example, no-frills airlines have costs 60% lower than major airlines; in Asia, HSBC Securities estimates that the gap can be held to 30%.
Their success at containing costs means that major airlines can afford to routinely sell some tickets at prices that are competitive with those of budget carriers. Overall, Fernandes says his airline charges about half as much as major competitors, but only about 30% of his seats are sold at the lowest advertised price. Fares increase as the plane fills up, especially on very popular routes, so passengers need to buy early to get the dirt-cheap fares. Sam Chan, a Singaporean trader, found this out on a June business trip to Malaysia. He purchased a one-way ticket from Kuala Lumpur to Kota Kinabalu the same day as the flight for more than $80—not much less than the Malaysia Airlines price, he says. And then, he gripes, he had to buy his own food. When a passenger with whom Fernandes is chatting complains that the number of cheap seats should be expanded, the CEO responds jokingly: "If I did that, I'd go bankrupt. Or you'd have to fly in planes with propellers."
With so many budget carriers starting up, they might be a bigger threat to each other than to the major carriers. Thailand has no fewer than seven low-cost operators. Tiny Singapore will be home to three: Valuair, Tiger Airways and an entry in which Australia's Qantas Airways is a major investor. Backed by powerhouse Singapore Airlines, Tiger plans to launch late this year on at least six routes. "We'll grow as quickly as we can and fly wherever we can," vows Stephen Johnson of Phoenix-based Indigo Partners, an investment company that owns 24% of Tiger. But for all these grandiose dreams, executives believe that not all of the budget carriers can survive. "There is going to have to be a consolidation or shakeout in the industry," warns Tiger's chairman William Franke, a former CEO of America West.
The rivalry among no-frills flyers is already getting brutal. Udom Tantiprasongchai, chief executive of Orient Thai Airlines, says fierce competition from AirAsia and flag carrier Thai Airways has forced him to slash the fare on his One-Two-Go budget service from Bangkok to Chiang Mai to less than $25, about 30% lower than he had planned. At that price, he admits he's losing money. But Udom has wreaked revenge. He says he routinely employs a team in his office to go on the Internet and buy up as many of the cheapest tickets on AirAsia flights as they can get, often spending more than $3,500 a day. It's a small price to pay, he argues, to keep the low-price tickets out of the hands of potential AirAsia customers and to foster ill will toward his competitor. (Fernandes contends this hasn't damaged his business in Thailand.) "I buy them and throw them away," Udom says, adding, "I didn't expect this dogfight to be so serious."
- Michael Schuman | Kota Kinabalu
- Budget airlines are changing the way Asians fly, making travel blissfully accessible to the masses