Malaysia Airlines - Orient Aviation

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Open skies means price war
Stand by for price wars on the Malaysia-
Singapore peninsula when phase one
of the Association of South East Asian
Nations (ASEAN) open skies pact comes into
effect in December 2008.
The agreement, which in effect allows airlines
from all ASEAN countries to operate when and
how they want between capital cities of member
states, will bring to an end more than 30 years
of dominance by Singapore Airlines (SIA) and
Malaysia Airlines (MAS) on the route between
Singapore and Kuala Lumpur.
The national flag carriers operate more than
200 weekly flights and control some 85% of the
traffic on the 30-minute hop, under a 34-yearold
air services agreement between the two countries – last
revised in 1980 – which does not allow for new players. The
remaining traffic is carried by international airlines operating
fifth freedom flights.
Now, hungry low-cost carriers (LCCs) such as Malaysia’s
AirAsia and Singapore’s Tiger Airways are queuing up to get in
on the act. Round-trip tickets from the incumbents currently sell
at US$294. AirAsia chief executive, Tony Fernandes, has already
signalled he will offer fares as low as $60.
With Tiger, partly owned by SIA, set to
enter the route as soon as it can, MAS is
also readying for battle. Chief executive, Idris
Jala, says the carrier has been preparing for
liberalization for some time. It is no coincidence
that its three-year turnaround plan – designed
to get it back into sustainable profitability after
horrendous losses two years ago – will be
completed before open skies arrive.
“What I didn’t like was some people
lobbying for an early liberalization. That’s like
moving the goalposts while you’re playing a
match,” said Idris. The impending arrival of
LCCs on the route is also the reason why
MAS launched its own budget airline, Firefly, he added. “I’d
expect that post- December 2008, a lot of people will want
to fly those routes and that’s why we have Firefly. That’s our
tool to participate in that process.”
Under the ASEAN agreement, air routes between capital
cities of member countries will be liberalised first. This will
gradually be expanded to other cities by 2015, making the
entire region fully liberalised.
MAS chief executive,
Idris Jala: been preparing
for liberalization for
some time
consolidation partner, as SIA has done, and
then wait for the wind to change direction.
Consolidation can take numerous forms,
they point out, from outright purchase
and merger, to cross-equity investment
aimed at strengthening partnerships. “I see
consolidation, or a series of these strategic
deals, as being a fairly constant flow from
now on,” said Negline.
UBS’s Horth agreed. “I don’t think it will
be big bang, but you will see more things like
the SIA-CEA deal. Fully fledged mergers
are a little more difficult because of national
interest but if you want to take a 10-year
view, anything is possible. If you had asked
10 years ago, was Air France-KLM possible,
most people would have said no.”
Although Chew stresses he can’t speak
for his two Star Alliance partners, ANA and
Asiana, he sees their equity swap as more
symbolic than substantive.
“It serves to cement their relationship,
even though that relationship of codesharing,
lounge facility sharing, is already
being done under the Star umbrella of
partnership,” he said.
“Perhaps they are positioning themselves
for the day when all the barriers come
down.”
Legacy airlines are not alone in eyeing
Jetstar: looking for partners
forms of consolidation. The low-cost sector
is also on the move. Malaysia’s AirAsia has
already invested in carriers in Indonesia and
Thailand to extend its brand and recently
moved to take a stake in the Philippine
operator Cebu Pacific. Sources say both
parties wanted the deal, but it foundered
on price.
Jetstar is also sounding out potential
partners. Now that its parent Qantas has
taken a 30% stake in Vietnam’s Pacific
Airlines, which is likely to become Jetstar
Vietnam, Jetstar chief executive, Alan
Joyce, has confirmed he is looking at taking
minority stakes in other Asian airlines as
part of an aggressive expansion plan. “We
are talking to a number of different partners
in Asia but there is nothing formal at the
moment,” he said. Under discussion are
investment in airlines in the Philippines,
Indonesia and Thailand.
O v e r a l l , t h e c o n s e n s u s i s t h a t
consolidation will continue to gather pace
within national boundaries, but until there
is a breakthrough in terms of cross-border
investment regulation, airlines will be forced
to forge partnerships in whatever way they
can. Both Chew and Bisignani see the
greatest impediment to change as political.
“There has been progress in some areas
but it has not been quick enough,” said Chew.
“We are a global industry yet we are the only
one, when you compare us to others, where
cross-border ownership and management
control is not permitted. We have one foot in
the 21st century and one foot in the 1940s.”
It may be a mixed picture but Bisignani
believes that after 40 years of nothing
happening, there has been movement over
recent years.
“It is a step approach and we are moving
in the right direction,” he said. “Let’s hope
these steps can move a bit faster over the next
few years.”
14 ORIENT AVIATION JULY/AUGUST 2007