AirAsia's Long-Haul Model Won't Fly
Munching through a $10 egg salad sandwich while crushed into a narrow plastic seat, it's easy to imagine that the business model of low-cost carriers is all about how they save money while aloft. In fact, it's almost the direct opposite: Discount airlines' real secret sauce is what they do when no one's on board.
In theory, one of Ryanair's 737-800s flying the 90-minute hop from Dublin to London could cram in nine plane-loads of passengers between 6 a.m. and midnight if it keeps to the carrier's touted 25-minute turnaround time. Stretch the period on the tarmac to 60 minutes, and the number of plane-loads drops to seven. It doesn't sound like a lot, but spread over 189 seats per plane, 365 days a year and a 10-year operating life, that's about 1.4 million more opportunities to sell a ticket to defray the aircraft's $96 million price tag.
Things look different in Southeast Asia, where geography and the ambitions of local airline executives have spawned a clutch of long-haul low-cost carriers. The big northern hemisphere discounters have few routes longer than 4,000 kilometers (2,500 miles) -- there's a reason it's almost impossible to catch a direct flight between the U.S. East and West Coasts on Southwest Airlines. The big three Asian budget airlines go much farther:
Does this long-haul low-cost airline model work? The numbers don't look good. Airlines have been enjoying the benefits of sub-$100 jet fuel prices for more than a year now, but AirAsia X on Wednesday announced its eighth consecutive quarterly loss and Singapore Air's long-haul discounter Scoot has yet to report a profit. Qantas posted a $51 million operating profit for its long-haul Jetstar International offshoot in the six months through December 2014, but the fact that it doesn't break out these numbers in a consistent way suggests the picture isn't always so rosy.
There's a host of reasons why things should be tougher over long distances for low-cost carriers. More time spent in the air means fewer opportunities to save costs during down-time on the ground, and a greater risk of having to put flight crew up for the night in a hotel. The 737s and Airbus A320s favored by low-cost carriers generally don't fly much farther than 5,000 kilometers, meaning you have to buy bigger twin-aisle planes that are harder to fill with passengers and consume more fuel. The jury's still out on whether more fuel-efficient jets such as Boeing's 787 Dreamliner and Airbus's A350 can change this dynamic.
Passengers are less accepting of the sort of bare-bones service offered by the likes of Ryanair if they're stuck on board for six hours or more, so ancillary costs will be higher. As if all of that wasn't enough, you'll also likely find yourself up against full-service carriers who are making a nice margin in their business and first-class cabins, so can offer surprisingly tough price competition at the back of the plane.
That's a particularly pertinent issue in Southeast Asia, where Malaysian Airlines is taking the fight to the competition with full-service flights at discount-carrier prices under new Chief Executive Officer Christoph Mueller, who made his name defending Aer Lingus against Ryanair.
Given all that, why would anyone even think of running a long-haul low-cost carrier? Well, every airline has some routes that are barely profitable or money-losing on their own terms, but deliver a consistent flow of passengers into hub airports and on to more lucrative destinations. Such feeder traffic is at the heart of aviation's hub-and-spoke model: Singapore Air's best way of making money from Melbournites wanting a cheap holiday in Langkawi is to make sure Scoot has a regular direct route between its home hub and the Australian city. But the set-up only really makes sense if the losing routes can be hidden and offset within a group that is profitable in aggregate.
That's what's unusual about AirAsia X. Co-founder Tony Fernandes, one of aviation's master salesmen, has managed to persuade Malaysian shareholders not only to back the existence of a long-haul low-cost carrier, but to shoulder a larger slice of the risk by floating AirAsia X as an independent company. Right now, the problems of the AirAsia group have led to chatter that he's looking to take his shorter-haul flagship AirAsia Bhd. private -- rumors that he's not exactly denying.
Shareholders should resist any such proposal. Despite falling 49 percent this year and suffering some questions about its accounting, AirAsia is a decent airline that's put in just one quarter of losses since 2008. If there's any carrier in Fernandes's empire that needs to move into the shadows, it's AirAsia X.
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