Low-cost Competition

Malaysia

Economic News

22 Jul 2010
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Competition between two of Malaysia's major carriers, AirAsia and Malaysia Airlines, is heating up. Both companies are now offering "zero-fare" programmes that oblige passengers to pay taxes and surcharges only.



On May 14, national airline MAS announced it would be offering "zero-fare" flights on selected international routes in Asia. MAS's managing director and chief executive officer Seri Idris Jala said the airline would reserve 1m tickets under the scheme for this year. Earlier in the month the company had launched similar deals for domestic flights.



AirAsia claims that MAS is unfairly copying its low-price strategy. It has countered with a "sub-zero" programme that it says will keep its flights below the cost of those of its rival, and has issued a pledge to refund passengers the difference if they find a cheaper flight on the same route with MAS.



Tony Fernandes, AirAsia's chief executive officer, has spoken out about MAS's fare cuts, as well as the government's subsidy of several of its international flight routes, claiming that MAS has an unfair advantage over his company. He has suggested that MAS may be using part of its state funding to make up for the difference lost on the "zero-fare" domestic tickets.



He told the local press, "The government will never allow MAS to fail but a private company? Who is going to save us? I'm not against competition but it has to be a level playing field. You can't send me into a boxing match with one hand tied behind my back."



Fernandes's views also stem from limits imposed on AirAsia's right to fly the popular and lucrative Singapore-Kuala Lumpur route. MAS currently has 69 flights per week between the two cities, whereas AirAsia is limited to 14.



Transport minister Ong Tee Keat has attempted to cool the dispute, the latest of a series of spats between the two airlines. While asserting that he had "no qualms about healthy competition", Ong said he sought to avoid such conflicts in the industry.



"I personally will step in to investigate," Ong told the government news agency on May 15. "I should talk to both of them at this juncture to find out exactly what went wrong."



With competition intensifying at home and escalating fuel costs adding further pressure, AirAsia may have decided that extending its network of international flights is its best option to preserve profitability. On May 15, AirAsia's long-haul budget subsidiary AirAsia X announced it would be expanding its operations in Australia.



Beginning on November 2, AirAsia X will be offering six return flights per week between Perth and Kuala Lumpur. This will be its second destination in Australia, as it already operates four return flights weekly between the Malaysian capital and the Gold Coast. Speaking to the local press on May 14, Fernandes said AirAsia X had already carried 50,000 passengers on its Gold Coast route.



"Looking at what we've done with these [...] routes, we are confident of creating a bigger market in Western Australia," Fernandes said.



AirAsia X has also discussed plans to open flights to the UK by the end of the year, targeting London and Manchester as possible destinations. It has also floated plans to fly to more destinations in China, a large and fast-growing air travel market.



While the benefits to the consumer of lower air fares are clear, AirAsia, MAS and their competitors will be wary of cutting corners to reduce costs; the poor reputation of Indonesia's airlines and their recent ban from EU airspace is a timely lesson.



Competition and rising overheads are not challenges for Malaysian airlines alone. The recent merger between the US's Northwest Airlines and Delta has generally been seen as a marriage of convenience to reduce backroom costs in the face of narrowing margins. Malaysia's air travel market, and that of the region, however, seems to be showing enough growth for everyone - for the moment at least.

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