Airline Weekly - August 15, 2011

Cover Story

Strange Bedfellows: Why is highly profitable AirAsia joining forces with troubled Malaysia Airlines?

There’s nothing abnormal about two airlines forming an alliance. On the contrary, alliance formation is one of the industry’s dominant trends. But an alliance between AirAsia and Malaysia Airlines?

Ten years ago, AirAsia didn’t even exist, at least not in its current form. It wasn’t until December 2001 that a former music executive named Tony Fernandes bought the struggling carrier for a symbolic one Malaysian Ringgit, plus the assumption of half the company’s debt. Let’s just say that turned out to be a pretty good investment.

Today, AirAsia is arguably the world’s most ambitious airline, up there in the rankings with even the Arabian Gulf’s Big Three, and inarguably one of its most profitable. Along with its fast-growing Malaysian shorthaul operation, it owns and works closely with expansion-minded AirAsia X, a longhaul LCC also based in Kuala Lumpur. It operates joint ventures in Thailand and Indonesia, also with big growth plans. And it’s now progressing toward launching additional airlines in Japan (together with All Nippon), Vietnam and the Philippines. Not stopping there, AirAsia recently forged a potentially powerful distribution joint venture with Expedia, giving the online retailer the exclusive third-party rights to sell its tickets in Asia.

You can go on. At the Paris airshow, it bought no fewer than 200 A320-NEOs, then the largest plane order by units ever (until being topped recently by American). It’s been a leader in penetrating markets large and small in China and India. It’s built one of East Asia’s most famous brands, uses social media to great effect, gets more than 20% of its revenue from ancillaries, operates 12 aircraft bases, wants to start an “aviation university,” expects to have as many as 500 planes by 2020, recently launched a loyalty program and more generally takes full advantage of the many benefits of operating in the airline friendly ASEAN region: favorable geography, low labor costs, a large population, huge tourism flows and so on. As it likes to say: Every three minutes, an AirAsia aircraft is either taking off or landing somewhere in... (357 of 1,428 words)

Also Inside this Issue:

It was too much to expect Hong Kong’s Cathay Pacific to replicate last year’s phenomenal first-half financial results. Same for Korea’s Asiana. But both still did reasonably well in the opening half of 2011.

Not so for Gol in Brazil, which started the year with a strong first quarter but saw it all fall apart in the second. Its larger rival TAM, meanwhile, did better last quarter but still not great, highlighting intense yield competition in the Brazilian domestic market. TAM now awaits regulatory clearance for its grand merger with LAN.

In India, Kingfisher lost money again. No surprise there. But its more successful rival SpiceJet also posted a more unusual calendar Q2 loss.

Just how healthy is Virgin Atlantic? The privately held carrier unveiled profits last week, but 1) they covered last year not this year, 2) the profits were unimpressively small and 3) it warned that this year has been much tougher. Maybe it does need to sell itself.

Aeromexico sold part of itself, not out of desperation but to tighten its alliance with Delta, which will now own about 4% of its SkyTeam partner. If Delta’s investment proves even half as successful as Continental’s 1998 investment in Copa, investors will be dancing the cucaracha.

In East Asia, several airlines placed aircraft orders while AirAsia and Malaysia Airlines gave more details about their surprising cooperation agreement. Qantas has something up its sleeve in East Asia, including perhaps a Jetstar-Japan Airlines tie-up. East Asia’s Tiger Airways, meanwhile, is back in the air down under.

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