A Whole New AirAsia

Edward Russell

December 12th, 2022

The pandemic has wrought big changes on Southeast Asia’s largest budget airline, AirAsia. The collection of carriers, primarily owned by Malaysia’s Capital A, is preparing to launch a new airline in Cambodia while also on the cusp of a major corporate overhaul.

Capital A unveiled last week plans for a new local joint venture in Cambodia with Sivilai Asia. The startup timeline and potential routes for the new airline, likely to be named AirAsia Cambodia if the practice at the group’s other airlines is kept, were not released. A local subsidiary would allow AirAsia to operate nonstop routes to countries from Cambodia where it does not have a local operation, for example China, India, and Japan.

“Cambodia is a market that is familiar to us and where we have deep infrastructure in place,” Capital A CEO Tony Fernandes said. “That’s why all our future airlines will be based in Asean,” referring to the Association of Southeast Asian Nations.

The new subsidiary could solidify AirAsia’s lead in the Cambodian market. In December, AirAsia (Malaysia) and Thai AirAsia will operate 13.9 percent of the seats to and from the country, just slightly ahead of partially state-owned Cambodia Angkor Air’s 13.5 percent share, according to Diio by Cirium schedules.

AirAsia and Thai AirAsia serve Phnom Penh and Siem Reap from both Bangkok Don Mueang and Kuala Lumpur. The former begins flights between Penang and Phnom Penh in January.

The group is already the largest in Southeast Asia. AirAsia and AirAsia X’s airlines in Indonesia, Malaysia, Philippines, and Thailand will have 17 percent share of Asean capacity in the first quarter, or nearly 7 points higher than the next largest airline, Lion Air, Diio data show.

The Cambodian play comes after Capital A outlined plans to divest its airline assets to AirAsia X in recent weeks. The company would be renamed AirAsia Aviation in what would essentially be an International Airlines Group for AirAsia-branded carriers in Southeast Asia. That plan, however, is not final and the group described it as “a work in progress,” in a Bursa Malaysia filing on December 6. Interestingly, Capital A does not appear to have an equity stake in AirAsia X since the long-haul, low-cost airline’s pandemic bankruptcy restructuring, potentially marking Capital A’s equity exit from the airline business. However, there remain indirect links between the companies; for one, two of Capital A’s board members — Chairman Kamarudin Bin Meranun and Fam Lee Ee — also sit on the board of AirAsia X.

The corporate restructuring follows Capital A’s decision to sell its holdings in AirAsia India to Tata Sons in November. The airline will become part of Tata’s re-energized Air India with plans to merge it with Air India Express in 2023. And earlier, the group closed its Japanese subsidiary, AirAsia Japan, due to the pandemic in October 2020.

“2022 was about restarting our airline to pre-Covid levels,” Fernandes said, adding that they expect the capacity recovery to be complete by the second quarter of 2023. “The second half of 2023 will be when we focus on our continued efforts in growth.”

Capital A is “confident” that it will return to the black in 2023, Fernandes added.

Edward Russell

Porter’s Economy Bet

Porter Airlines is not so much reinventing itself with the introduction of its first-ever jet aircraft as much as doing more of what it does well: The economy travel experience.

The Toronto-based airline’s new Embraer E195-E2s will keep the all-economy cabin familiar to Porter’s fleet of De Havilland Dash 8-400s. But, while almost every other airline in the Canadian market is going downmarket in economy to compete with the rapidly expanding ranks of discount airlines, Porter will instead launch what could be viewed as a premium economy-light product, PorterReserve, with all the bells and whistles of business class except the seat. The airline will also offer all passengers free inflight wi-fi — though no in-seat entertainment — on the E2s, and continue with its standard economy offering that includes free beer and wine served in real glassware.

“From our perspective, economy is kind of a multi-segmented part of the market,” Porter Chief Commercial Officer Kevin Jackson said in an interview. To that end, its full-service PorterReserve product will be complemented by its existing Porter Classic fares, as well as a no-frills fare option to compete with budget operators.

Porter will introduce its first of 50 E195-E2s that it has on order from Toronto Pearson to Montreal, Ottawa, and Vancouver — the last a new destination for the airline — beginning in February 2023. Additional routes are planned between Halifax, Montreal, Ottawa, and Pearson on longer routes to western Canada, the U.S., and Caribbean destinations. Porter secured a second operating certificate, in addition to the one it uses for Dash-8 flights, for its new jet operation.

Betting that travelers will pay more for an elevated — but still economy — experience is fraught. Remember American Airlines’ “More Room Throughout Coach” campaign in the early 2000s? The carrier attempted to get travelers to pay a little more for extra legroom at every economy seat only to find that people still bought the cheapest fare; though United Airlines proved flyers were then willing to pay an extra fee for additional legroom with its Economy Plus product. American quickly put seats back and dropped the campaign only to emulate United with an extra-legroom offering years later.

Fast forward 20 years and it is a different market. Budget airlines are more budget today with fees for everything from seat assignments to carry-on bags. Segmentation, where an airline splits an aircraft cabin with numerous fare and cabin offerings where the differences are as fuzzy as the curtain dividing economy and first class, is now the norm among large airlines. Even leisure travelers, as they have returned from the pandemic, have shown a greater willingness to pay more for greater comfort when they fly.

A more-segmented future is clearly what Porter plans with its new E2s. While the entire aircraft will feature the same hard product in a 132-seat layout, PorterReserve travelers will be able to sit in seats with extra legroom. And, on flights over 2.5 hours, they will receive free meals; the same meals will be offered for purchase to other passengers. Other than that, everything will be the same onboard — from the wi-fi to the drinks and glassware

This standardized service, where the main difference is whether something is free or for purchase, will reduce costs as compared to offering a separate business or first class cabin, Jackson said. Lower costs, in turn, will ensure that Porter can continue to provide an elevated level of economy service.

“If you’re going to compete in economy, as we intend to do, you have to compete on cost and you have to compete on product,” Jackson said.

Asked about the revenue side of the equation, Jackson said Porter sees a significant potential market of travelers for an offering at the “upper end of the economy segment,” particularly among corporate flyers who do not currently pay for business or first class. Leisure travelers willing to pay for additional onboard space and perks are also a target market, though he repeatedly mentioned the corporate market. Porter has an established brand and relationships with many businesses, as well as travelers, in eastern Canada, particularly Toronto where it is based.

Porter lost money during the pandemic when it shut down for 18 months after a profit in 2019, and expects a loss this year having invested significant capital in its new jet operation, Jackson said. The airline, which is privately held and does not disclose financials, hopes to return to profitability in 2023.

Costs are a challenge for airlines globally. While red-hot travel demand has driven yields well above 2019 levels in many cases, staffing issues, supply chain backlogs, and high oil prices have simultaneously driven up costs. In the U.S., Airlines for America (A4A) estimates that non-fuel unit costs, or cost per available seat mile excluding fuel at its member carriers will increase roughly 19 percent this year compared to 2019. A “normal” increase is typically in the low single digits or flat. The metric was up nearly 15 percent year-over-three-years at Air Canada, Porter’s main competitor, during the quarter ending in September.

Canada’s other main domestic airline, WestJet, in June unveiled plans to return to its low-cost roots and refocus its network on western Canada, particularly its Calgary base. That pivot, while occurring nearly a year after Porter announced its jet plans, created a potential opening for Porter to pick up WestJet flyers in Canada’s eastern cities who are not interested in the airline’s shift west or the offering of its discount subsidiary, Swoop.

Of course, even with WestJet’s pull back in eastern Canada, there is no promise of success for Porter. The Canadian market has seen a surge in low-cost startups during the pandemic, including Jetlines, Lynx Air, and OWG. Porter’s new jet operations, while positioned in a different segment of the market than these startups, will still have to compete with these airlines in a country that has long been dominated by just two major network airlines.

Edward Russell

IATA Raises 2023 Outlook

IATA, which represents most of the world’s airlines, now expects a return to industry profitability next year. The profit will be slim though, equivalent to a net margin of less than 1 percent. The last time airlines earned a collective worldwide profit was 2019, when net margin was 3 percent. As for this year, net losses will approach $7 billion, down from $42 billion in 2021 and a massive $138 billion in 2020.

When IATA last ventured a profit forecast in June, it was considerably more pessimistic about 2022. At the time it expected an industry loss of nearly $10 billion. Why did 2022 turn out better than expected? IATA pointed to “strengthened yields and strong cost control.” Ongoing cargo strength helped too. Nevertheless, other factors turned out worse than expected. One was China’s insistence on maintaining Covid-19 travel restrictions. Another was a deteriorating global economic outlook. In fact, while revenues have revived at a surprisingly rapid clip, IATA’s June forecast saw passenger traffic reaching 82 percent of pre-crisis levels for the full year. Now it looks like it will reach just 71 percent, in large part because China never reopened. On the cost side, IATA believed airlines would pay $192 billion for fuel this year. The actual figure will be more like $222 billion.

Recent oil price declines, however, along with sustained pent-up demand, are reasons for optimism about 2023. China remains a big uncertainty though, and cost pressures remain elevated, in part caused by labor, skill, and capacity shortages. Other potential concerns next year include recession, proposals for higher infrastructure charges (airports and air navigation), and a cooling off in cargo markets. Hence the reason IATA says that “risks to our forecast are predominantly on the downside.” Financial performance, to be sure, varies greatly by region. This year, North America will be the only region where airlines earn a collective profit. Next year, if IATA’s forecast holds, North America will be joined by Europe and the Middle East. But Asia-Pacific, Latin America, and Africa will remain in the red.

Jay Shabat

In Other News

  • The Lufthansa Group could be moving the lead in the beauty contest for ITA Airways. The new Italian government hopes to reach a tentative privatization deal with the group, potentially including Italian rail operator Ferrovie by the end of the year, Italian daily Corriere Della Serra reported. The move follows the expiration of previous preferred bidder Certares, which was joined by Air France-KLM and Delta Air Lines, exclusivity period to finalize a deal at the end of October. Air France-KLM has recently confirmed interest in making an investment in TAP Air Portugal, which could potentially leave ITA for Lufthansa.
  • Brazil is not an easy place to run an airline. Currency volatility alone is a major headache, to speak nothing of high fuel taxes and limited demand to neighboring countries. It does have more than 200 million people though, and just three major airlines to serve them. One of those, Azul, held an investor day event last week. Immediately, it described how fuel prices in Brazil have increased 115 percent since 2019, in part due to depreciation of the Brazilian real. Corporate travel demand, meanwhile, is still significantly below 2019 levels. Yet Azul has recovered financially, thanks to corporate fares that are higher than they’ve ever been. It saw strong gains in non-business traffic. Azul has also gained domestic market share. It’s boosted ancillary revenues. And it’s getting major contributions from its cargo, tour operator, and loyalty businesses. Critical to Azul’s business plan is fleet modernization, focused on Airbus A320neos and Embraer E2s. As for its network, the airline scored a major win by securing lots of new slots at Sao Paulo’s downtown Congonhas airport.
  • JetSmart, the Indigo Partners-owned Chilean discounter, wants to open a Colombian operation. If approved by Colombia’s regulator Aerocivil, it would be JetSmart’s fourth subsidiary after Argentina, Chile, and Peru. The airline has proposed operating up to 111 routes in Colombia if granted an air operators certificate. JetSmart currently serves Bogotá, Cali, and Medellin from Chile currently, per Diio. The application comes as Colombia’s main budget airline, Viva Air, is seeking a merger with Avianca amid financial troubles.
  • Air New Zealand raised its pre-tax and items profit outlook by at least NZ$20 million ($13 million) to NZ$295-325 million during the six months ending in December, or the first half of the airline’s 2023 fiscal year. The carrier cited strong demand and the recent decrease in oil prices for the improved outlook. Air New Zealand plans to fly 75 percent of its pre-Covid system capacity in December.
  • We don’t regularly report on monthly traffic numbers but sometimes they merit mention. Norse Atlantic, the “not” Norwegian Air longhaul copycat, had a load factor of just 50 percent in November, particularly from its Oslo base, the airline said last week. While we knew it was having a challenging time — it has suspended some flights and subleased out five of its 12 Boeing 787s to generate revenue — half empty flights is not sustainable for any airline, let alone one whose business model is built on low fares and very full planes. Norse raised roughly $30 million in cash from a private placement in November.

Edward Russell & Jay Shabat

Edward Russell

December 12th, 2022