If a company could ever symbolise the development of the Asean bloc as it prepares for economic integration in 2015, AirAsia might stake a large claim.
Tony Fernandes’ low-cost Malaysia-based airline not only connects much of the region but has also been instrumental in lobbying governments for better coordination between states.
Perhaps more importantly, AirAsia, Asean’s biggest low-cost carrier, is on the frontline in a battle that has stymied the region for years: namely the parlous state of infrastructure.
“The problem is infrastructure,” Raman Narayanan, AirAsia group head, Asean affairs and government relations, told FinanceAsia. “Every airport in Asean is bursting at the seams. It is becoming a very big issue.”
Southeast Asia’s international air travel market grew by 20% from about 4.7 million weekly seats in April 2012 to 5.6 million weekly seats in October 2013, according to CAPA and Innovata data.
Airports under development in Asean are failing to keep pace with this growing number of air travellers. Indonesia and the Philippines in particular trail neighbouring countries in terms of the pace of development.
According to airline magazine New Airport Insider, Jakarta Soekarno-Hatta, the main airport in Indonesia, Southeast Asia’s biggest economy by GDP, handled 60.1 million passengers in 2013. The airport is designed to handle 22 million passengers.
Plans are under way to boost the capacity to 62 million but this won’t be complete until 2017 at the earliest, according to the magazine. And it’s a similar story at airports across the country and region.
The Philippines’ four major airports, meanwhile, could barely cope with 7.7 million tourists in 2014 but that number is expected to surpass 10 million by 2016. Plans have been lodged with the government for a new airport in Manila to help ease the strain but these are at a very early stage.
Upgrading existing national airports is expensive and takes years to complete. AirAsia argues it is therefore not the best solution for the Asean bloc.
“In almost all of Asean — and elsewhere too for that matter — airports are monopolies, either public monopolies or private ones,” Narayanan said. “We have recommended that governments allow competition among airports, much like liberalisation has boosted competition among airlines and lowered fares for consumers.”
AirAsia is lobbying governments to follow Malaysia and Thailand, which have airports that handle legacy carriers and also airports that cater solely to low-cost carriers.
In addition to being cheaper to build, low-cost carrier airports’ operating costs are less than legacy counterparts, according to AirAsia. This trickles down to the airlines and keeps fees, taxes and charges to the airlines down.
“We are constantly emphasising the need for low-cost airports to all governments in the region,” Narayanan said. “Clearly, Thailand and Malaysia have heeded our requests. Others are still mulling it over.”
“Both [prestige and low-cost airports] have very different business models. If you want to build a national airport for legacy purposes, that’s fine, go ahead. But first [governments] should focus on building low-cost carrier terminals for low-cost carriers that can support a lot of planes. The money comes in volume [of planes], not from more people flying,” he added.
The issue is important because some 60% of Southeast Asia air travel is on low-cost carriers, according to CAPA, the airline research group, a number that’s expected to grow.
“Low-cost airlines just need a simple airport. We don’t need marble floors, we don’t need bridges. We don’t need a Taj Mahal,” Narayanan said.
If governments build more low-cost carrier airports that boost competition among airport operators, this will lower costs for airlines and consumers, he argued.
This is important considering the traditionally punishing effects of fuel prices, which get passed on to passengers and which have – up to recently at least – been high.
It is also timely as the Asean bloc develops, and its population becomes more wealthy and has more disposable income to play with.
“The very nature of our business — making air travel affordable and accessible by serving the underserved — helps integrate the region,” Narayanan said.
Formed nearly a half century ago, Asean is now an economic powerhouse, attracting investment from around the world, and would be the world’s seventh largest economy as a combined entity.
Asean has experienced average annual growth rates of 5.1% between 2000 and 2013, behind only China and India. More than 600 million people live in Asean; a population that is becoming increasingly wealthy.
AirAsia itself is testament to this growth.
The airline started in 2002 with one route – between Kuala Lumpur and Langkawi – two planes and a staff of 250. Now Asean’s largest low-cost carrier has more than 88 destinations and carries more than 220 million people annually. More than half of its destinations are in Southeast Asia.
AirAsia began with the premise that the no-frills, hassle-free, low-fare business model was the way forward. The business model proved prescient. Now over 50% of intra-Asean air travel is on low-cost carriers, a number that is forecast to increase.
“I went out there and built an Asean airline by putting airlines in four countries. I found ways of doing it. I didn’t wait for the Asean community,” AirAsia’s founder Tony Fernandes told consultants McKinsey recently.
Ultimately, though, Asean governments have to be negotiated with if growth is to be maintained, and Narayanan contends the airline is constantly negotiating, especially as the industry is heavily regulated.
“We need the nod from governments for much of what we do,” he said.
At the moment, flights are restricted by government-to-government deals. It is not possible for an airline to fly to a country without that government’s permission. All of this will go out the window under the impending Open Skies initiative. “Anybody can fly to any country,” he said. “The access to the routes will be fantastic.”
AirAsia is heavily involved in pushing Open Skies, which promises to enhance air connectivity among Asean, bring down trade barriers, improve labour and good flow and boost tourism. It formally comes into effect in 2015 but it’s not that simple.
“All indications are that it not will be fully implemented in 2015. It will happen in stages,” noted Narayanan. “It took Europe 30 years, so it’s going to take a while [in Asean].”
AirAsia plans to ramp up the frequency of existing routes and add new destinations to its already extensive network to connect Asean to North Asia and India in the next few years.
Ultimately though, increasing the routes is not the problem that airlines, governments and airport operators face. Once Asean’s economic integration is up and running, politics should be less of an excuse for any lack of further development.
All that will remain is the quality and quantity of the bricks and mortar.
Source: Suzy Waite, FinanceAsia