Malaysia Airlines and AirAsia Sign Collaboration Agreement

Malaysia Airlines, budget carrier Air Asia and long-haul, low-cost operator AirAsia X have entered into a comprehensive collaboration framework that will see the airlines leverage on their respective core strengths. The agreement includes a Collaboration Agreement to explore opportunities to co-operate on a broad range of areas, complementing each other’s businesses in the process. As part of the deal Tune Air and Khazanah Nasional Berhad, the major shareholders of AirAsia and Malaysia Airlines respectively, have agreed to acquire from each other existing shares of both companies. As a result, Tune will hold 20.5 per cent of shares in Malaysia Airlines and Khazanah will hold ten per cent of shares in AirAsia with a proposal to double this stake to 20 per cent in the future.

“Broadly, the Collaboration Agreement enables Malaysia Airlines, AirAsia and AirAsia X to respectively focus on business segments in which they are capable of developing the most value,” say the carriers in a joint statement. “Under the Collaboration Agreement, the parties shall assess and review their network services to enhance their offering of services and customer experience. This will include partial interlining and flights to new destinations currently not served by any of the airlines. “

The Collaboration Agreement will come into effect immediately upon its execution and will remain in effect for a period of five years from the date of signing with an option for a further five-year renewal.

The table below highlights the current network of Malaysia Airlines, AirAsia and their affiliate companies from Kuala Lumpur International Airport. Although executives at the airlines have denied their new agreement will lead to major network changes, we can expect some level of rationalisation, especially in the domestic market. According to the latest schedule data, the airlines’ networks overlap directly on 38 routes, while there are some indirect synergies in some markets. These include London, where Malaysia Airlines serves Heathrow and Air Asia X flies to Stansted (Gatwick from the end of October) and Paris where Malaysia Airlines flies to CDG and Air Asia X to Orly airports.

Obviously there is scope for the airlines to complement one another on many routes, particularly the larger markets where Malaysia Airlines can concentrate on premium travellers and AirAsia the cost-conscious budget sector. However, on some routes it is inevitable that one of the airlines will transfer capacity to alternate destinations and most likely AirAsia will primarily serve short-haul markets with Malaysia Airlines focusing on medium- and long-haul destinations.

Over recent months there has been growing competition between AirAsia and Firefly as the latter has expanded its network and introduced short-haul jet airliners. However, Firefly’s resources will now be “refocused to launch a new regional full service airline operation,” is likely to see it return to a turboprop focus and this will help AirAsia’s own development strategy. This does raise the issue about who will pick-up any capacity short-fall from this restructuring; if these flights will operate under the Malaysia Airlines brand or if a new sub-brand will be established to serve regional Asean markets.

The collaboration agreement will also change the dynamics between Malaysia Airlines and AirAsia X, which has been competing for traffic rights on many of the routes currently served by the national carrier. It is likely that the two operators will co-exist in some markets, for example Melbourne and Perth, although AirAsia X is much more likely to focus on secondary destinations, where its low cost structure will enable it to operate more effectively than Malaysia Airlines. In some markets there could easily be a switch to a single operator - the new Oaska Kansai route from AirAsia X is a good example of a destination that is better suited to the low-cost airline’s model, enabling Malaysia Airlines to focus on its premium markets and competing with international rivals such as Cathay Pacific, Emirates Airline and Singapore Airlines.

However, for AirAsia X to continue its success it will need to focus on a mix of primary and secondary markets as it needs the right balance. Even though Malaysia Airlines is likely to retain its routes to London and Paris, Air Asia X would argue that that is has sufficiently stimulated demand in these two markets to show there is space for two carriers.

Kee Keat Ong, a Consultant with ASM in Kuala Lumpur, told The HUB that AirAsia needs to serve primary markets to survive, especially in the long-haul market. “There must be a ratio of say 60:40 for primary and secondary destinations. Without the core markets the company would not be successful and this explains why it has been campaigning for the past couple of years for the rights to serve Sydney,” he said.

As the table below shows, the growing links between Malaysia Airlines and AirAsia will considerably strengthen their position at Kuala Lumpur International Airport, currently the tenth largest Asian airport by weekly seat capacity. Together with their associated companies they will have a 77.5 per cent share of the available capacity from the airport, an unprecedented level of control over any of the hubs in the Asia Pacific region.

This will obviously raise some anti-trust issues as the five largest carriers at the airport will all be linked by the Collaboration Agreement. Malaysia Airlines and AirAsia each hold a 33 per cent share of the capacity from Kuala Lumpur, followed by regional carrier Firefly (4.7 per cent), Indonesia AirAsia (3.6 per cent) and AirAsia X (3.4 per cent). Emirates Airline is currently the largest operator at Kuala Lumpur not associated with Malaysia Airlines and AirAsia, but holds just a 2.2 per cent share of the capacity.

The growing dominance of the AirAsia brand across is also clearly visible when you look at some of the other major airports around the region. Its affiliate, Thai AirAsia, is currently the second largest operator at Bangkok Suvarnabhumi with an 11.4 per cent share of the capacity, while Indonesia AirAsia is the fifth largest at Jakarta Soekarno-Hattawith a 6.1 per cent share of the weekly seats.

In June this year Malaysia Airlines announced its intention to join the oneworld global alliance in late-2012. This deal is unlikely to impact its plan as existing member Qantas already offer a dual brand strategy with its low-cost offshoot Jetstar Airways, albeit both airlines are under full common ownership. Moving forward there are sure to be greater synergies developing between the carriers and we could get our initial insight into these later this month when Qantas announces its revised network structure on August 24. What is certain though; Oneworld will significantly be expanding its presence in the Asia Pacific region through these strategies.

Only time will tell who will be the winners from the deal, although the initial day’s trading after the announcement of the Collaboration Agreement shows just what the financial markets thought of the deal… a big win for Malaysia Airlines as its shares rose by up to 18 per cent, ending the day 9.4 per cent up; AirAsia shares fell 14 per cent before recovering to end the day 11 per cent down.

One industry executive described the deal to The HUB as a “Shotgun Marriage” but was uncertain who was actually holding the firearm and while Malaysia Airlines has been the clear winner in the markets, AirAsia boss Tony Fernandes now owns a sizeable stake in the national carrier and seats on its board, giving him control over its destiny. However, one thing is certain - the deal will impact local travellers. Frequencies and choice will be reduced on some routes and AirAsia will no longer have to cut fares to attract customers as capacity will be much more controlled at a sensible level where the operating airline will enjoy a sensible yield.