AIRASIA SOARS IN PRICE-SENSITIVE SEGMENT
Low-cost carrier leveraging capacity reductions of its competitors, says analyst
LOW-COST carrier (LCC) AirAsia is better positioned than full-service carriers in the price-sensitive domestic market, even as Malindo Air and Malaysia Airlines Bhd (MAS) undertake capacity reductions.
CAPA Centre for Aviation chief analyst and Southeast Asia chief representative Brendan Sobie said air travel yields are low in the domestic market.
“It is difficult for airlines to charge a premium or command a high price for domestic routes. Many passengers travel mainly from Sabah and Sarawak to Kuala Lumpur. They are very price-sensitive,” he told NST Business recently.
Sobie said Malindo and MAS can price their fares higher in some international markets as passengers are not so price-sensitive.
“What MAS and Malindo did was sensible, by reducing capacity on domestic routes. If domestic routes can’t make money, airlines are better off moving that capacity somewhere else, like international routes,” he added.
AirAsia, however, can be profitable in a low-yield environment due to low costs, heavy reliance on ancillaries and high load factors. “MAS and Malindo Air need some domestic services at the Kuala Lumpur International Airport (KLIA) to feed international routes, but the local market is better served by the LCC model.” Sobie said yields in the domestic market are pressured further as AirAsia resumed its expansion early last year.
The domestic market is dominated by AirAsia, with a market share of 66 per cent.
MAS accounted for 31 per cent share of domestic seat capacity at KLIA, while Malindo’s share dropped to eight per cent from 13 per cent last year.
Sobie said the cuts by MAS and Malindo resulted in a six per cent decline in domestic traffic to 6.2 million at KLIA last year.
He said the biggest traffic reduction was in the last four months of the year as MAS’ cuts were implemented in the early third quarter.
Malaysia Airports Holdings Bhd (MAHB) reported a 34 per cent drop in domestic traffic at KLIA’s main terminal in December last year (26 per cent in November, 24 per cent in October and 30 per cent in September last year).
“Not surprisingly, this trend has continued early this year. MAHB reported a 31 per cent decrease in domestic traffic at the KLIA main terminal for January.”
Sobie said AirAsia has increased its domestic market share over the past six months, leveraging the capacity reductions of its competitors at KLIA.
“AirAsia’s domestic traffic at the Kuala Lumpur International Airport 2 increased 18 per cent, while that of Malindo and MAS combined decreased by 28 per cent.”
Sobie said domestic passenger traffic in Malaysia grew 3.6 per cent to 24.91 million last year, representing the second slowest growth rate in a decade.
“Malaysia’s domestic passenger market has doubled since 2006 when traffic was flat at 12.26 million. However, the rate of domestic growth has been relatively modest over the past four years.
“Domestic growth initially slowed to five per cent in 2014 and was only two per cent in 2015, before picking up slightly to 4.5 per cent in 2016,” he said.
Sobie said the growth rate last year was dragged down by domestic capacity reductions at MAS and slower domestic expansion by Malindo, while AirAsia resumed domestic expansion after three years of flat domestic capacity.
“MAS cut domestic capacity in the middle of last year in response to challenging market conditions.
“MAS recognised it was better off increasing its focus on the regional international market.”
The airline’s capacity declined by 10 per cent to 12.1 million seats, according to CAPA and OAG.
“Malindo’s domestic seat capacity at KLIA has also been reduced by 35 per cent year-on-year,” said Sobie.