Air Asia and Jetstar Form an Alliance, But You’ll Never Notice

If I told you that two of the largest low cost carriers in the Asia Pacific region got together to form an alliance, that would be pretty big news, right? Well, that’s what is happening now as Jetstar and Air Asia have decided to link up. This is big news, but for passengers, it’s not news at all. This is going to be a Jetstar Air Asia Alliancebehind-the-scenes link for now, but I wouldn’t rule out bigger changes up front later on.

For those who aren’t familiar, Air Asia is the monster of the low cost carrier world in Southeast Asia. They started out with a couple used 737s, but they’ve now grown into a behemoth. They should be flying 100 airplanes by the end of this year, most of which are A320s. They have plenty more on order as well, effectively trying to turn themselves into the Asian version of Ryanair (though, funny enough, unlike Ryanair, with European-built airplanes). They’ve also recently started Air Asia X for long haul low cost flying with A330s. (Strange fact: Air Asia X inexplicably sponsors the Oakland Raiders despite a) them not flying anywhere on this continent and b) the Raiders absolutely sucking.)

Jetstar has taken a different path. They are a very rare specimen – a successful low cost airline within an airline. They are a part of Qantas and are about half the size of Air Asia in terms of fleet. They have a bunch of A320s buzzing around Australia, and they added long haul flying on A330s. They’ve grown their Jetstar Asia (and Jetstar Pacific in Vietnam) product in the same region as Air Asia, but they don’t actually overlap that much.

Jetstar started the consolidation party by merging with Valuair a few years back. You’ll still see Valuair flying airplanes but the branding is Jetstar these days. Now, Jetstar is getting together with Air Asia, but it’s not like you think.

This alliance is supposedly all about cost savings. They’re going to get together to try to build purchasing power for fuel, ground handling, airplanes, and more. The airplane piece is particularly interesting in that they’re really going to try to push the development of the successor to the 737 and A320 airplanes. They want the next generation so they can drive down costs.

There are some really good points in a blog post over at Plane Talking covering the announcement. Air Asia is really focused on driving down costs – lower costs means they can lower fares and stimulate travel. They’re gonna make money on volume. And it’s been working for them so far.

This does put an abrupt end to the rumors swirling about Air Asia and Virgin Blue coming together to create an ultra low cost carrier in Australia. That’s probably a good thing. There’s already a blood bath in that country, so they don’t need any more rock bottom fares.

All eyes are now on Tiger Airways, the biggest competitor in the region. Tiger not only flies around Southeast Asia, but they opened up an Australian division as well. They don’t appear to be making money on that, and this is likely to put more pressure on them. If Air Asia and Jetstar can lower costs and fares, that can’t be good for Tiger.

Now, will this spill over into a customer-facing alliance? I don’t see why it wouldn’t some day. Though Qantas has done a good job with Jetstar, why not join forces with Air Asia and let the leader in the space run your low cost carrier? Keep a stake and watch your fortunes rise. But for now, there’s nothing to announce on that front. We’ll see how long it takes.

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20 Responses to Air Asia and Jetstar Form an Alliance, But You’ll Never Notice

  1. David SFeastbay says:

    How does one ”” lower costs means they can lower fares and stimulate travel. They’re gonna make money on volume. “”?

    Making more money on volume may work in a department store selling a pair of shoes, but how does it work for an airline. They fly a plane that seats X number of people and it costs X dollars to operate that flight. Having lower fares would not pay for that flight and make a profit if you can still only sell X number of seats on each plane. It’s not like the plane seats 100 people and a low fare will stimulate travel and they now put 200 people on the same plane. To have lower fares you need to cut costs somewhere else which goes back to paying a low salary to your workers, not offering may services to the passenger, or making them pay for every single thing.

    Making money on volume would mean having to add more planes which would cost money ahead of time which would still need to be paid for every flight it operates with the fares collected, which means you haven’t gained anything if you have low fares. You would make no more money with one plane then with two since most of the ‘low’ fare would have paid to operate the flight and that’s not counting all the other expenses in the company.

    Can’t see how having low fares will cover every cost a company has. But low prices at a department store can get many more people into the same building where they can make money on volume. Walmart will make more money with 200 people in a store instead of 100 people. But an airline can never put more people in a plane to get more volume, they can only put X number people to fill the X number of seats it has.

    Ok I got wordy, but I hope it’s understood what I was trying to say.

  2. Dan says:

    The LCC game in SE Asia is a bit interesting when compared to the US. I have some upcoming travel in the region, and it appears that if Air Asia goes where I want to (and they do) that it is significantly cheaper than any of the “legacy” (Thai, Malaysian, etc) carriers. Additionally, Air Asia flies point-to-point to a whole slew of markets, and in many cases, I’m guessing TG and MH don’t fly much beyond hub and spoke.

  3. A says:

    David SFeastbay wrote:

    Making more money on volume may work in a department store selling a pair of shoes, but how does it work for an airline.

    My guess is they will make more money on volume the RyanAir way…by selling stuff on board. On a recent flight I was starved for something to eat so bought a $7 sandwich, which probably cost the airline under $1. If we assume the ticket price pays for the actual flying, everything else is gravy on top.

    This reminds me of a joke about General Motors being a bank that just happens to make cars, i.e. because they sure don’t make any money building the cars these days. If the LCC model prevails (which I think it will) we’ll see more and more “retailers” that just happen to fly commerical airplanes.

    Cranky, I do find it interesting that this alliance is in part to put pressure on the Airbus/Boeing types to build a new narrow body. Since the 737 & 320 aircraft are the most common equipment I see the inside of I’m all for something new. Then again, even combined they don’t seem that large.

    I would think Southwest is the 800lb gorilla when it comes to pushing Boeing on 737 changes. Haven’t heard them clamouring for anything new lately. Can anyone even compare a 320 fleet to what WN has? That said I have heard rumors that the 787 technology is going into a 737. Well, the 787 has flown now. Any idea if this is already in the works?

  4. David M says:

    David SFeastbay wrote:

    How does one ”” lower costs means they can lower fares and stimulate travel. They’re gonna make money on volume. “”?

    Airlines have a break even load factor (percentage of seats filled on a flight) at which a flight goes from losing money to breaking money. Lowering costs pushes that break even point down, but lowering fares brings it back up. Stimulating travel pushes load factors up, so assuming that lowering fares does indeed stimulate travel, the airline that can lower costs can indeed lower fares and stimulate travel, thus in a sense “make it up on volume”.

  5. Terry says:

    There is a marked difference in Jetstar and Air Asia and that is (from experience) Jetstar are profoundly customer focused and its a pleasure to fly with them whereas Air Asia – much like Ryanair, the passenger is just a bum on a seat. Revenue is THE driving factor.
    I was as surprised as anyone by this consolidation but if the cost savings are passed on to the consumer I for one am all for it. Similarly, and I’ve not seen you mention it, but if Jetstar cancel my service and Air Asia will move me on one of their services as is part of the alliance, I think its a positive step forward.

  6. BJ says:

    Despite all the posturing the ULCC model works by covering current costs with future revenue. This is why increasing volume is important and why the ULCC carrier needs to be continually growing.
    Ergo if you look at a particulay point in time you might find that what the pax have paid are less than the costs at that time. This explains why ULCC carriers have large aircraft orders to grow volume.
    If you wish to analyse an ULCC carriers ‘health’ look at how much volume they are needing to add in the future combined with how far out they are selling seats.

  7. Wat happened to Air Asia?!

  8. Craig says:

    David SFeastbay wrote:

    How does one ”” lower costs means they can lower fares and stimulate travel. They’re gonna make money on volume. “”?

    The basic principle is still the same for an airline as for any other company – if expansion leads to more marginal revenue than marginal expense, the new volume makes the airline more profitable (or less loss-making, depending on their current condition.)

    Driving down costs can mean:
    * driving down costs on the existing volume
    * driving down cost of adding new volume, or
    * driving down the average cost by spreading fixed costs across a larger customer base (for example, new flights increasing utilization of existing equipment, gates, etc.)

    Any combination of these, along with growth that contributes more marginal revenue than marginal expense, leads to more profit, as long as you don’t lower fares to an extent that offsets the profit on existing volume.

    It’s easy to get hung up on “fares”, too, with ancillary revenue being so important these days.

  9. Qantas has been shoveling around Asia for a partner ever since it broke off its marriage with British Airways, Malaysia Airlines was given a few dates then they called and announced that the whole dating scene was over.
    Suddenly Jetstar is in bed with AirAsia and is it behind Mum and Dad’s back or is it Junior making his own way in the big bad world, or just Qantas doing what it was going to do anyway, so it will in time be one or the other in that AirAsia will buy out Qantas? or the other way round, its really not hard to guess which one.

  10. CF says:

    David SFeastbay wrote:

    Making more money on volume may work in a department store selling a pair of shoes, but how does it work for an airline. They fly a plane that seats X number of people and it costs X dollars to operate that flight.

    I think this has already been answered a couple times, but I’ll give a shot. Air Asia likes to talk about the route from Kuala Lumpur to Gold Coast in Australia. Originally, they didn’t think it would necessarily support a single flight. Now they think it can support 2. So let’s look at that using absurdly simplistic numbers.

    Let’s say that fully allocated costs on that route are $1000. That means that the ownership costs, administration, etc are included in that number. And let’s say that they can make $1100 for a $100 profit on every flight, but at that level, there is only enough demand for one flight per day.

    Now let’s say that they can lower ownership and fuel costs thanks to this cooperation to the point where it’s now $800. They can lower fares so that they only earn $900 of revenue on that flight. The profit is still $100. But now that they’ve lowered fares, demand has risen, so they can now fly two airplanes and make $200.

    A wrote:

    Cranky, I do find it interesting that this alliance is in part to put pressure on the Airbus/Boeing types to build a new narrow body. Since the 737 & 320 aircraft are the most common equipment I see the inside of I’m all for something new. Then again, even combined they don’t seem that large.
    I would think Southwest is the 800lb gorilla when it comes to pushing Boeing on 737 changes. Haven’t heard them clamouring for anything new lately. Can anyone even compare a 320 fleet to what WN has?

    Southwest certainly wants to see what’s been called the 737RS – next generation airplane. Nobody can approach Southwest’s size with a single fleet type, but that doesn’t mean they can’t get a seat at the table. United has been pretty vocal about this as well – they want a new technology narrowbody.

    Terry wrote:

    Similarly, and I’ve not seen you mention it, but if Jetstar cancel my service and Air Asia will move me on one of their services as is part of the alliance, I think its a positive step forward.

    So far, there are no commercial ties in this alliance.

  11. Kim says:

    Not convinced that this tie-in has the consumers best interests at heart. These are the two largest LCC’s in the region. Their competitors are the full fare airlines. This just means that they take on the full fare airlines together and remove any competition from the LCC’s. Tiger and FireFly are still bit players (although the papers this morning noted that Tiger – partly owned by SQ – might be looking at listing).

  12. Matt says:

    I flew Tiger Airways a few weeks ago Chennai-Singapore return and was surprised to find that they deny their passengers water! You can’t bring it on board for security reasons and Tiger’s website (and cabin crew) actively discourage passengers from bringing their own food and drink on board. Oh sure, you can buy a tiny 200ml mini-bottle for Singapore $3.50, but if you don’t have US or Singaporean cash on hand, you’re gonna get parched. Isn’t there a human right to water on board the dehydrating atmosphere of an aircraft cabin for flights of 4 hours? Would be interested to hear about others experience with Air Asia and Jetstar – are they as stingy with their passengers too?

  13. Sofia says:

    Have you heard about the new way Ryan Air is trying to make it even cheaper travelling with them?

    They’re going to have “standing” seats, meaning that you can buy a ticket even cheaper where you get a place to stand during the flight.
    The first 10 “seats” will be free.

    It’s not decided yet, and if it will go through, it will luckily only be for flights flying less than an hour. Who wants to stand up longer than that?!

  14. CF says:

    Matt wrote:

    Isn’t there a human right to water on board the dehydrating atmosphere of an aircraft cabin for flights of 4 hours?

    Not sure about the other Asian carriers, but that’s certainly been a tactic of other low cost carriers around the world. US Airways tried charging for water but backed off. The low cost carriers, however, have stayed firm on charging.

    Sofia wrote:

    Have you heard about the new way Ryan Air is trying to make it even cheaper travelling with them?
    They’re going to have “standing” seats, meaning that you can buy a ticket even cheaper where you get a place to stand during the flight.
    The first 10 “seats” will be free.

    I think this is one of their chief Michael O’Leary’s PR stunts. There are a lot of safety issues with designing a standing seat, but if they can do it, then I have no problem with it. If people want to pay less to stand, then good for them. I agree with you though – anything over an hour would be pretty ugly.

  15. Craig says:

    If this alliance is focused on cost-savings (joint fuel purchases, new aircraft development), why is Qantas itself not involved?

    It seems to me that Qantas would benefit from less expensive fuel and more efficient aircraft just as much as its Jetstar subsidiary would, and adding Qantas mainline to the Jetstar-Air Asia purchasing group would simply increase the size of the group’s order, perhaps permitting it to obtain even lower prices than Jetstar and Air Asia together could.

  16. CF says:

    Craig wrote:

    If this alliance is focused on cost-savings (joint fuel purchases, new aircraft development), why is Qantas itself not involved?

    I wonder if it’s a political thing? Maybe Qantas doesn’t want to be associated with an LCC that competes against its oneworld partners. Not sure, just a thought.

  17. Warren says:

    Regarding Air Asia’s sponsorship of the Oakland Raiders:
    According to BusinessWeek, “it’s all part of their plan to build a global branding image…” Air Asia already flies to London, and now Fernandes, AA’s CEO, is now aiming for the U.S., and hopes to fly across the Pacific soon–the likely first destination being Oakland.

  18. paulk says:

    Most recently, my wife and I were stranded in Abu Dhabi when AirAsiaX announced they were canceling service to/from Abu Dhabi in January this year. They didn’t notify us (their stranded passengers) until Feb 10th. Neither did they offer any accommodation nor answer our emails asking for help. We had to get back to Malaysia on our own. They won’t reimburse our additional expenses either.

    They said they would refund the Abu Dhabi/Kuala Lumpur portion of our trip, but it will take them 30-50 days to process the refund. Such an attitude!

    Watch out for these guys. If you are considering using AirAsiaX, It might be a good idea to develop a plan B… just in case.

  19. Alex says:

    Interesting flight from KL to Gld Coast with Air Asia last night..12.30am which was a couple of hours into the flight they turn all the lights on and tell us that “due to hydraulic failure plane will be returning to KL, about 15 minutes later another announcement “apologising for previous announcement and after discussion with company now safe to turn around and continue to Gold Coast”…we land 6 hours later and get stuck on a taxiway as ” plane steering not working and truck will tow us in”…

  20. Peter says:

    Air Asia last week cut their flights from Melb to KL from twice a week to once a week. Coincedence????
    Our holiday plans that we booked 6 months ago now have to be changed due to our flight out and back being deleted from their schedules.
    Only found out by accident when we noticed that their web site had drppoed mention of our flights from their schedule.!!!! We were not told.

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