Air Raiders

• Share

(2 of 3)

Asia's major airlines will soon start feeling the pinch. Airline analysts and executives expect budget carriers to drag down fares throughout Asia. Both Singapore Airlines and Hong Kong's Cathay Pacific, Asia's premier airlines, deny they are cutting prices in response to this new threat. But they have been offering what they call routine special promotions. In May Cathay Pacific sold round trips between Hong Kong and Singapore for $128even less than the $160 fare offered by Singapore-based low-cost carrier Valuair, which started flying that same month. Major airlines "have been advertising prices even lower than ours," says Lim Chin Beng, Valuair's chairman. If they "want to lose money by undercutting us, good luck to them."

What makes the budget carriers such ornery opponents is their relentless cost cutting. Fernandes, who has dreamed up all kinds of ways to save money, claims AirAsia is the world's lowest-cost airline. He pays his flight attendants to clean planes instead of hiring special crews, which not only lowers costs but also chops the time spent boarding at terminals to 25 minutes — about half that of the major airlines. His pilots are trained to land at a farther point on the runway and at a slower speed to conserve fuel and reduce wear and tear on tires. Half of AirAsia's tickets are sold over the Internet, eliminating travel-agent fees. Passengers pay for their food and drinks. When a professional aviation-construction outfit demanded $20 million to build a hangar at Kuala Lumpur's airport, Fernandes instead asked the small contractor who had built his home to do it for $500,000. "There is a lot of excess in the airline industry," he says. "The challenge is to change the mind-set of staff so they eat, sleep and breathe costs."

Still, even Fernandes doesn't expect budget airlines to create the same upheaval for big carriers in Asia that they have in the U.S. and Europe. A tighter web of regulation provides established airlines more protection by preventing low-cost carriers from hopping from city to city around Asia the way Ryanair does in Europe. With only 2% of airline capacity in the region, the budget carriers have a long way to go to challenge the big boys. Most of all, major Asian airlines have much lower costs than their U.S. and European counterparts, allowing them to compete more easily. In Europe, for example, no-frills airlines have costs that are 60% lower than those of the major airlines. HSBC Securities estimates that in Asia the gap can be held to 30%.