AirAsia plans state tie-up to bring low-cost model to China

Charles Pertwee | Bloomberg | Getty Images

AirAsia, the Malaysian low-cost carrier, is planning to enter China, one of the last untapped markets for budget airlines, in a joint venture with the government of Henan province and Everbright, the state-owned conglomerate.

Tony Fernandes, the co-founder and chief executive of AirAsia, signed a memorandum of understanding with his potential Chinese partners on Sunday on the sidelines of the Belt and Road forum in Beijing.

Under the proposal, which is likely to face opposition from China's three dominant state-owned airlines, AirAsia and its Chinese partners would establish a budget airline, pilot training centre and aircraft maintenance facility in Zhengzhou, the capital of Henan.

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"Zhengzhou sits at the centre of a vast rail, highway and air transport network that forms the linchpin of China's development plans for its central and western regions," said Mr Fernandes, who has been trying to enter the Chinese market for years.

China is forecast to overtake the US as the world's biggest air travel market by 2024 but budget carriers have made little headway so far because of the dominance of the big three state players: Air China, China Eastern Airlines and China Southern Airlines.

"Unlike the 'fat and lazy' state-owned incumbents that AirAsia faced in Southeast Asia over the last 15 years, China's 'big three' carriers have large fleets of the latest, most fuel-efficient aircraft and are likely to use predatory pricing and their political leverage to stymie AirAsia."

Low-cost carriers such as AirAsia and China's Spring Airlines control less than 10 per cent of the Chinese market, compared to 56 per cent in Southeast Asia, 40 per cent in Europe and 32 per cent in the US, according to AirAsia.

While China is an enticing prize, analysts warned that it is a risky market for AirAsia, which is already struggling to build new businesses in India, Japan and Vietnam, and faces problems in markets such as Indonesia because of its rapid expansion.

Unlike Europe, which has an integrated air travel market, most Asian nations bar foreign investors from majority ownership of airlines. That has required AirAsia to execute financially complicated and politically delicate joint ventures to expand beyond its home market.

"The risk for AirAsia is that it's spreading itself very thin," said Corrine Png, a transport analyst at Crucial Perspective, a research house in Singapore. "They have found good partners but it's harder to operate a low-cost carrier in China than in Southeast Asia."

China is suffering an acute pilot shortage, she said, which explains why AirAsia intends to build its own flight school in Zhengzhou. In addition, unlike the "fat and lazy" state-owned incumbents that AirAsia faced in Southeast Asia over the last 15 years, China's "big three" carriers have large fleets of the latest, most fuel-efficient aircraft and are likely to use predatory pricing and their political leverage to stymie AirAsia.

"The China unit will be complex because there is local government support implied but competitors will lobby for protectionism at other levels," said Will Horton, an analyst at the Centre for Aviation in Hong Kong.

In an attempt to boost its political credentials in China, AirAsia announced the joint venture proposal during the Belt and Road forum, a high-level initiative designed to promote infrastructure investment connecting China with the rest of Asia and beyond. It said it also was "exploring" the possibility of using the Comac C919, China's rival to the Airbus A320 and Boeing 737, which had its maiden test flight earlier this month.

Mr Horton said that while it was too early to say if this would happen, there would be "huge political wins" in ordering the C919 even if it resulted in higher costs for AirAsia.