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Cost a top concern for Brunei-based regional airlines

Publication Date : 11-12-2013

 

A feasibility  and routing study needs to be done before a proposal to establish a new, Brunei-based regional airlines that will provide feeder services to the national carrier can be realised, a forum discussing the proposal concluded yesterday.

With the government in the midst of considering the notion, Royal Brunei Airlines (RB) Chief Commercial and Planning Officer cautioned interested parties of the risks of failure largely due to the lack of profitability and “intense” competition experienced in the industry.

“This is one industry that has over the years not delivered profits at all, or delivered at a level which is insufficient,” Karam Chand told the forum held at the Ministry of Communications in Berakas.

He explained that high fuel cost and declining average fares due to market pressures meant profits were hard to come by.

“If you look at four years before the latest year, we’ve wiped out the entire profitability that was made over 50 years prior,” Chand said.

Fuel cost has traditionally been at US$40 per barrel, but has increased to more than US$100 per barrel in recent years.

“One-third of your cost base has basically gone up by 100 per cent. And I can assure you that there is no way airlines can increase its air fares by 100 per cent. It’s simply not practical. The demand will evaporate overnight if you try to do something like that.”

This was happening while cost for manpower and goods and services for the airlines were on the rise, in line with inflation.

“So you’ve got a mismatch of your cost and revenue.”

Different business models were also entering the marketplace, reducing the average fares in real terms, particularly those offered by low cost carriers.

“They have now set their benchmark, so the airline pricing will be what the low-cost models offer. So if the low-cost models are offering US$50 pricing in Brunei to go to KL, the expectation of the market is that everybody can offer US$50 pricing, and the reality is far from that.”

“So you have to think of a business model that can sustain itself with a very low pricing environment,” Chand said.

Despite growth of the middle class population and consequent growth of disposable income in Asia, lagging infrastructure development in capital city airports –where most of the significant traffic flows were generated - made it a “major struggle” to get slots at these airports.

Chand also spoke of the high risks of failure for new start-up airlines.

“Historically, one in 10 start-up airlines has failed, either before starting or on the first day of operation. So that says something about the intensity of the competition of our business and the challenges that we face.”

The reasons for failure included ambitious business plans that underestimated the cost involved and the “fierce” competition from other airlines.

There was also the risk of delays in acquiring certificates or licences issued by air operators.

“So you are paying bills for your staff and you’re paying bills for your services, but there is no revenue to offset that. And this can very easily eat away your seed capital that you have to start off with.”

“Entrepreneurs come with their $5 million and they expect to run an airline business, but $5 million could very much cover one day’s cost,” he added.

Any new airlines also had to be very careful with their strategy, since if they tried to cater to everybody without focusing on their strength in either cost-effectiveness or a unique product, the chances of failure were very high.

Chand also noted that Brunei’s small population meant it had a very small outbound market as well as the inbound market, with only about 220,000 inbound passengers per year.

“This is one of the very few markets in the world where you have a unique situation: we have neither an outbound market nor inbound market. So we are struggling to have any critical mass,” the RB Chief Commercial and Planning Officer said.

Chand also cautioned that should the proposed airline fail, it would have implications on RB itself.

“There could be an expectation that the national carrier will absorb this airline.”

Asked if he felt RB needed feeder services, the Chief Commercial and Planning Officer said: “I think we have to address this two ways. First one… has Brunei got the capacity, in terms of demand – current demand and future demand to support a second airline? If the answer is yes,

then I think if a feeder airline existed and brought passengers from (the region) that we can’t serve, then of course their air services into ours is no problem.”

He spoke of the potential markets around Brunei, particularly Indonesia and the Philippines.

“The regional airline has to focus on inbound, as opposed to outbound. With 400,000 people, we are already over-flying… What we need to do is find inbound tourism: people coming in from other countries into Brunei and beyond Brunei,” he said.

“So that has to be the core part of regional airlines’ business strategy: to look at how we can generate tourism from Indonesia and the Philippines and bring it here and beyond.”

“It’s not easy. We’ve been in this business for too long but we find it very, very challenging.”

 

 

 

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