Price War Dogs Airlines

June 2008

Already battered by record fuel prices, Malaysia's low-cost carrier, Air Asia, now has to contend with headwinds in the shape of national full-service carrier Malaysia Airlines which has launched its own low fares campaign.

However, Malaysia Airlines has denied that its new low and zero fare products are competing directly with Air Asia's business model, instead explaining that it is meant to create new demand and to generate revenue from hitherto unsold seats. According to Malaysia Airlines, the campaign was intended to help offload between three and four million unsold seats for its domestic and Asean routes annually. Passengers who book free and low-cost seats on Malaysia Airlines still have to pay for fuel surcharges, administration fees and airport taxes, similar to the Air Asia model.

In retaliation, Air Asia has launched its own sub-zero campaign, which it insists is cheaper than its competitor's fees. The LCC has also reiterated that the playing field should be leveled, and that it should be allowed to compete without restrictions against the national carrier. Notably, restrictions on the lucrative Kuala Lumpur to Singapore route are a sore point for Air Asia.

On the bright side, the ongoing skirmish between Malaysian aviation's David and Goliath has benefited consumers looking for bargains to cushion the pain of rising prices. According to media reports, the zero and low fare products enabled Malaysia Airlines to sell an additional 150,000 seats, including those at normal fares, during the week of the campaign's launch while increasing its online penetration by 900%.

On the downside, if price undercutting is sustained, foreign airlines may be discouraged from flying into the Kuala Lumpur International Airport if they are unable to compete, which would defeat the KLIA's objective of attracting and retaining more carriers and becoming a major regional airline hub.