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Business Trends

Asia budget carriers spend big at air show for long-haul routes

New fuel-efficient jets open up possibility of service to Europe, US and Africa

Vietjet has placed an order with Boeing for 100 737 MAX aircraft worth $12.7 billion.

KUALA LUMPUR -- Emboldened by fuel-efficient aircraft and growing demand from a burgeoning middle class, Southeast Asia's budget airlines are showing ambition to fly long-haul routes beyond the region -- a high-cost sector dominated by full-service carriers.

Malaysia's AirAsia X and Vietnam's Vietjet Aviation ordered new aircraft this week at the biennial Farnborough International Airshow in the U.K., expanding their existing fleets anchored in the Asia.

AirAsia X, the long-haul unit of AirAsia Group, signed a deal with France's Airbus for 34 A330neo widebody jets priced at $296.4 million each to serve its hubs in Malaysia, Indonesia and Thailand. With a fleet of 30 aircraft at the end of March, the carrier currently flies to nearly 30 destinations across Asia as well as Hawaii in the U.S.

"AirAsia X is going to be a huge airline and redoing long-haul low-cost travel," tweeted co-founder Tony Fernandes on Friday.

In a series of tweets, Fernandes, who is also AirAsia's group chief executive, said the airline plans to reorganize routes and business partnerships to focus on a "sustainable model." He hinted about expansion in Japan, South Korea, Australia, China and India -- countries the group currently serves through joint ventures.

The newly ordered planes will be considered for flights from Bangkok to Stockholm, Namibia in Africa, Brazil and the U.S, according to the group. It has not decided on London and Paris, two cities from which it withdrew in 2012 owing to low yields.

Meanwhile, short-haul carrier Vietjet has placed an order with America's Boeing for 100 737 MAX jets worth $12.7 billion, adding to its current fleet of 60 aircraft. The privately-owned airline serves nearly 100 routes in Southeast and Northeast Asia, and it is looking at new destinations in Australia and India to grow its network development in the Asia-Pacific region and beyond.

Airbus said passenger traffic is forecast to grow 5% annually in the Asia-Pacific region over the next 20 years, partly fueled by an increase in middle-income consumers.

Long-haul routes to developed countries are long considered a no-go sector for Asian budget carriers due to the high operating cost involved. AirAsia X learned its lesson from the unprofitable ventures in Europe to focus mainly on Asia. Even its current Kuala Lumpur-Hawaii route has one stopover in Osaka.

But analysts say newly developed aircraft will make the budget model sustainable for long-haul with better fuel-efficiency and higher seat capacity.

AirAsia X's new order for the twin-aisle A330neo will reduce fuel consumption by 25%, compared to existing aircraft of similar size, on top of a 5% saving in maintenance cost, according to MIDF Research. Danial Razak, equity research analyst at the investment bank, said the order reflected the group's confidence of its value-based long-haul model amid heightened competition faced by AirAsia in the short-haul sector.

The new aircraft, set to be delivered from the fourth quarter of 2019 through 2028, can fit 287 seats -- 10 seats more than the older version.

"The higher density and improved efficiency will result in lower unit costs, enabling AirAsia X to break even or make money on long-haul routes even with relatively low yields," said Brendan Sobie, chief analyst at CAPA, a Sydney-based aviation think tank.

But Sobie warned that long-haul flights will remain relatively challenging even with the improved economics of the new-generation aircraft, as they must compete against national flag carriers and other full-service operators.

Vistara, a New Delhi-based joint venture between Indian conglomerate Tata Sons and Singapore Airlines, placed 19 new aircraft orders at Farnborough with Airbus and Boeing. The three-year-old airline currently only flies Indian domestic skies, but plans to enter international routes by the end of this year. The aggressive fleet expansion, valued at $3.1 billion by list price, looks to propel Vistara's expansion in both domestic and international markets, including the long-haul sector.

Nikkei staff writer Mayuko Tani in Singapore contributed to this article.

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