IF you missed it, read all about it here: “MAS to launch zero fare tickets for domestic destinations today”
Is it really possible for an airline or for that matter any business to make money by giving away its product for free? In the case of MAS, it’s Managing Director has publicly stated that it will price 30% of its seats or 1 million seats as RM0 = USD 0. All you have to pay is the fuel surcharge and airport tax. Is Idris out of his mind? The answer is No.
IF it is the right move or not, only time will tell, but any triz expert will probably agree that it is in the right direction.
If we look at the banking industry, over the last 15 years they have changed their main source of income from interest income (that is the difference in interested earned on loans disbursed and interest paid on deposits on hand) to fee based income. As the banking sector, like in any sector becomes more open and competitive, the power to set price erodes and the sector has to look for new ways to make money. In the case of banks, lending is so competitive that in certain categories like housing loans we even see negative base lending rate offers. Banks have had to shift their paradigm from interest income to fee income – where people pay for “the value” of the service – like wealth management, advisory, and even down to transaction fees.
In the telco sector – look at how fixed lines have become dinosaurs as compared to mobile operators (Think de-merger Telekom Malaysia and TMI). Look at how pricing for mobile rates have just come crashing down – to the extent, phone companies are prepared to “give a way” free phones in return for a guaranteed subscription period.
Then against mobile co’s you have competitors like SKYPE and AIM, where you make video calls anywhere in the world for free, and now there is fring – using phone wifi to make phone to phone calls for free. Again you see how price comes crashing down.
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Newspapers – Paid papers like the STAR are seeing market share drop then there is the SUN for free which is increasing in circulation (read here).
So why is IDRIS Jala doing it and is it viable?
1. IDRIS is probably doing it to preempt the open skies agreement in 2009. He is saying, yes let’s go for open skies but for a competitor to come in they too better have zero fare and still offer full service. It will be interesting to see how AIR ASIA responds to this.
2. Is it viable? Probably yes. Its all down to cost structure and understanding of the P&L. If we start from cost, imagine you are an airline of 1 plane. Once you have bought it / or leased it, your cost starts rising. Interest cost, depreciation, maintenance, parking charges. And you incur this even if you plane just sit on the tarmac and never moves.
Then you decide to fly the plane and assume you have ZERO passengers. Again you will incur another set of cost to fly albeit empt. There is fuel cost, a crew to pay, landing charges etc.
Then you decided to carry passengers – now you need ticketing, sales staff, phones etc to answer calls, catering, more fuel etc.
So you see how quickly cost piles up with no certainty of the revenue yet. I am sure DRB HICOM, previous owners of Air Asia can a test to this.
Now with planes, there is one more bit to it, if all you have is 1 plane, and even if you give your tickets for free, people may not fly with you. The one one more bit you need is frequency. How easy is it to get to a destination and back. And this is MAS’s trump card in the domestic sector.
So how will MAS make money – they will do it using business 101:
a: accept that with open skies prices will come crashing . So crash your price first while building up non ticket related revenue like from selling services e.g. Engineering and maintenance, travel insurance…
b: convert as much as their fixed cost into variable cost; e.g like rent aircraft engine using “power by the hour”
c: eliminate all unnecessary cost or erosion of margin e.g. avoid ticketing agents and go direct through the web:http://www.malaysiaairlines.com
d: Give away you know unsold capacity for free (of course you recover fuel and airport charges). If MAS knows that on average 30% of its capacity is unsold, it is much better to give it for free and at least recover the fuel cost and airport tax to defray some of its cost. Conservatively, at RM81.45 per seat and with 1 million seats on offer, MAS will collect RM81.45 million in revenue as compared to ZERO if the seats were left empty. It will earn a cool RM4.1 million of interest on that money, or if it is used to pay down debts it will save RM6.5 million in interest expense per annum.
Now, all of the above is just me trying to figure Idris Jala and not facts from MAS, but I must say that this is move is really audacious!
He is going to make money while protecting his market and at the same time consumers will benefit enormously.
Now if only Proton can start thinking like IDRIS!