Taking the Budget Airline to China Could Cost You

 | May 17, 2017 | 10:00 AM EDT
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Taking on the closed Chinese economy, forming a forced joint venture, entering a highly regulated industry and engaging in a price war hardly sound like a recipe for success. But that's exactly what AirAsia (AIABF) wants, as it proposes bringing a budget carrier to the mainland.

AirAsia's co-founder, Tony Fernandes, is Asia's Richard Branson of Virgin and Virgin America (VA) fame -- never short for words and always up for a photo opportunity.

And like Branson, he has his hubris and his flaws. That appears to be encouraging him into overexpansion. He has timed the signing of a memorandum of understanding with his new Chinese partners to coincide with the Belt and Road forum in Beijing.

"One Belt One Road" counts just about any project in any of the nations anywhere near routes between China and Europe. Throw in a budget airline that was doing that anyway? Why not.

Malaysia-based AirAsia is the continent's best-known cut-price carrier. It often operates out of secondary airports, but nevertheless maintains a fleet of new planes and pretty high standards of service. I've flown them a couple of times and been a happy customer.

Customers are hardly ever happy when they fly in China. Delays are notorious, because the military locks up large parts of the Chinese skies whenever it has anything going on even remotely nearby, and often when it has nothing going on at all.

Then there's the operational ineptitude. Forget about booking an afternoon flight from Shanghai to Hong Kong, my frequent-flying executive buddies tell me. You'll sit around being delayed well into the night before being told to come back the next morning. Sorry!

AirAsia is expanding into China through a partnership with China Everbright Holdings, the state-owned conglomerate that is the parent of China Everbright International (VA) , and the government of Henan Province.

The airline will be based in Henan's capital, Zhengzhou, which is conveniently situated between Shanghai and Beijing, although it's a little inland from China's throbbing east coast. The partners also want to set up a pilot-training center and aircraft maintenance facility there, according to the Financial Times.

"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," the FT quotes Fernandes as saying, adding that he has been trying to enter the Chinese market for years.

AirAsia will face extremely stiff competition from Chinese carriers. Will there be enough growth, in a market forecast to supplant the United States as the world's biggest by 2024?

The three biggest players, all state-backed, are in order of magnitude China Southern Airlines (ZNH) , China Eastern Airlines (CEA) and Air China (AIRYY) , which is the flagship carrier internationally but lags the other two domestically. The three are likely to attempt to undercut the budget carrier on fares until it can't take the pain.

AirAsia became the first foreign company to enter the Indian airspace when it won approval to set up an airline in India in 2013 and set up a joint venture with Tata Sons, the private parent of Tata Motors (TTM) .

The Malaysian company is only allowed to own 49% of the venture, just as in China. Tata has another 40% and entrepreneur Arun Bhatia's investment company Telstra Tradeplace owns the remaining 10%.

Bringing in Bhatia guarantees the support not only of the powerful Tata family, which exited the airline industry 60 years back when they sold the Air India BSE:AIND they founded to the government, but also the equally influential Mittal family. Arun Bhatia's son Amit is married to Vanisha Mittal, only daughter of Lakshmi Mittal, the chairman and CEO of global steel giant ArcelorMittal (MT) .

Despite all that support, there's been infighting between the founders, according to The Economic Times, and the company has incurred heavy costs while gaining market share. It has also had to fight hard in Japan and Vietnam and has been losing money in Indonesia, where it has another joint venture.

That may leave it spread too thin. China also does not have enough pilots, by any stretch of the imagination. So the flight school may be crucial to AirAsia's success. Likewise the extent to which it can keep provincial and national governments on side.

Fernandes is exploring using the Comac C919 within China. That's the Chinese rival to the Airbus (EADSY) A320 and Boeing (BA) 737. It'll take such smart moves to keep the business going in a fight for the skies that will be very fierce indeed.

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