The prospect of new cheap flights between the United States and Japan is likely to be delayed after the Federal Aviation Administration downgraded Malaysia on Monday to a Category 2 safety ranking. Malaysia’s AirAsia X planned to operate fifth freedom flights between Japan and the U.S. West Coast in a bid to stimulate competition in a market effectively consolidated by joint-ventures between U.S. and Japanese airlines more here.
Malaysia’s Category 2 ranking is based on Malaysia’s ability at a country level to provide oversight of its aviation industry and to adhere to international standards. A Category 2 ranking does not imply any Malaysian airline is unsafe – unlike the European Union’s Annex A “black list†of airlines banned from flying in EU airspace.
A Category 2 ranking has two immediate impacts to passengers and airlines. First, U.S. airlines cannot codeshare with airlines from a Category 2 country. American Airlines codeshares on Malaysia Airlines, but American can continue selling codeshares to Malaysia via its existing codeshares with Japan Airlines and Cathay Dragon. A spot-check on American Airlines fares for travel between Los Angeles and Kuala Lumpur show the Cathay and Malaysia codeshares were the same price, but the Malaysia codeshare had better timings. The codeshare restriction is two-way: Malaysia Airlines can have codeshares on Japan Airlines or Cathay Pacific, but not American Airlines.more here
Second, airlines from a Category 2 country are not permitted to add new services to the U.S. or modify flights – such as aircraft type used – unless the flight is entirely withdrawn. Malaysia Airlines stopped flying to the U.S. in 2014 and did not have plans to resume North American service. But AirAsia X is impacted.
The low-cost, long-haul carrier is partially owned by Tony Fernandes’ AirAsia franchise of airlines. It already links Kuala Lumpur with Honolulu via Osaka Kansai and wanted to expand that flying pattern. While Japan is the intermediary point between Malaysia and the U.S., AirAsia X is targeting local Japan-U.S. traffic.
An Airbus A330 aircraft of the Malaysian company Air Asia prepares before taking off the Toulouse ... [+] -Blagnac airport on December 12, 2014 in Blagnac. AFP PHOTO / PASCAL PAVANI (Photo by Pascal PAVANI / AFP) (Photo credit should read PASCAL PAVANI/AFP via Getty Images)
AFP via Getty Images
Although there is over-capacity in many trans-Pacific markets, AirAsia X sees opportunity. Besides high outbound Japan fares, AirAsia X could stimulate demand since its Malaysian cost base is lower than Japanese or U.S. airlines. The group has a Nagoya-based short-haul carrier, AirAsia Japan, that could provide marketing and brand synergies.
The AirAsia Group never disclosed firm plans, saying instead in 2018 that it would serve the U.S. West Coast in 2019, which was pushed back to 2020 due to aircraft delays. The group at various times has named Los Angeles, San Francisco and Oakland as possible destinations.
It is unclear how long Malaysia could remain at Category 2. Thailand has been at Category 2 since 2015 despite attempts to improve. The only other Asian nation that is at Category 2 is Bangladesh. Vietnam regained Category 1 this past February while Indonesia did so in 2016 and the Philippines in 2014.
Prolonged listing as Category 2 could see AirAsia explore options if it still wants to grow in the U.S. The group’s only other active long-haul unit is Thai AirAsia X, but it too is prohibited from adding U.S. services while Thailand remains Category 2.
AirAsia could theoretically base widebodies in Japan and fly under a Japanese license, which would not be restricted on Tokyo flights the way a fifth freedom operator typically is. However, the relatively young AirAsia Japan would need regulatory permission to grow from narrowbody A320s to widebody aircraft. AirAsia Japan’s shareholders would have to approve, and they may not share the same long-haul vision as AirAsia in Malaysia. AirAsia Japan has a higher cost base than AirAsia’s Southeast Asian units, due to smaller scale and Japan’s higher costs, so AirAsia Japan would not have as strong a competitive advantage.
Even if Malaysia’s AirAsia X proceeded with continental U.S. flights, financial performance would be challenging. One consideration is fuel. AirAsia X’s Osaka Kansai-Honolulu flight is within the eight-hour sweet spot for operating costs. Flights much beyond eight hours see fuel comprise a higher share of costs, leaving less room for airlines to differentiate on variable costs. Flights from Japan to California, or even further in the U.S., would surpass eight hours.
If AirAsia was having any doubts about U.S. service amidst a sluggish economy, a Category 2 ranking could make a convenient excuse to postpone plans.more here