Malaysian minister steps into airline price war

http://sg.biz.yahoo.com/080515/1/4gjt8.html

Malaysia's transport minister said Thursday he would try to resolve a cut-throat fare war between the national carrier and budget airline AirAsia, whose founder has complained of unfair competition.

Malaysian Airlines said Wednesday it would give away fares weekly to 20 Asian destinations, prompting criticism from Air Asia's founder Tony Fernandes since the government subsidises some of the national carrier's international flights.

Both Malaysian Airlines and Air Asia had earlier announced similar offers for domestic flights, even though soaring oil prices and a slowing global economy are squeezing the aviation industry.

"I personally will step in to investigate," Transport Minister Ong Tee Keat told the official Bernama news agency. "I should talk to both of them at this juncture to find out exactly what went wrong."

He said he had "no qualms about healthy competition" but that conflicts between operators should be minimised.

However, Fernandes has argued that Malaysian Airlines enjoys government backing.
"The government will never allow MAS (Malaysian Airlines) to fail but a private company? Who is going to save us?" the New Straits Times quoted Fernandes as asking.

"I'm not against competition but it has to be a level playing field. You can't send me into a boxing match with one hand tied behind my back," he said, referring to issue of the government subsidy.

AirAsia also wants to be given equal rights to fly the Singapore-Kuala Lumpur air route, one of the region's most lucrative connections. Malaysian Airlines currency has many more flights on that route.

Earlier Thursday, AirAsia X, a sister company of budget-carrier Air Asia, launched a new six-weekly service between Perth and Kuala Lumpur starting November 2, the airline said in a statement.

The airline said it planned to launch flights to Britain in the fourth quarter of 2008, with London and Manchester being considered. It is also eyeing more destinations in China as it expands its network.


Review:
As mentioned in the article, Malaysian Airlines (MAS) and AirAsia are the two major airline companies operating in Malaysia. However, the former is a national carrier while the latter is a private budget airline company. These two companies are substitutes of each other. The cross elasticity of demand of them is high.

Compared to MAS, AirAsia is smaller in size. It has fewer planes and limited flight routes (as it is asking for more routes such as Singapore-Kuala Lumpur). The only reason why it can still survive with existence of its much stronger rival, MAS, is because it has a much lower price by cutting cost from the lowering the quality of service compared to MAS. In economics concept, the demand for AirAsia is said to be price elastic to most of people as it takes up a large portion of their income. By offering a lower price, more people will be attracted to it and hence increase the total revenue.

Now, Malaysia government intervenes into the competition between these two airlines. It is offering subsidies to MAS so that MAS can reduce its cost of production and hence reduce its ticket price near to that of AirAsia to increase its competitiveness. In this way, AirAsia is being put into a more disadvantaged position as its only strength (low price) in the competition with MAS has been severely weakened. To consumers, they would rather choose to fly with MAS which offers much better and convenient service with a bit higher price than AirAsia. This threatens the survival of AirAsia and hence prompts criticism from Air Asia's founder Tony Fernandes. Rather than further slashing its price which may lead to subnormal profit, Fernandes is wisely asking for more flight routes to promote its product diversity to attract consumers and make profit from other markets(lowering risk).

Tianning