Will Asia’s low-cost carriers soon beat legacy airlines in the business travel market? Rachael Ho investigates
There was once a time – in the not-so-distant past – when flying, even on economy, was out of most people’s reach. As technology improved, however, the costs of running an airline were reduced, making air travel more affordable, while more countries established their own airlines, driving competition up and prices down.
But in recent years a new breed of players has emerged: low-cost carriers. Generally, these are akin to buses: they transport you to a destination with a minimum of comfort. You have a small seat and little check-in baggage allowance for the ticket price, and everything else – like food and even water – costs money.
How it all began
Way back in 1949, Pacific Southwest Airlines offered flights between San Diego and Oakland, at US$15.60 for a one-way ticket. Other airlines followed suit in 1967, thriving on narrow profit margins but high traffic volumes.
The trend hit Europe after small airline Ryanair restructured itself in 1991 because the company had been operating at a loss. Today, it is the largest international carrier based on passenger numbers, carrying 75.5 million passengers from June 2010 to June 2011, according to the airline.
Although Malaysia-based AirAsia started offering low fares in 2002, some believe that the concept of flying budget has only recently picked up speed because of the economic recession.
“Low-cost carriers gained extra appeal with their low-price offerings which helped bolster the economy. The success of AirAsia has shown us the increasing demand from the region’s growing middle classes,” says Robert Bailey, president and CEO of Abacus International.
Low-cost carriers are gaining an increasing presence in Asia with a 14 percent rise in the capacity of available low-cost seats from July 2010, and 18.8 million seats available in July, according to the Centre for Asia Pacific Aviation.
Across continents, steep fares from full-service carriers play a part. For example, the internet rate for a one-way flight in economy class from Berlin to London on September 1, operated by British Midland International (bmi) was approximately E166 (US$238), according to flybmi.com. Flying on Ryanair cost E72 (US$103). However, one cannot ignore the fact that bmi departs from the larger Berlin Tegel Airport and lands in Heathrow, while Ryanair departs from Schönefeld in southeastern Berlin and lands in Stansted, a relatively inaccessible airport more than twice as far away from Central London. This has a huge impact on the appeal of choosing Ryanair.
Different side of the coin
Asian carriers currently have limited route rights, imposed by the need to forge bilateral agreements between countries and the desired destinations, in contrast to the US and member states of the European Union (EU), where carriers can fly to any destination under the Airlines Deregulation Act of 1978 in America (followed by a similar process in the EU).
However, by 2015, carriers in Asia will be able to enjoy more growth, as ASEAN’s open skies agreement will be finalised by then, allowing airlines to access new markets with the liberalisation of airspace between member countries.
The lack of secondary airports is another difficulty. Unlike in Europe, where carriers like Ryanair can negotiate on landing and ground service fees, most Asian carriers operate from primary airports which allow little room for negotiation. As a result, most low-cost carriers fly to smaller airports or destinations. For example, AirAsia started operating flights to Macau Airport in 2004, as a low-cost alternative to Hong Kong. (The carrier has since set up operations at the Hong Kong International Airport.)
Thankfully, Bailey of Abacus points out, these challenges are being mitigated by the nature of Asia’s business culture. “Asians like to do business face-to-face, more so than in Europe. This impacts the overall travel demand,” he explains.
The importance of low-cost carriers has grown so much that some major airports are setting aside dedicated budget terminals to address the challenge these operators face in getting landing slots. Malaysia and Singapore both built budget terminals back in 2006, and now the two hubs have expansion plans in the works. “We recognised the need to build a terminal that will meet the requirements of our airline partners operating the low-cost business model,” explains Lim Ching Kiat, senior vice president for market development, Changi Airport Group.
Flying low-cost
According to a poll conducted by the Business Traveller Asia-Pacific website, 13.9 percent of the readers surveyed always fly with low-cost carriers, while 66.7 percent do so sometimes. However, budget airlines are still not used regularly by most business travellers because of the drawbacks.
LuganoPirate, a Forum correspondent from the website, wrote: “I will not fly Easyjet or Ryanair, preferring the comfort of a business (or F) class seat, a lounge and all the privileges of being Star Gold, which makes a journey less stressful than it would otherwise be.” Freddy Tan, chief security advisor from Microsoft, agrees: “At the end of the day, we don’t want to spend time managing our travel. It has to be hassle-free.”
Others are more pragmatic. Vivian Lam, sales executive at Freight Forwardings, will fly low-cost carriers but only on short-haul flights. In those instances, she says, “I don’t have to eat onboard, and less-spacious seats are bearable.”
Short-haul routes aside, low-cost carriers are also gaining some market share in business travel by serving flights to small destinations that legacy carriers do not find profitable because of their higher operational costs. Serene Chua, travel manager at McDermott Asia Pacific reveals that the company spends about S$40,000 (US$32,588) monthly on low-cost flights such as from Singapore to Miri – although this only comprises approximately 6 percent of the company’s total flight expenditure. With destinations like Miri, “major airlines require transit in another city, and it’s just not time efficient,” says Chua.
Good for business?
While low-cost options are still not a first-thought priority for business travellers, some budget carriers have rolled out extra services to increase their appeal.
“Business travellers can benefit from switchmyflight, which allows them to make unlimited changes up to four hours before departure,” shares Dave Perring, commercial director Tiger Airways Singapore.
Another game-changer for the low-cost carrier market is the entry of legacy carriers with their own low-cost products. While legacy carriers once showed a muted response towards the low-cost model, its prominent success has forced them to acknowledge the market’s viability.
All Nippon Airways (ANA), together with First Eastern Investment Group, recently launched Peach Aviation, believed to be Japan’s first low-cost airline. More recently, ANA entered a joint venture with AirAsia to form AirAsia Japan – the first low-cost carrier to be based at Narita International Airport.
With slots to expand at airports in Tokyo in the coming years, Ryosei Nomura, spokesperson for ANA predicts: “Competition will increase with non-Japanese low-cost carriers serving routes from Japan. To compete, we judged that we needed a low-cost carrier based in Tokyo. To move quickly, we decided to tie up with AirAsia from the standpoint of brand recognition.”
With fares almost 50 percent that of ANA’s, Peach will commence flights from Kansai International Airport to Sapporo and Fukuoka by March 2012, then to Seoul. “These routes are also available with ANA, but Peach users – cost-conscious women in their 20s to 30s who have never used air travel – will have different demands,” says Peach spokesperson, Kensuke Asami.
Will rivalry arise between Peach and AirAsia Japan? “Since we have a huge enough market in Japan, there is no worry that both carriers will be rivals,” Nomura says. “It is important that they develop through friendly competition.”
More recently, Qantas Group, Japan Airlines and Mitsubishi Corporation have come together to form Jetstar Japan, scheduled to commence operations by late 2012. It will initially fly from Tokyo and Osaka to Sapporo, Fukuoka and Okinawa, with plans to expand to “key Asian cities”, states the press release.
Soon, Singapore Airlines (SIA) will also be operating a currently unnamed low-cost airline. While it is too early to tell, “travellers have said that they won’t mind flying on it, simply because of brand loyalty,” says Bailey.
Undaunted, Azran Osman-Rani, CEO of AirAsia X, AirAsia’s long-haul subsidiary, says: “A lot must be said for first-mover advantage. It’s going to help us that such an established company as SIA is validating the potential in the low-cost carrier model.
Low-cost versus full-service
One question remains: Will low-cost carriers give legacy airlines a run for their money in the business travel market? “No,” says Business Traveller consumer editor Alex McWhirter. “ Legacy carriers reign supreme because they offer a better product in terms of convenient scheduling, airport handling, onboard comfort, service and reliability.”
Still, Pattee Sarasin, CEO and founder of Nok Air, a low-cost carrier operating within Thailand, believes that to the benefit of low-cost carriers, “business class travel will continue to be strongly altered by the economic crisis of the past few years. The change won’t be that big, but there is no doubt that certain businesses have cut down on travel spending.”
Dato’ Eddy Leong, managing director of Firefly, a low-cost subsidiary of Malaysia Airlines, says: “Competition is probably the least-feared word in the world of airlines. Look at how the industry is growing!”
Raising the bar
Indeed, growth is obvious – so much so that the low-cost model is blurring as carriers raise the benchmark, offering services traditionally found only on legacy airlines.
Jeju Air, a low-cost airline based in South Korea, now provides complimentary in-flight meals, while Cebu Pacific Air (CEB) conducts in-flight games. By 2012, AirAsia X will be offering in-flight entertainment accessed either through passengers’ mobile devices or by booking a tablet. The carrier is even looking to provide e-mail and BlackBerry Messenger access.
Impressive offerings, but does this mean carriers are losing the edge they have as budget airlines? “Once a carrier interlines, offers free food, etc, it becomes part of the establishment,” McWhirter explains. “But it can only survive provided it controls its cost structure.” McWhirter cites Ryanair’s ruthless cost-cutting measures as its formula for success. Safety too is paramount.
Coming up
While awaiting ASEAN’s deregulation by 2015, which will stimulate more growth, low-cost carriers are aggressively expanding their fleets and routes. At the Paris Air Show in June, AirAsia made a purchase of 200 A320neo aircraft, the largest single order Airbus has ever received. CEB has also recently ordered 30 Airbus A321neo aircraft, while Jetstar Asia “will focus on the Pan-Asian strategy,” a spokesperson reveals, with plans to add up to 12 flights to China by year-end.
Hub-wise, Malaysia is building a new low-cost carrier terminal to replace the existing one, accommodating 30 million passengers annually, twice the capacity of the current terminal.
Singapore Changi Airport also plans to increase its budget terminal’s aircraft handling capacity by 2013. “We expect low-cost carriers to continue to register strong growth in Asia,” says Lim. Avelino Dl Zapanta, CEO of Southeast Asian Airlines (SEAair), a Philippines-based low-cost carrier agrees, predicting that “it will be explosive”.
Once upon a time, many doubted the survival of low-cost carriers. Now, budget carriers are even patronised occasionally by high-ranking officials – for instance the UK’s Prince Harry, who flew on Easyjet for a weekend trip. Perhaps one day flying low-cost will become part of all our routines.
The print and digital versions of this story in the September issue consist of a comparative table looking at the price differences between a low-cost carrier and a legacy carrier on select routes.
