The airline business has faced many challenges over the past year, especially with oil prices rising above US$100 per barrel and taking up 30 per cent of airlines’ operational costs (a decade ago, the percentage point was 13). The global economic slowdown does not help – it affects not only passenger yields but also freight demand. Despite all this, however, one sector of the industry seems to be growing: low-cost carriers (LCCs).
Beating the odds
In a recent announcement, the International Air Transport Association (IATA) chief executive Tony Tyler revised upwards the aviation industry’s financial outlook for 2012, with airlines expected to post a profit of US$6.7 billion instead of US$4.1 billion. Still, that represents a mere 1 per cent net profit margin, and Tyler said the industry was merely “keeping its head above water”.
It seems though, that one airline’s uphill battle is another airline’s chance to take off. As travellers tighten their purse strings and legacy airlines drop routes incompatible with their business models and fleets, budget carriers have seized the opportunity to expand.
Last November, Ryanair reported a record first-half-year net profit of #596 million (US$804.5 million), a 10 per cent year-on-year increase and beyond all forecasts. The Olympics may have contributed to a bumper summer, but the airline has also seen a 24 per cent increase in its oil bill, according to chief executive Michael O’Leary. Europe’s second largest budget airline, easyJet, also reported a surge in pre-tax profit, by 27.9 per cent to £317 million (US$499 million) over the year to the end of September.
In Asia, perhaps the most successful low-cost carrier to date is AirAsia. The company began services in 1996 as simply a Malaysia-based LCC, but it has grown into a multi-hub operation that covers more than 400 destinations across 25 countries.
The most recently announced figures show that AirAsia Berhad – Malaysia AirAsia, Thai AirAsia and Indonesia AirAsia – carried 33.8 million passengers in 2012, a 13 per cent increase on the 29.86 million passengers carried in 2011. This figure correlates with the airline’s increase in capacity, which rose 13 per cent to 42.42 million from 37.50 million in 2011. The group increased the total fleet size by 17 to 113 at the end of last year. AirAsia also has joint ventures AirAsia Japan and Philippines’ AirAsia, as well as long-haul operator AirAsia X.
The New World
Like their counterparts in other parts of the world, LCCs in the region keep fares low through high utilisation of smaller aircraft, ancillary revenues from charging for services such as checked-in luggage, in-flight meals and seat selection, as well as using secondary airports – although these are not as widely available in Asia as in Europe. In some cases, LCC crew members multitask to help reduce the size of the staff – cabin attendants of the newly established Japanese LCC Peach, partly owned by ANA, are also responsible for aircraft clean-up and helping passengers check in.
But whereas travellers in the West may have turned to LCCs because of worsening financial situations, the opposite is true in Asia. “The demand for leisure travel is highly correlated with GDP, with travel demand growth rates historically exceeding GDP by 1 to 1.5 points,” says Campbell Wilson, chief executive of Singapore Airlines-backed LCC Scoot.
The airline, launched in June last year, operates a fleet of four B777s and serves six destinations from Singapore with five routes – direct flights to Sydney and the Gold Coast in Australia, Bangkok, Tianjin in China, as well as Tokyo Haneda via Taipei. “Asia’s economies are still growing at a healthy pace of around 5-6 per cent per annum,” Wilson adds, “and demographically, more people are entering the middle class with the time, money and inclination to travel. The rate of growth in this region is such that the total number of international air travellers may double in little more than a decade.”
Scoot’s hub Changi Airport has earned a lot of LCC business. It opened the Budget Terminal in March, 2006, and in that year alone received 2.7 million passengers flying on LCCs. The number then rose to a record 14.3 million passengers in 2012, accounting for 28 per cent of the airport’s total passenger traffic. Still, there are 15 LCCs serving Changi, with more than 2,100 flights each week to 55 city links.
Since the regular price for an economy ticket for, say, Kuala Lumpur to Hong Kong on AirAsia can be less than half of that on full-service Malaysia Airlines, many travellers will consider it an attractive deal even with any add-on costs – especially when they are travelling with family members.
Treasure islands
LCCs also play an important role in facilitating domestic travel, and one market that serves as a perfect example is Indonesia. The resource-rich archipelago has a booming economy, a total area of more than 1.9 million square kilometres spread across 17,508 islands, and a population close to 250 million, many of which are entering middle class status.
Rising demand for low-cost air travel in Indonesia is reflected in the stunning expansion of local airlines. In 2011, Jakarta-based Lion Air committed to an order of 201 B737 MAXs and 29 Next Generation B737-900ERs from Boeing, while obtaining purchase rights for an additional 150 aircraft at a listed value of more than US$14 billion.
The deal was the largest in the US aircraft manufacturer’s history in terms of dollar volume and number of planes, and the announcement was such an event that US president Barack Obama personally attended the agreement signing at the East Asia Summit in Bali.
More significant still is the fact that Lion Air only started operating in 2000, and its current fleet size is barely 100 strong. Its network of some 36 destinations covers mostly Indonesia and accounts for 47 per cent of the market, according to Reuters, while the low-cost arm of flag carrier Garuda takes up only about 23 per cent. The airline’s international destinations are Singapore, Kuala Lumpur, Penang and Ho Chi Minh City. Exactly where the new aircraft will be deployed is still an unknown.
Citilink, another Indonesian LCC backed by national carrier Garuda, seems determined to recapture lost ground. In January it placed an order with Airbus for 25 new A320neo aircraft, in addition to the 15 A320ceos and 10 A320neos parent airline Garuda signed up for in 2011. Currently, it has a fleet of 12 leased A320s which it is operating on its fast-growing domestic network.
The AirAsia Group has also been working to capture the Indonesian market. At the end of July last year, the company announced a deal to acquire Metro Batavia, which would include an aviation training school as well as the LCC Batavia Air. However, the plans were scrapped by mid-October, with group chief executive Tony Fernandes saying “the timing was perhaps not appropriate as it would have induced too many risks”.
Still, the group has its AirAsia Indonesia unit, which has plans for further fleet expansions this year. Chief executive Dharmadi explains: “We are looking to more than triple our fleet size in the next five years to accommodate an average annual passenger growth rate of 24 per cent and 28 per cent in international and domestic markets respectively.”
China surprise
In recent years, outbound tourism has become another major export for China. According to the Pacific Asia Travel Association (PATA), Chinese outbound departures reached 38.5 million from January to June last year – a 19.7 per cent increase on the same period in 2011. These travellers are generally regarded as high spenders, as many are seen lining up for designer goods all over the world. In fact, according to London Heathrow Airport, Chinese passengers are responsible for around 25 per cent of luxury spend at its outlets even though they only represent 0.7 per cent of passenger volume.
However, what is less talked about outside China is the even more robust growth in domestic travel within the second-largest economy in the world. The Global Business Travel Association estimates that this year domestic travel spend will grow 14.6 per cent to reach US$213 billion. Other than national carrier Air China and the globally known players such as China Southern and China Eastern, there are actually well over 20 flight operators in the country, shuttling thousands of passengers between Chinese cities daily. But only one of them calls itself a low-cost carrier: Spring Airlines.
This privately owned carrier, one of very few in China, inaugurated its first flight in July 2005 and now flies to 50 domestic destinations as well as Bangkok and the Japanese airports of Ibaraki (85km north of Tokyo), Saga (near Fukuoka) and Takamatsu on Shikoku Island. According to Spring Airlines president Wang Zheng Hua, his LCC’s flights are 20-30 per cent cheaper than full-service competitors and enjoy an average payload of 95 per cent. Fares of as low as RMB129 (US$21) are often offered near departure times to fill seats.
However, Wang is quick to point out that his customers are not necessarily cash-strapped. “For flights that are two to three hours, or five to six hours, people might prefer to save on air tickets and put the money into more luxurious accommodation,” he said in November last year at a press conference in Hong Kong, adding that according to the airline’s own survey, a substantial proportion of its passengers check in to the Sheraton or Westin after their flights.
The future course
The LCC model is still a rather new concept in the region, and its potential is strong. According to IATA chief economist Brian Pearce, LCCs command a 15 per cent share of the available seat capacity in this region, versus 23 per cent globally. There still seems to be a lot of room to grow.
Legacy airlines are increasingly feeling the pressure from LCCs, and each is dealing with it in a different way. Singapore Airlines, in addition to its stake in Tiger Airways, launched its own LCC Scoot last year, while ANA partnered with a Hong Kong company to establish Peach. Thai Airways, having scrapped plans to establish its own LCC, established the “light premium” Thai Smile to take over a number of its domestic and regional routes.
Jetstar, a low-cost subsidiary of Qantas, is set to expand its reach in Asia by partnering up with China Eastern to launch Jetstar Hong Kong this year, adding to a portfolio that already includes Jetstar Japan, Jetstar Asia (Singapore-based) and Jetstar Pacific (Vietnam).
How much further will these developments change the picture of aviation in Asia? Will full-service airlines such as Dragonair and Silk Air, whose core markets are also regional, feel increasing pressure? And will LCCs ever be able to compete on long-haul routes? Stay tuned for part two in the April issue of Business Traveller Asia-Pacific.
