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Are Asia's no-frills airlines
stalling?
By David Fullbrook
BANGKOK - Take any seat, buy a cup of hot tea,
sandwiches or even sushi to eat while reading the
newspaper onboard the growing number of low-cost
airlines proliferating across Europe and the United
States. With or without the frills, this may be the
future of budget air travel in the West. But is Asia
ready for a similar aviation revolution given the
region's fragmented markets, government protection of
flag carriers and diverse geographical conditions?
Investors love them, analysts are gushing with
praise, and pundits are declaring in chorus that Asia is
poised to follow suit. Financiers, aircraft salesmen and
budding airline moguls grin as they paint a bright,
profitable future, but Cathay Pacific veteran Richard
Stirland is not convinced. He wonders how, in Southeast
Asia particularly, these carriers will fare on
international routes given the paucity of domestic
destinations in the region.
"There is this
vicious circle of international routes mainly using
widebody aircraft, which the low-cost carriers don't.
They confer a lot of advantages - airlines can sell a
lot of seats at the back cheaply, and they can also sell
freight, which low-cost airlines don't. So effectively
they are flying aircraft half-empty," says Stirland, now
director-general of the Association of Asia Pacific
Airlines.
Low-cost carriers are disadvantaged
because on most busy international routes in densely
populated East Asia, many passengers are arriving from
elsewhere on airlines belonging to large alliances.
Low-cost carriers generally do not have this kind of
reach. "If you take a route like Bangkok-Hong Kong,
people are coming from all over the world. How do
low-cost carriers sell seats all over the world?"
Stirland asks.
Fast-growing low-cost airlines in
the single-market European Union and the United States
do not face these problems because they fly between
hundreds of towns and cities where most people can
afford flights. Southeast Asia's new carriers can only
hope to access similarly large markets by flying
internationally, but on top of the difficulties of not
being linked up with a major airline alliance,
international flights come with a host of other
problems. In much of Asia, many countries have only one
enormous capital city where all the economic activity
takes place and low-cost airlines can count on a steady
supply of passengers. "With the exception of Japan, if
you look around Asia there aren't too many points people
can serve," Stirland says.
However, Jim Eckes,
another industry veteran heading Indo-Swiss Aviation, an
aviation consulting firm, sees opportunity in connecting
Asia’s disparate towns and cities. "There is no question
out here that the geography is different. But there is a
higher demand for flying because of the geography. There
are no fast railways or super highway networks as in
Europe or the USA," says Eckes.
To be sure,
there are some transportation networks in Southeast Asia
and regional leaders are working together to build new
intra-regional routes. But poor-quality roads and
railways are still hampering regional integration and
development. In response, some countries - particularly
Malaysia - are pushing their neighbors to open up air
routes as a way to avoid transportation bottlenecks.
Stirland contends that new air routes will not be
enough: "Given the limited number points that are viable
I don’t think open skies will make much difference."
Eckes, however, is certain that when government
regulations are scrapped, travellers will take to the
skies. "The future in Asia is going to be one where up
to one-third of travel will be by low-cost carriers, as
long as the politicians allow it. Once the region opens
up there is huge a opportunity for airlines that are
well financed and politically adept."
Eckes
foresees growing demand for budget airlines as steady
economic growth in India and Indonesia, coupled with
stellar growth in China and Thailand, will add hundreds
of millions of prospective passengers. Eager to avoid
crash-prone buses and slow trains, he predicts people
will be willing to pay for the convenience of air
travel.
In order to bypass national ownership
rules and route regulations, joint-ventures are being
established, the most notable of which is the
yet-to-be-named airline born out of a recent tie up
between Malaysia's AirAsia and Thailand's Shin
Corporation. Shin Corporation, owned by Thai Prime
Minister Thaksin Shinawatra, holds a majority stake in
the joint-venture. According to Stirland, this strategy
is risky: "AirAsia is trying to set up a separate
company in Thailand. However, they are losing management
control. You lose management control if you have to go
into partnership with a foreign entity."
Different national regulations have also forced
airlines to maintain separate fleets, training programs
and maintenance regimes in each country, adding to
costs. New budget carriers have done so well in the
deregulated West only because they have been able to
keep costs down, however. In fact, many established
carriers in the US and Europe have run into financial
problems due to their old-fashioned, high-priced ways.
Asia's big national airlines by contrast are
either among the world’s best or job-creation projects,
protected as Europe’s national airlines were up to the
1980s. Either way, that makes them tough competitors.
"If a genuine low-cost carrier tries to establish itself
in places like Singapore, Hong Kong, Taiwan or South
Korea, the incumbents will zap them," says Stirland.
Asia’s new budget airline czars are well aware of these
issues; in response, they are using diverse pricing
strategies to take advantage of consumers' growing
purchasing power, keeping salaries low and buying cheap
airplanes.
Malaysia's AirAsia has jumped on the
low-fare bandwagon and is mimicking Western marketing
strategies and luring passengers with unbelievably low
fares. Many of its tickets sell for substantially higher
than Malaysia Airlines though, and are sometimes even
higher if purchased at short notice during peak times.
Whether the same gimmicks will work in Thailand,
where AirAsia's new joint venture has just launched
services in competition with Thai budget carrier
One-Two-Go and Thai Airways' forthcoming low-fare
carrier, remains to be seen.
In Indonesia, Lion
Airlines is offering service with the frills, including
personal televisions in economy class. The airline makes
money by running a tight ship and earning customer
loyalty through quality, timely departures and cheap
fares (not unlike the upmarket low-cost US carrier,
JetBlue).
Despite the obstacles faced by
low-cost carriers in Asia, increasing numbers of
investors and executives seem willing to bet on these
new airlines. "Two years ago I had one inquiry for
aircraft from a low-cost carrier. For 2004 alone we will
probably place 60-70 percent of our new aircraft
capacity with low-cost carriers, and 50 percent of our
used aircraft are on offer to low-cost carriers in the
region," says Robert Martin, managing director of
Singapore Aircraft Leasing Enterprise (SALE). Martin
expects up to a quarter of Asia’s 800 airliners to be
flying with new-style carriers in five years. "We’re
enthused about this sector, but it musn’t be over-hyped.
You’ve got to have capital, good management and a proper
business plan," Martin says.
While Southeast
Asia, led by Indonesia, is currently the hotspot for new
carriers, within five years SALE's biggest new customers
may well be in China and India, where governments are
pursuing policies that will create a niche for new
carriers that fly locally and internationally.
With so much flux, opportunity and uncertainty,
Stirland is not alone in having doubts about the future
beyond national air routes. "[A] feature of this new
environment will be greater volatility, especially as
the new genre finds its true role partly constrained by
regulatory controls. Consequently, we shall also see
market exit - ie, collapses - in some cases," says Peter
Harbison, managing director of the Center for Asia
Pacific Aviation.
(Copyright 2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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