|
|
|
|
Cheap airlines take flight in Pearl
River Delta
By Mani Goel
HONG KONG - The Pearl River Delta (PRD)
has become the trial venue for a brand new
low-cost, long-haul airline model being
simultaneously pursued by two start-ups, Oasis
Hong Kong Airlines and Wow! Macau, headed by noted
aviation figures Stephen Miller (former chief of
Dragon Air) and Andrew Pyne (former head of
International Affairs at Cathay Pacific Airways),
respectively. An overcrowding of low-cost traffic
on short and medium Asia Pacific routes, fast
expanding interregional business and leisure
links, and the growing demand for cheaper
long-haul travel spurred by the growth in the
Chinese economy has prompted the two airlines to
adapt a budget model for intercontinental
operations from PRD.
Oasis is banking on
an impending expansion in regular and low-cost
flights between China and Hong Kong following a
2004 air services agreement and Hong Kong's
liberal aviation outlook. The new carrier is
seeking to consolidate its hub status and allay
competition from Singapore, Kuala Lumpur and
Bangkok to feed four routes to Europe: Hong Kong
to Milan, Berlin, London Stansted and Cologne,
slated for a November 2005 launch. In 2006, the
airline plans to add routes to Oakland and
Chicago.
Wow, on the other side of the
Pearl River, is taking advantage of Macau's
booming gambling industry, "Gateway to the Pearl
River Delta" status, lower operational costs and
cheap airport landing charges (30% less than Hong
Kong's) to connect Macau to destinations in
eastern Europe, Africa, the Mediterranean
countries, Russia, Central Asia and the
Asia-Pacific region. Success, however, will
require Wow! to successfully sublease Air Macau's
monopoly traffic rights.
Comparison
with traditional low-cost carriers
Simple
operations and price elasticity brought about by
point-to-point routes, shorter turnaround times,
single class layouts, standardized fleets,
second-tier airports, no-frills service and direct
customer distribution are the hallmarks of
traditional low-cost carriers (LCCs) like Ryan
Air, Southwest Airlines and Air Asia. But until
recently, flights beyond four or five hours were
considered too complicated and pricey to be
profitably incorporated in a low cost set-up, and
investment groups are known to have rejected
several such proposals.
Despite a market
opportunity bolstered by first-mover advantage,
juggling long-haul operational demands with
low-cost structural imperatives may not be easy,
and indeed tends to automatically dissipate
several of the cost advantages enjoyed by other
LCCs. Seat pitches on LCCs tend to be smaller, and
an additional 3-4 seat rows are often substituted
for galley space. The cost advantage of being
transported cheaply on domestic and short-haul
regional routes far outweighs the attraction of a
meal served by a fetching flight attendant. But
this may no longer be the case on intercontinental
trips of between 12-13 hours, which are also
characterized by demands for greater leg room and
bigger seat pitches.
Oasis intends to
serve free meals, but charge for alcohol and
entertainment to lower costs. Flight attendants
would nevertheless have to be brought in, as
opposed to traditional LCCs, which refrain from
carrying a full complement of flight attendants.
Shorter ground turnaround time, which
enables optimum utilization of aircraft, is a
mainstay for budget carriers' profitability. Ten
minutes saved on a 3-4 hour leg can accumulate to
20-30% additional flying time and one or two extra
journeys in the airplane's itinerary. But the
advantage gained by a quick turnaround is minimal
on a 13-hour intercontinental flight involving a
single daily landing and take-off.
The
global airline industry is reeling under mounting
fuel prices - 88% higher than three years ago -
which have brought even legacy carriers to their
knees. Cathay Pacific has won the approval of the
Hong Kong civil aviation authorities for a 33%
higher travel surcharge, despite a recent fuel
price slowdown. Accordingly, the fledgling
airlines will need to stir demand - capture the
low-end customer base of legacy carriers, attract
first-time travelers, and fill at least 70-80% of
their initial flights - to sustain investors'
interest.
This will involve generating
sales while keeping marketing and advertising
costs to a bare minimum. Low-cost airlines have
become known for innovative direct distribution
and marketing practices. Most have their web
addresses printed on the aircraft. Thailand's Nok
Air and Orient Thai's regional and domestic low
cost offshoot, One Two Go, sell tickets through
prepaid smart cards in convenience stores. Oasis
will have no frequent flyer program, and employ
outsourcing and limited advertising while
promoting direct customer distribution via the
Internet or even through tour operators and travel
agents.
Homogenous fleets allow LCCs to
optimally utilize their cockpit crews (because
members can be substituted freely when necessary),
and lowers crew training costs because the carrier
does not have to recruit different flight crews
for flying different types of aircraft. Oasis is
planning to have a fleet of three or four Boeing
747-400s, a long-haul aircraft popular with
industry experts for its fuel efficiency, or
Airbus A340-300s, which are widely utilized by
airlines like Cathay Pacific for intercontinental
flights. Wow intends to employ a fleet of four
Boeing 757s and 767s.
Regional
competition
Given the recently enhanced
air, road and sea transportation links within the
PRD region due to infrastructure like the
Macau-Zhuhai-Hong Kong Bridge, along with swift
ferry connections and single-stop immigration
procedures, fierce mutual competition between
Oasis and Wow is inevitable. So is the competition
from revenue-strapped full service carriers, who
have made their long-haul networks more
consumer-friendly in terms of frequencies,
destinations and fares offered. In 2004, British
Airways and Swissair offered the lowest off-peak
fares from Hong Kong to Europe, at 380 British
pounds (HK$5,500, or US$707.714). Cathay Pacific's
return fares for direct flights to London, Rome,
Paris, Frankfurt and Amsterdam can range between
HK$7,000 and 19,000. Emirates offers one of the
most competitive return trip fares to Europe, via
its hub Dubai, from 440 British pounds. Oasis
fares are likely to range between HK$4,000-5,000
year round.
Oasis' decision to bypass
primary European gateway airports such as London
Heathrow, which most legacy carriers fly to, for
secondary airports and novel destinations serves
to avert direct competition with de facto home
carrier Cathay Pacific, while fitting in
reasonably well with the Hong Kong airport's hub
ambitions. Negotiating lower parking and landing
charges with the European authorities may enable
the airlines to whittle back some of their fixed
costs. Currently, no airline offers direct flights
from Hong Kong to Milan, Berlin or Cologne; these
destinations can only be reached via European hubs
like London, Rome, Zurich, Amsterdam, Frankfurt
and Istanbul. Claiming to present its consumers
with "real choice" and a new range of
destinations, Wow has also shied away from
replicating the cities served by other local
carriers like Cathay Pacific, Dragon Air and Air
Macau.
In 2004, traffic between Hong Kong
and Milan registered a 16.67% growth. Traffic
between Hong Kong and London grew at 25.5%, with
Cathay Pacific grabbing the biggest share of the
total traffic at 49% - a 22% growth from 2003 -
and British Airways attracting a 36% share, an
increase of 35.5% from 2003. Moscow and Rome
registered the highest growth, at 57.3% and 57.05%
respectively.
According to aviation
experts, a low cost start-up may only need half of
the US$70-80 million required to set up a full
service airline, whereas a long-haul low-cost
model may require investment in the range of
US$40-50 million. Raymond Lee, Chairman of
US-based East West Enterprises Co Ltd and the
Oasis Development Enterprises group of real estate
and investment companies, owns the majority stake
in Oasis Airlines (just under 60%), along with his
wife Priscilla Lee. Dr Allan Wong, the Chairman of
Vtech Holdings, the Hong Kong-based manufacturer
and supplier of telecommunication products, holds
a 15% stake. Taking off with an initial investment
pool of US$25 million, Oasis intends to inject
additional capital only after it achieves success.
Wow!, for its part, is backed by business and
political interests in the gambling enclave, and
by investors in Hong Kong, Thailand, Australia,
Europe and Japan.
Outlook for low-cost,
long-haul
As David Dodwell at public
relations firm GolinHarris noted earlier this
year, competition need not be a zero-sum game, and
a shift in market paradigms does support
flexibility in business models. The new buzzword
in the Asia-Pacific aviation landscape is
"hybrid", spurred by the low cost phenomenon,
demographic realities, ever-expanding
intra-regional trade and tourism linkages, the
growing influx of start-up airlines, and the sheer
profit dependence of legacy carriers worldwide on
rapidly opening Asian markets like China and
India.
Boundaries between legacy and
budget carriers are increasingly becoming blurred,
as airlines tread upon each other's territory for
market share, renewed profits and business
practices. This compromise approach can spell
trouble, as in the case of Singapore's Valuair,
which recently succumbed to operational pressures
stemming from high fuel prices, rising pilot
wages, the continuing entry of new players in the
Southeast Asian aviation market, including Indian
domestic airlines, and the absence of an umbrella
airline's protective shield, and merged with
Jetstar Asia to form Orange Star. Valuair had
become known for imaginative marketing campaigns -
all-female Hong Kong shopping trips and cosmetic
surgery holiday packages in Bangkok, for example -
and offered free in-flight meals,
leather-upholstered seats and long-haul flights to
destinations like Perth.
It can be argued
that the traditional LCC airline structure
diligently followed by Air Asia is not suited to
long-haul operations. Hybrid status and the
resulting costs are intrinsic to the new airlines
and not just superfluous. Besides, with an army of
cheap flights on limited domestic and regional
routes, going low-cost, long-haul may be just the
"right way to fly". But these ventures will
inevitably be expensive, not exactly
competition-free, and difficult to sustain.
Ability to garner adequate market "thrust"
and capital "fuel" to counter cost and business
turbulence, en route to a smooth long haul, will
eventually determine whether Oasis and Wow! Macau
can find a place in the sky. It will also mark the
beginning or the end of a new trend in Asian
aviation.
Mani Goel is a Hong
Kong-based aviation analyst and freelance
writer.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
© Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
|
|
|
