Budget airlines move to a higher plane
By David Fullbrook

BANGKOK - Innovation, diversity and competition will define Southeast Asia's low-cost airlines in 2005, likely influencing new carriers taking off in China and India as well. Branding, ever-longer routes and airports are now all entering the equation as carriers in crowded skies seek an edge over competitors.

Last year saw a slew of low-cost carriers (LCC) take to the skies in the region, defying doomsayers who said the model would not work in a region with complicated rules restricting routes and traffic rights, and few secondary airports. "In fact there hasn't been any new entry into the Asian market for a decade or so until the new flock of carriers came in. In that time the market has trebled. New carriers are straying from the model, what we're seeing is diversification," said Peter Harbison, the Center for Asia Pacific Aviation's managing director.

Singapore's Changi airport, where LCCs now account for 7% of traffic from almost nothing at the beginning of 2004, is building a terminal just for these no-frills airlines. Bangkok's Don Muang, earmarked for closure later this year, may well soldier on as an LCC and charter flight hub. With passengers now spoiled by rock-bottom fares, carriers are fast graduating to Madison Avenue sophistication from nuts-and-bolts simplicity.

Thailand's Nok Air kicked-off services in July, with razzmatazz street campaigns and radio promotions pushing its brand as much as its prices. Meanwhile, LCC peers AirAsia and One-Two-Go reduced services. "When you're around the same price point, brand is an issue," says Ravindran Devagunam, Deloitte's aviation and transportation practice head in Singapore.

Nok, claiming total management independence from owner Thai Airways, needed to do something different with three other carriers also operating domestically in addition to AirAsia and One-Two-Go. Branding brings in sales of airline apparel, and partner products and services. Margins on these items are much higher than the 5-10% a modern airline earns from selling seats, or 2-3% legacy airlines expect. "I would imagine 20-30% of revenue will come from non-airline services and products by January," said Patee Sarasin, Nok's chief executive.

This January, Nok's brand will get a further boost from a new strategy, which Patee declilned to divulge, that will bring flights within the reach of the 5million to 6 million Thai families earning 20,000-30,000 baht ($500-750) monthly. "This one is really going to rock AirAsia - and everybody else," says a grinning Patee. In Phuket, Nok offers "beachside" check-in, issuing boarding passes at a hotel a few minutes from the airport. It takes a cut from revenues partners earnings from selling things like drinks, food, Internet, and transport to Nok passengers. Similar check-in centers are likely to follow at other destinations.

"Any carrier that can put together the good bits or some of the good bits is going to have an edge," said Harbison. "It's very much about making sure you've evolved into your niche, it's got to be a niche you can protect."

Nok will start selling ad space on overhead baggage bins, seat trays and the fuselage, pulling in more of that juicy incremental revenue. Nok is also introducing a loyalty scheme, possibly a smartcard later. In Thailand, Nok has teamed up with banks to allow passengers to pay for tickets via ATMs (automated teller machines) and 7-Eleven convenience stores for counter payments. This is something it hopes to repeat in China and elsewhere. "We are the only airline in the world selling tickets via ATMs," Patee says.

Having spent two decades with ad agencies in Thailand and the US, Patee is certain that loyalty lies in consumers' hearts, not their wallets. "Price is not the key to everything, people still have emotions, which can be stronger than price motivation. Unlike AirAsia, We are not focusing on price-sensitive clients. Ryanair is adding frills, which they charge for, because they know pricing is not the key to medium- to long-term success," he says.

Price, however, creates the market as the masses' wealth is rising pretty fast in Asia's booming economies. "One of the surprise things about low-cost carriers in Asia has been the huge elasticity of demand when you drop the price. It provides a huge increase. Asia doesn't remotely have the capacity to meet the demand. Down the track, the low-cost industry in Asia will be a big one," said Harbison.

Though Nok appears ahead of the Asian pack, other low-cost airlines, especially in Europe, are working hard to build non-airline revenues. Harbison noted that Easyjet and Ryanair earn "double-digit" revenues from cross-selling. Success is not certain though. Richard Branson's European airline Virgin Express has struggled, while Virgin Blue in Australia is flying high. "Brand-building has to be from the start, it is difficult for AirAsia to do that because their brand-building is built on price alone," said Patee.

That may be so, but the result is, AirAsia has a strong brand, spreading beyond Malaysia to Thailand, Indonesia, and quite probably China this year. Tony Fernandes, AirAsia's chief executive, also has that rare combination of charisma, confidence and ego to go with it. "When AirAsia was set up there was no flair, Fernandes was providing a bus service in the air: reliable, safe, easy travel. People tended to trust his product, building his brand," said Devagunam. "It sounds simple, some people are innately better at it than others. There's a first mover advantage."

AirAsia has not been standing still, a few months ago ordering 40-odd Airbus A320s for expansion and to replace leased second-hand Boeing 737s. It has been working hard pushing its holiday service, enabling passengers to bolt together all the things they need for a holiday via a website. Most carriers will need to do something similar to survive, especially as many low-cost passengers are taking their first holiday, which may also be their first trip overseas.

"When you go international, the linking of those other products is that much more important, people can feel confident they have everything tied up in a nice product, they don't have to worry," says Harbison. That means Nok has to work doubly hard to succeed long-term. "Differentiating from AirAsia is not easy, but there are probably a few ways out there, such as the JetBlue way," said Devagunam.

Nok intends to add five Boeing 737-400s this year to the three it already operates. Plans for routes to cities across southern China, from Chiang Mai, this year could accelerate to make up for lower traffic on southern Thai routes where many beach resorts lie in ruins after the tsunami. Phuket, which should be shipshape in time for the traditional high-season running between November and February, is in Nok's plans as a stepping stone to Bali and elsewhere.

Whether from Phuket or Bangkok, Bali is beyond the three-hour flight time considered the limit for LCCs to thrive. While that might be true in Europe or North America, Asia may well be different. Qantas subsidiary Jetstar Asia, based in Singapore alongside Tiger Airways and Valuair, is flying as far as Shanghai, a little under seven hours away. "I think that was more a matter of a lack of choice. I think they found Bangkok and Hong Kong pretty congested, so they were looking for alternatives when they were establishing their route network. But it is interested in pushing the boundary of the low-cost operation," said Harbison. If Jetstar can make such a long route work, other LCCs are certain to follow, especially opening routes from China to points across Southeast Asia.

Meanwhile in Indonesia, where at least 22 airlines, most falling in the low-cost bracket by default because of intense competition, Lion Airlines - the largest private carrier with around 25 aircraft - took control of Jakarta's old international airport Halim Perdanakusuma in December 2004. Terminal expansion work, taking a year, should begin soon, doubling the numer of gates gates to 16. Facilities will be better, including automated ticket kiosks. Lion hopes to lure foreign airlines now flying into Jakarta's Soekarno-Hatta airport. "It's downtown, it will attract passengers because of that," said Rusdi Kirana, Lion's president-director. Thailand's Bangkok Airways has chalked up handsome profits from a similar strategy beginning with cash-cow Samui airport in 1989. Well-managed airports earn as much, if not more, from retail and services as airline fees.

Southeast Asia's new airlines are taking the low-cost airline model pioneered in the US and developed further in Europe to new places. Their successful innovations cannot but fail to influence new players entering much larger and more promising markets of China and India over the next year or so.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)