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Clearing Asia's crowded
skies
By Ng Boon Yian
SINGAPORE - To many observers, the
question was not if, but when. The recent merger
between Singapore-based budget airlines Valuair
and Jetstar Asia merely confirmed earlier
suspicions that Asia's skies have become
overcrowded with the budget airlines that have
sprouted over the past two years.
After
exploring its options over the past month or so,
privately owned Valuair finally decided on Sunday
to join hands with Jetstar Asia under a new
umbrella company named Orange Star. For the time
being, however, both airlines will continue to
"operate in their own right…with little or no
change to the service offered by either",
according to a media statement. Helming Orange
Star as chairman will be Qantas chief executive
officer Geoff Dixon. Jetstar Asia's chief
executive Ken Ryan will also stay on as the new
company's CEO.
As a Singapore company, 51%
of Orange Star will be held by Singaporean
interests, which is likely to include Temasek
Holdings as well as the Singaporean shareholders
of Valuair and Jetstar. Of the remaining shares,
Qantas will hold 44.5% while the other 4.5% could
go to Star Cruises.
Growing
turbulence
The consolidation shake-ups were
unavoidable, given the increasingly harsh
environment that budget airlines found themselves
in. Not only were the start-up costs dauntingly
high, the trend of climbing fuel prices,
competitive price-cutting as well as other
hardening cost pressures fueled by a crowded
playing field made the financial squeeze that much
tighter for new airline players.
While
Jetstar and Tiger Airways can tap on parent
companies - Qantas and Singapore Airlines
respectively - with deep pockets, a start-up like
Valuair ended up finding itself constantly
thirsting for funds even though it is run by
industry veterans like Lim Chin Beng, who helped
build Singapore Airlines from scratch back in the
1960s. As such, Valuair, which started operations
in May 2004, lost S$4.1 million in its first seven
months, largely due to start-up costs. A capital
of S$15 million (US$9 million) had to be later
injected by one of its shareholders, Star Cruises,
owned by Malaysian casino tycoon Lim Goh Tong. But
that apparently was not enough either, given how
Valuair has been courting both Jetstar and
Malaysia's AirAsia for a merger lifeline over the
past month or so.
Some analysts point to
Valuair's neither-here-nor-there strategy of
positioning itself as an upper-end budget carrier
for its setbacks. Unlike the typical budget
airline, Valuair offers perks such as free
in-flight meals, leather-upholstered seats and
longer-haul flights to destinations like Perth.
While it is arguable whether "hybrid" models like
that of Valuair are viable in the industry, it is
clear that the circumstances and structural forces
over the past two years ratcheted up the
operational pressures for all players involved,
and in such a situation, bottom line discipline is
crucial.
One oft-cited source of rising
cost pressures was record-high oil prices, which
have been rising over the past 18 months due to
surging demand, limited spare capacity and
potential supply-side disruptions. High fuel
prices are estimated to have raised Valuair's
operating costs by as much as 20-30%. Beyond that,
however, the sudden flurry of competition caused
by the rapid entry of numerous players led other
costs such as aircraft leasing rates and pilot
wages to go up as well.
All three budget
airlines in Singapore popped up in the space of
just one year, with Valuair having started in May
2004, Tiger in September, and Jetstar in December.
All of them operate four leased aircraft each.
According to a Financial Times report, it is
estimated that the leasing rates for short and
medium-haul aircraft - often used by budget
carriers - rose by about 40% over the past 12
months. Wages for pilots and other qualified staff
have edged up as well, especially as India's
proliferating airlines have been busy recruiting
pilots from all over Southeast Asia to meet their
growing needs.
Even as the budget airlines
were hit by rising costs, they were further
squeezed by price-cutting as they had to elbow not
just one another but also full-service carriers
such as Singapore Airlines and Cathay Pacifc for
breathing space in a tight market. Adding to the
competitive pressures is the entry of more players
like India-based Jet Airways and Air Sahara into
Southeast Asia, which the Economist Intelligence
Unit estimates could lead to fares being cut by
30%.
One could argue that cheap airfares
themselves did help to stimulate greater travel
demand and generate a bigger piece of the pie. But
the problem in Asia is that there are limited
routes to compete on. This is due to government
restrictions and difficulties in securing landing
rights in some potentially lucrative countries
such as Indonesia and China, as Jetstar has
experienced.
In this respect, Asia's
competitive landscape is fundamentally different
from that of the US and Europe, where budget
carriers took off rapidly, thanks to a unified
regional regulatory framework. In Asia, newcomers
have to negotiate with individual countries in
order to win rights to fly there. The outcome: a
duplication of services along liberalized and
popular routes such as Singapore-Hong Kong and
Singapore-Bangkok by both Valuair and Jetstar. The
latter also competes with Tiger with services to
Manila and Taipei. In the meantime, highly
lucrative routes such as Singapore-Kuala Lumpur
remain closed.
More shake-ups to
come?
Given the competitive setting, it is
hardly surprising that the first ripple of
consolidation is starting to take place in the
Asian budget airlines arena. The bloodletting is
par for the course in the US and Europe where 9
out of 10 budget carriers either failed or merged.
What has raised some eyebrows, however, is how
quickly consolidation has started, with Valuair
and Jetstar having commenced operations just last
year.
Still, the merger is an opportunity
for the beleaguered budget airlines to cut
overheads and rationalize operations - especially
given the duplication of routes - in order to
become a stronger and more competitive outfit.
According to credit ratings agency Standard &
Poor's, the new airline company, Orange Star,
would need to boost revenues "by diverting traffic
away from competitors with the creation of a
larger, fuller-route network and increased pricing
power via market domination".
Compared to
Tiger Airways, which currently serves nine
destinations and is still expanding, the beefed-up
Orange Star does seem to be in a better
competitive position as both Valuair and Jetstar
now serve eight destinations, with services to
Kolkata, Phnom Penh and Siem Reap coming on board
soon. This consolidation round, however, is
unlikely to dent the position of full carriers
such as Cathay Pacific and Singapore Airlines as
the budget carriers still offer only about 5% of
the total seat capacity of their full service
competitors on the routes where they compete. An
interesting issue is whether this high-profile
merger will portend more of such consolidation
elsewhere in Southeast Asia. All eyes are now on
Thailand, which may be too small to sustain its
three domestic budget carriers - Thai AirAsia,
One-Two-GO and Nok Air, says Chris Eng, an
aviation analyst with OSK Research.
Airline buzz in Northeast
Asia
Even as consolidation is taking place
in Southeast Asia, the budget carrier business is
just taking off in North Asia. According to a
report by the Center for Asia Pacific Aviation
(CAPA), an aviation consultancy, at least 12 new
carriers are expected over the next year in Macau,
China, Hong Kong, South Korea and Japan. Spring
Airlines, one of China's first budget airlines,
just started flying between Shanghai and the city
of Yantai this month. This came after another
private player in China, Okay Airlines, took to
the skies in March.
South Korea too is
jumping on to the bandwagon, with the launch of
Hansung Airline in June, which offers domestic
services between Cheongju and Jeju. Another budget
airline, Jeju Air, is expected to start in 2006.
While it will initially operate from Jeju to
Seoul, Busan, Daegu and Cheongju, it is also
considering short-haul international destinations,
including China and Japan. Both airlines are
expected to charge fares that are about 30-40%
lower than those charged by Korean Air and Asiana
Airlines.
Analysts such as CAPA's Peter
Harbison are highly optimistic about the growth
potential of the Northeast Asian market,
particularly since the economy is growing and
income rising. Within the three-hour radius in
North Asia, there are 500 million consumers who
can afford air travel, said Harbison in a report.
The Japan-Korea-China nexus therefore offers
plenty of opportunities for city pairs. Even so,
much remains to be done in the policy realm as the
airline industry in Northeast Asia is still
tightly regulated. The lessons learnt in Southeast
Asia with its first wave of consolidation will
also be a valuable step forward as Asia
collectively charts the budget airline skies
ahead.
Ng Boon Yian is a
research associate at the Institute of Southeast
Asia Studies, Singapore. The views expressed here
are her own, not the
institute's.
(Copyright 2005 Asia
Times Online Ltd. All rights reserved. Please
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