Despite weaker bottom lines, fiercer competition and high fuel prices, the biggest burden for any airline, the low-cost carrier (LCC) business in Asia remains attractive with more room to grow, say industry executives.
The reopening last week of Don Mueang in Bangkok to serve budget carriers was evidence of a belief that demand for affordable flights will continue rising. So too was the demolition last month of the budget terminal at Changi, where Singapore authorities are building a new one to serve 7 million passengers a year.
Kuala Lumpur already has a dedicated LCC terminal, and AirAsia is urging Indonesian authorities to follow suit, though not necessarily in Jakarta.
While there appears to be room in Asia’s skies for quite a few budget airlines, like any other business they have to differentiate themselves from the competition in order to survive. For LCCs, that means developing routes that full-service airlines have never flown. As well, there’s room for flexibility in pricing, depending on the level of service a passenger wants to pay for. Some budget carriers may even seek collaboration with rivals.
By far the best-known low-cost carrier in the region is AirAsia. Among the emerging rivals are Singapore-based Scoot, which began flying in June, and Malindo, an Indonesian-Malaysian joint venture that will take off next May.
The extra competition doesn’t worry AirAsia founder Tony Fernandes. When he started his business, he saw his main competitors as bus, train and ferry operators, not other airlines. A decade later, he sees bright prospects for the industry because of the rapid rise of middle-income consumers who can afford to fly.
“No problem about new players, nothing to worry about. There are as many as 600 million people in the region; we have plenty of room for growth in the market,” he told Asia Focus.
The figures bear out Mr Fernandes’s optimism. Passenger volumes on many LCCs are increasing. For AirAsia, the number grew 10% in the second quarter of this year. Its revenue also increased to 1.18 billion ringgit from RM1.08 billion a year earlier, and its average airfare was up 8% year-on-year, though operating profit dipped 4% to RM205.82 million.
The year-on-year profit decline looks modest but it has to be remembered that its full-year profit of RM555 million in 2011 was only 54% of what it had been the previous year. The load factor last year rose to 80% from 78% expenses jumped to RM3.33 billion from RM2.88 billion.
Other carriers have been facing similar challenges. Cebu Pacific of the Philippines earned 1.73 billion pesos in the first half of this year, down by 29% from the same period of 2011, even as revenue rose 17.9% to 19.73 billion pesos.
This decline came despite a 17% rise in passenger numbers to 6.9 million. Its fleet as of June 30 consisted of 38 aircraft compared with 33 a year earlier.
Tiger Airways, a unit of Singapore Airlines, reported a net loss of S$13.7 million for its first quarter ended June 30, improving from a loss of S$20.6 million a year earlier. Revenues for its financial year to March 31 were flat at S$618.2 million, as its load factor slipped to 81.5% from 85.8% in the previous year. Passenger numbers also dropped to 5,465,000 from 5,968,000.
Toe Lay Cheng, director of corporate communications and investor relations, said Tiger would continue its strategy of developing a network of routes with consistently high passenger load factors while carefully managing yields.
She believes the low-cost airline industry remains robust. The passenger load factor for the group stood at a healthy 84% in August 2012, a sign of improvement.
Tiger Airways currently operates a fleet of 30 Airbus A320 aircraft with an average age under three years.
Ms Toe said fuel was a significant expense for all players in the industry. Tiger manages its exposure to fuel price risks and also keeps a close eye on variable costs when evaluating routes, and works toward moderating capacity expansion to better match passenger demand.
Tassapon Bi-level, chief executive of Thai AirAsia, says jet fuel accounts for as much as 30% of operating costs and maintenance another 20%. The fuel cost remains high, but one encouraging sign is that airline price wars have eased, he said.
Mr Tassapon says that every airline needs to find way to stay different, whether it be with new aircraft, specific and unique routes, increased flight frequency, better services and good price offers.
The strategy of the Scoot, which is also under Singapore Airlines’ umbrella, is an example. It defines itself as a long-haul LCC. It chose Singapore-Sydney as its first route as there was no low-cost service to Australia’s biggest city, and AirAsia X and Jetstar were already well established in Melbourne.
Its second route will serve the Gold Coast in Australia, which has an excellent track record of success with LCCs.
Scoot’s decision to offer a Singapore-Bangkok service raised eyebrows given the huge number of services between the two cities. SIA now has three brands operating on the route.
However, Singapore-Bangkok is the 22nd most popular route in Asia Pacific and ninth in Southeast Asia, and the airline says it is up for the challenge.
The service will allow Scoot to conveniently connect with its other international services. However, currently the airline offers only one daily flight, making the layover length an issue. In the near future, it could possibly add a second Bangkok service to ensure quicker connections.
Another strategy of Scoot is to offer three airfare levels: “Fly” with no meals and no baggage allowance; FlyBag with a baggage allowance of 15 kilogrammes; and FlyBagEat with a hot meal plus a 15kg baggage allowance.
Leslie Thng, chief executive of SilkAir, a short-haul full-service SIA affiliate that operates between Singapore and 41 destinations within a five-hour radius, said more competition was good for the customer, as well as the industry.
“We are a firm believer in the liberalisation of the aviation industry and open competition. The existence of competition will help to grow the market for everyone,” he said. “Be it full-service or low-cost, airlines that operate between Singapore and the points that we fly to are competitors to various degrees. Where there is overlap, we compete for the business as we do with any other airline.” SilkAir currently has 22 Airbus aircraft in its fleet and recently announced its intention to purchase up to 68 Boeing aircraft, the largest deal it its history.
Mr Tassapon said Thai AirAsia did not expect to see the return of fierce price competition in the near term since all airlines were facing cost pressure from fuel and other factors.
“Most airlines usually concentrate on their customer segment. Even though there might be some overlaps, I believe there is enough cake for everyone to have a piece,” he added.
About the author
Writer: Nalin Viboonchart and Nithi Kaveevivitchai