Asia’s Low-Cost Carriers in the Crosshairs

[bigdelta 46]

Asia’s low-cost carriers will be coming under more competitive pressure as full-service airlines move into the low-fare segment.

 

In the move to capture market share, the new entrants are likely to spark a price war, leading to what some of the incumbent low-cost carriers predict will be a “blood bath” one or two years from now.

 

Survival in the new market dynamics will depend on which low-cost carriers have the deepest pockets and commitment from stakeholders.

 

However, the new entrants can claim to have strong financial backing thanks to some of the area’s large network carriers.

 

All Nippon Airways (ANA), Garuda Indonesia, Malaysia Airlines, Philippine Airlines and Thai Airways International are just some of the players entering the low-cost carrier market.

 

This comes as Asia-Pacific passenger traffic experiences a sharp “V-shaped” recovery, with traffic bouncing back steeply after a sharp drop-off.

 

The Association of Asia Pacific Airlines (AAPA) says Asia-Pacific-based carriers had a record 17.2 million international passengers in July, 20% higher than the same period last year. Passenger demand was particularly strong on busy regional routes served by low-cost carriers.

Thai Airways had been pushing Nok to re-enter the international market, particularly on routes such as Bangkok-Penang, where Thai felt competition was needed against AirAsia.

 

Nok launched services to India and Vietnam in 2007 but withdrew in late 2007 and early 2008, respectively.

 

The losses from domestic and international routes were so great in 2007 that the carrier downsized to three aircraft from 10. Since then, Nok has rebuilt its business and is now profitable with a fleet of six Boeing 737-400s and two ATR 72‑200s serving domestic routes.

 

Nok plans to add four leased 737‑400s and four leased ATR 72-200s this year so it can develop its domestic network, says Nok CEO Patee Sarasin. It will re-enter the international market “within one or two years,” he says.

 

Nok is based at Bangkok’s Mueang Airport, which only permits domestic services, so it will have to establish a second base at Bangkok Suvarnabhumi Airport for international services.

 

“We have to find a way to separate the profit and loss so we can be sure of the performance of that operation, rather than subsidize it from Don Mueang.”

 

Patee also says that prior to the Thai Tiger announcement, the president of Thai Airways, Piyasvasti Amranand, sounded him out about Nok expanding internationally.

 

“My reply was we . . . learned from the 2007 saga and need more time [to address domestic issues] first.

 

“He told me he was in a rush . . . and he didn’t want to let AirAsia grow with no competition,” Patee says.

 

AirAsia now faces no domestic competition in Malaysia from low-cost carriers, but that is about to change.

Malaysia Airlines (MAS) is allowing its turboprop operation, Firefly, to add 737-400s.

 

Firefly operates a fleet of seven ATR 72-500s out of Subang Airport, but the move to jets means it must establish a second base at Kuala Lumpur International Airport (KLIA), AirAsia’s base. The Malaysian authorities do not allow scheduled passenger airlines to serve Subang with jets.

 

Some industry executives are concerned that a second base at KLIA will be costly to Firefly’s business and add complexity, because its staff will have to shuttle between airports.

 

Firefly managing director, Eddy Leong, is tight-lipped about when the airline will start operating 737-400s, but later this year seems probable as Firefly has already advertised for 737-400 pilots.

 

Leong also declines to say where the 737-400s are coming from. But MAS, which starts phasing out its 737-400s in October as its on-order 737-800s begin to arrive, seems the likely source.

 

Garuda Indonesia mainline has steered clear of competing in the low-fare segment because it has succeeded in catering to the local business traveler. But when it completes its initial public offering in the coming months, it plans to expand its low-cost carrier, Citilink.

 

“We need to fix our main[line] business first and then we need to focus on Citilink,” because the low-fare market is where the growth is, says Elisa Lumbantoruan, Garuda executive vice president for corporate strategy.

 

The premium travel market in Indonesia has single-digit growth, whereas the low-fare market has double-digit growth, he says.

 

By 2014 they want Citilink to account for 40% of Garuda group revenue, whereas now it is less than 5%, he says.

 

Citilink has six 737-300/-400s and Garuda plans to transfer its -400s to Citilink as Garuda takes delivery of 737-800s, he adds.

 

The full-service airlines’ move will likely affect AirAsia, the region’s leading low-cost carrier group. AirAsia has operations in Indonesia, Malaysia, Thailand and, very soon, Vietnam.

 

In a sign that the low-fare airline is already feeling the pressure, its group CEO and founder, Tony Fernandes, says full-service carriers should focus on what they do best.

 

He points out that full-service carriers in other regions tried to start low-cost carriers and failed.

“It is uncanny how history repeats itself. You’ve seen it before. In Europe there was British Airways’ Go and KLM with Buzz,” says Fernandes, referring to low-fare operations that failed.

 

“[Legacy] airlines are bereft of ideas,” he says, adding that “it may look easy running a low-cost carrier but it isn’t.”

 

One issue a low-cost carrier faces when its parent is a full-service carrier is the potential for a clash of cultures, says Fernandes. To be successful, the low-cost carrier’s management has to be focused, he says. That is hard to do because the interests of the parent often takes precedence over the interests of the low-cost carrier.

 

The track record of U.S. and European carriers suggest Fernandes is correct, although operating conditions, such as labor rules, are very different in Asia.

 

Fernandes, however, is adamant that Asia’s second wave of low-cost carriers will struggle.

 

ANA President/CEO Shinichiro Ito has announced that ANA is establishing a low-cost carrier in a joint-venture with First Eastern Investment Group, a Hong Kong investment firm.

 

The yet-to-be named carrier will be based at Osaka Kansai International Airport and will start flying in 2011’s second half using a single aircraft type. It will serve domestic and international markets, Ito says, but be managed as a completely separate business and will stimulate the market using low fares.

 

Japan Airlines has announced that it too is considering establishing a low-cost carrier, but its immediate focus is on getting out of bankruptcy.

 

In Thailand, national carrier Thai Airways has signed a memorandum of understanding with Singapore’s Tiger Airways to launch Thai Tiger Airways, a low-cost carrier to be based in Bangkok that will serve international and domestic routes. The aim is to have it start flying in March with Airbus A320s.

 

Thai Airways partnered with Tiger after becoming frustrated with Nok Air, which is considered to be Thai Airways’ low-cost carrier, although Thai Airways only owns 39%. As a consequence, Thai has no management control over Nok.