LCC wunderkinds lose their sparkle

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

April 1st 2015

Print Friendly

Many of the Asia-Pacific’s low-cost carriers (LCCs) have had a new experience in the last 12 months. They have lost money. Among them are AirAsia, its long-haul subsidiary, AirAsia X, Tigerair, Nok Air and Jetstar. Read More »

The unpleasant experience is in stark contrast to the heady years that followed the global financial crisis. Back then, full service carriers were falling into the red as passengers, including corporate travelers, were forced to down-size their budgets and become LCC customers.

Today, it’s a different story. It is generally accepted that in the Asia-Pacific there are too many LCCs bringing too many aircraft into service too quickly. A perfect example is Thailand, where there has been domestic passenger growth of 10.1% in the past year, but an 18.6% increase in airline capacity.

Analysis of the region’s LCC expansion shows the combined seat capacity of the sector in the 10-member Association of Southeast Asian Nations (ASEAN) has jumped to 57% in 2013, compared with 13.2% in 2003. Ticket discounting has been the general knee jerk response to declining load factors and the evitable consequences have been falling yields and eroding profits.

Some carriers, such as China’s Spring Airlines and Vietnam’s VietJet are making money, but generally Southeast Asian LCCs have been hardest hit by the overcapacity trend. At last count, 22 of the region’s more than 50 LCCs were operating in this emerging market zone, flying a combined fleet of 550 aircraft.

The situation will almost certainly deteriorate. As an example, Malaysia-headquartered AirAsia, combined with Lion Air, have orders in place for 800 airplanes.

A dramatic drop in the oil price since last June has brought some relief to LCCs. Fuel averages 50% of their operating costs, but no-one should take it for granted that the lower oil price will last. The recent escalation in the conflicts of the Middle East already has triggered increases.

LCC managements across the region, particularly in Southeast Asia, need to seriously review their expansion plans and work towards restoring equilibrium in the market. The alternative must be a consolidation of the sector across the region.