Low-Cost Carriers
Jeju Air’s leap of faith in joining the Value Alliance
Competition among low-cost carriers in the South Korean market is about to intensify with market leader, privately-owned Jeju Air, expanding its international network to build its successful business.
June 1st 2016
It may seem unusual that in South Korea, with its population of 51.5 million people, that a local budget carrier would operate four domestic routes but have a network of 27 international destinations. Read More »
But there is logic to the LCC’s network, Jeju Air president and chief executive, Ken Choi, told Orient Aviation in Singapore last month.
“The domestic market is limited and highly competitive. It was inevitable that we had to build our cross-border network.”
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| Jeju Air president and chief executive, Ken Choi: a Jeju Air joint venture possible with Thai partner? |
The carrier links the major cities in South Korea from its island headquarters on Jeju to Busan and Seoul’s Incheon and Gimpo airports. Choi sees international expansion as a way to build traffic. The LCC has been developing this strategy by having all its hubs operating flights to foreign destinations.
South Korea’s home skies are increasingly crowded, with five LCCs operating in the country: Jeju, Jin Air (Korean Airlines), Air Busan, Eastar Jet and T’Way Air. Another carrier, Air Seoul, controlled by Asiana Airlines, will launch services in the second half of this year.
Not surprisingly, with domestic routes saturated with capacity, Jeju is not the only LCC expanding onto regional routes. According to the latest figures from South Korea’s Ministry of Land, Transportation and Infrastructure (KADA), international passengers rose by 13.7% percent, to 5.22 million year-on-year, to last November.
Passengers flying full service carriers rose 10.3%, but LCC international traffic surged by 54.6%. Overall, the market share of LCCs in South Korea last year had reached 14% of market penetration in 2015 from 0.05% in 2008.
“Due to their extended operations for the mid- and long-range routes, which make airlines earn more profits, and the lower burden from oil prices, the market share of LCCs is expected to soar to 30% within five years,” the KADA said.
Jeju Air, whose majority shareholder is South Korea’s Aekyung Industrial Company, was launched in 2006 and is the country’s largest LCC in passenger numbers, fleet size, revenue and net profit.
Its 23 B737-800s, with three more to come into the fleet this year, carried seven million passengers in 2015 to destinations within South Korea and to Japan, China, Southeast Asia, Guam and Saipan. Its first international flight, in July 2008, was from Jeju, a popular destination for Japanese tourists, to Hiroshima in Japan.
“We have been adding at least four or five new aircraft every year and our top line in terms of sales and capacity growth is around 20% annually, which is pretty significant,” said Choi, who took charge of Jeju in 2012.
It was Choi’s first venture into the airline industry. A certified chartered accountant who holds a Master’s degree in Engineering Management from Stanford University and a Bachelor’s degree in engineering from Seoul National University, Choi joined Jeju after a long career with global financial institutions such as Citigroup followed by the presidency of the Korea Game Industry Agency, where he regulated and promoted the country’s digital media industry.
Choi told Orient Aviation that despite the competition from rival LCCs, the airline is well positioned financially following its listing last November and its three recent years of consecutive profits.
“We have a pretty healthy balance sheet and we want to make new investments in aircraft and network expansion,” he said. “We are continuously looking for opportunities to build a better platform, not only for growth but for a sound financial base.”
In 2015, Jeju Air’s net profit jumped 47.3% year-on-year, to $38.8 million, driven in part by historically low oil prices coupled with increased inflight sales and network expansion. The airline’s profit margin has hit an all-time high of 8.5%, well ahead of the global industry average.
However, Choi said there is one sector of the airline that is under-performing compared with the carrier’s LCC rivals. Jeju earns only 8% of its revenue from ancillaries, which is well below the level of most budget airlines. “But three years ago it was only 3%,” said Choi. “This year, I think it will grow to about 10%. I acknowledge that is low, but the flip side of that is we have a lot more potential for introducing quality ancillaries.”
Another sector of Jeju’s operations that is disappointing is the carrier’s penetration of the China market. “We are not getting as much as we hoped into China. The problem is that the China-South Korea market is not open skies yet. So we are running a lot of charters, but it is one of the potential valuable markets for us,” he said.
Choi spoke to Orient Aviation at the launch of the Value Alliance, an eight-member LCC alliance of which Jeju Air is a founding member. Choi sees the merit of the alliance for Jeju Air in network expansion and brand recognition.
“With the current network of [alliance] partners we can immediately expose our brand to those local markets and, probably and hopefully, encourage a lot more inbound travellers to come to South Korea,” he said.
While Jeju is focused on shorter haul flying, Choi is not ruling out longer haul operations, including setting up a joint venture in another country. “The Value Alliance allows us to build a platform. In the future, we can potentially look at a joint venture. For example, Bangkok is a very good market and Thailand is relatively flexible in allowing the establishment of a new carrier. We will see how this alliance goes in building a base towards that,” he said.
Nevertheless, maintaining profitability at Jeju won’t be easy as competition intensifies for the carrier, especially on international routes. Last year, South Korea’s five LCCs opened 39 international destinations. Seven were launched by Jeju, but Jin Air launched 11 and T’way 10.
Korean Air’s Jin is now flying Incheon-Honolulu, the first long-haul international service operated by a South Korean budget carrier. Analysts said Jin’s decision to go long-haul is because short and medium-haul LCC routes are saturated and suffering from declining yields.
For Jeju, flying long haul is not yet part of its strategy, but it is possible, given the right conditions, said Choi.
