Limitless skies for low-cost carriers

Asia-Pacific budget carriers may only hold 18% of the air passenger market, but the modest numbers mask the influence these airlines have across the Asia-Pacific and beyond. Chief correspondent, Tom Ballantyne, reports.

December 1st 2017

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With more than a thousand aircraft scheduled for delivery to Asia-Pacific low-cost carriers (LCCs) in the next decade, expansion of the sector in the coming 12 months is a foregone conclusion, especially as investor appetite for budget carriers is evident in India, South Korea and several Southeast Asian markets. Read More »

An example of heightened investor interest in LCCs was evident with the successful round of fundraising conducted by Thailand’s struggling Nok Air that attracted US$51.8 million to its coffers, including an additional $11.2 million from previously disenchanted part owner, Thai Airways International.

In 2018, several other Asia-Pacific budget carriers have indicated they will either go public or increase their working capital via institutional investors. These ambitious LCCs include South Korean budget airlines, Japan’s Peach Aviation, Vietnam’s Vietjet and the offshoots of the AirAsia Group in the Philippines and Indonesia.

Analysts believed that after a tough few years, there is renewed vigor in the sector, especially among emerging Long Haul Low Cost Carriers (LHLCC). Consultancy CAPA said LHLCCs now accounted for five per cent of the market and are “very much where we’re heading in the future”.

The consultancy said there were 43 LHLCCs in 28 countries with 16 of them based in 10 countries in the Asia-Pacific. Their market share has increased globally to 11.3% in 2017, from 3.5% a decade ago. In the Asia-Pacific, it stands at 7.7% of the overall international market compared with 1.6% ten years ago.

Boeing Commercial Airplanes vice president marketing, Randy Tinseth, said in Seoul recently that by 2036, Northeast Asia would require nearly 1,500 new planes, valued at $320 billion, and that 45% of those orders would be for single-aisle aircraft.

“Most of the demand for single-aisle airplanes will be from low-cost carriers. When we look at growth going forward, almost all the growth will be driven by LCCs,” he said.

While the penetration of LCCs at all levels of the passenger market –from domestic to international – is below 20% in the Asia-Pacific, it is on a rapid upward curve. In the domestic sector, LCCs held 57.2% of all seats booked in South Asia and 52.6% of the market in Southeast Asia.

Budget carriers dominate local air traffic in Thailand, Malaysia, Indonesia, the Philippines and South Korea. Japanese LCCs, who were late-comers to the sector, have 10% of the market.

In North Asia, South Korea is a text book example of the sector’s rapid growth. The country has six LCCs - Air Busan, Jeju Air, Jin Air, Air Seoul, Eastar Jet and T’way Air – and two more are awaiting clearance to fly.

By year end in 2016, the six budget carriers were carrying 57% of domestic passengers and 20% of passengers traveling abroad, South Korea’s Ministry of Land and Transport reported. In November, Seoul-based T’way Air posted a record operating profit of $23.3 million for the third quarter of this year, a 56% increase over the same months a year ago. In the last three quarters, the LCCs’ combined sales of $390 million were 50% higher than in 2016.

In August, Jeju Air reported its operating profit had grown by 2,448% in the second quarter of 2017 compared with the same three months in 2016. The results were a record high for the last 12 consecutive quarters. In the first half of this year, the carrier reported an operating profit margin of 9.29% and a net profit of $29.4 million, beating Asiana Airlines’ net profit of $19.5 million and Korean Air’s $183.3 million loss for the period. Jeju went public in 2015.

T‘way is hoping to go public in 2018 and to use the funds raised to buy midsize and long haul aircraft by 2020 and launch flights to Europe and North America five years later. Air Busan, a subsidiary of Asiana Airlines, also is rumored to be preparing for an IPO. Its mid-term strategy is to introduce larger aircraft into its fleet after 2020 to fly long-haul to Hawaii, Australia and Europe.

Recently, Jin Air, the LCC affiliated with Korean Air, filed a registration statement with South Korea’s Financial Services Commission with the intention of raising $341.9 million in an initial public offering (IPO).

While not as successful as their South Korean peers, Japanese LCCs have made inroads into the country’s passenger market. Analysts forecast the sector, which is a little over five years in the making, would not succeed, but they were wrong. LCCs, which are mostly part or fully owned by All Nippon Airways or Japan Airlines, hold 10% of the domestic market and up to 20% of the regional leisure travel market.

Full service All Nippon Airways has benefitted from the success of its Peach Aviation and to a lesser degree, Vanilla Air. Japan Airlines’ Jetstar Japan, the largest Japanese LCC, also has begun to prosper.

The market is expected to expand with the launch of the AirAsia Group’s AirAsia Japan. CAPA has calculated that LCCs transport one in every 10 Japanese domestic passengers and said capturing a 10% market share was an achievement considering how reluctant Japanese passengers were expected to be about flying on an LCC.

“LCCs in Japan do have a higher cost than LCCs elsewhere, but they still hold a strong cost advantage compared with incumbent airlines,” said CAPA.

It is agreed that Southeast Asia is the “competitive battlefront” for LCCs and that budget airlines with large fleet orders, such as the Lion Air and AirAsia Group, will drive the market. North Asia and China remain followers in the market because of a lack of liberalization said CAPA, but added the profile for aviation growth in China is “astonishing” and has great potential for LCC expansion.

The number of domestic airlines in China increased from 26 in 2007 to 44 in 2017. Routes flown grew to 2,739. International routes increased to 285 in the same period, CAPA said.

In September, the AirAsia Group announced it was moving closer to setting up a joint venture LCC in China. It has entered into a nonbinding long-term agreement with the China Everbright Group and two other partners for a carrier based in the central Mainland city of Zhengzhou. It is not yet known when it will launch.

In India, the market is dominated by LCCs with IndiGo heading the table and not just in its home country. In September it was reported that the Delhi-based budget airline had grown 14.4% this year, to 35.11 million seats, leapfrogging past Indonesia’s Lion Air at 8.8% and 30.54 million seats.

India’s market can be chaotic and is burdened by high aviation taxes and charges, but it is destined to become the world’s third largest domestic airline market in the next two decades, behind China and the U.S.

IPOs provide the main avenue for LCCs to raise funds. The AirAsia Group said it planned to sell its holdings in non-flying businesses and return the proceeds in special dividends to shareholders.

It is reported to be close to sealing a deal for the disposal of its aircraft leasing subsidiary and has completed the sale of its 50% equity in the Asian Aviation Centre of Excellence (AACE) to its joint venture partner, CAE, for US$100 million.

AACE has training centres in Sepang, Singapore and Ho Chi Minh City and a joint training facility with Cebu Pacific in Manila. Food, engineering businesses and duty free business are being considered for sale by the group.

AirAsia Group has made a significant commitment with the signing of joint venture that will unite it with Singapore’s SATS Ltd in a new ground handling company. AirAsia Group expected to earn $87.7 million in eventual proceeds from the deal.

AirAsia Group CEO, Tony Fernandes, said: “There is a whole pipeline of those assets. We do joint ventures and eventually we will dispose of those joint ventures. They are not core. But the relationship will always stay.”

In Vietnam, dynamic LCC, Vietjet, has committed to a series of deals that will expand its influence as well as its network. The Hanoi-based, privately controlled LCC has written a 12-year agreement with CFM, valued at $3.6 billion, to support the 215 engines it has bought to power its expanding single aisle fleet.

Additionally, Vietjet and GECAS, under GE, have signed a Memorandum of Understanding for aircraft financing valued at $1 billion. GECAS will support Vietjet in the financing and/or purchase of aircraft and enter into a lease back arrangement for 10 aircraft ordered by Vietjet.

Vietjet also will be a customer of global aerospace manufacturer, Honeywell Aviation’s Auxiliary Power Units, for 98 of the airline’s planes. Vietjet is a full member of the International Air Transportation Association (IATA) and is continuing with its plans to be the first Vietnamese company to list on an overseas stock exchange.

“We’ve been approached by some foreign stock exchanges including London, Hong Kong and Singapore, which expressed interest in our stock,” said VietJet CEO, Nguyen Thi Phuong Thao. She told Bloomberg a year ago she planned to make VietJet “the Emirates of Asia”.

Last April, the LCC received shareholder approval to increase its foreign ownership limit to 49% from 30%.

The downside of this optimistic growth is overcapacity, a situation that could force some LCCs to cancel and/or defer aircraft deliveries. Cebu Pacific, AirAsia, AirAsia X, the Lion Group carriers and the VietJet group account for close to 75% of Southeast Asia’s LCC fleet and approximately 90% of the order books of aircraft manufacturers and engine-makers. At press time, AirAsia X announced capacity cuts to Australia.

For Boeing and Airbus, single aisle orders from Asia-Pacific LCCs are the mainstays of their future business, particularly energy efficient A320neos and B737 MAXs. Manufacturers also anticipated more orders for wide bodies from LHCCs.

All the news is good unless it is not. Factors that could trigger a capacity contraction in the region include the absence of slots for expansion, severe airport and airways congestion and disruptive geopolitical situations. Whatever happens, it is clear that more people will fly in 2018 and more of them will be flying with Asia-Pacific LCCs.