Now we are won

Asia-Pacific LCCs welcomed into the fold

by ORIENT AVIATION 

December 1st 2013

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Airline chiefs across the Asia-Pacific have accepted the region’s low-cost carriers, with their booming market share, are a permanent and valuable sector of the aviation landscape. Read More »

CEO panelists at the AAPA Assembly of Presidents: Emirsyah Satar, President Garuda International, Patrick Yeung, CEO Dragonair, Robert Martin, Managing Director and CEO, BOC Aviation and John Byerly, aviation consultant and a former U.S. Transportation Department deputy assistant secretary with panel moderator, Tom Ballantyne, Orient Aviation’s chief correspondent

Forget the old labels of low-cost carriers (LCCs). Or full service or network carriers or whatever we call them, was the message from the airline bosses participating in a CEO panel at the Association of Asia-Pacific Airlines (AAPA) Assembly of Presidents last month.

“We are just left saying they are airlines. It’s not so easy to distinguish between them or use different labels,” said Andrew Herdman, the director general of the Association of Asia Pacific Airlines, at the Hong Kong Assembly. “It’s very difficult to generalize. Wherever you look people are experimenting.”

When it comes to the debate about legacy airlines versus LLCs, Garuda Indonesia president, Emirsyah Satar, has one important message: “I don’t like the word legacy. You feel like a dinosaur,” he said.

“All of us, as full-service airlines, need to be low-cost and efficient. There are so many add-ons if you fly low-cost. Passengers are becoming smarter. If you add up all these on an LCC flight it might cost more than the full service option. Passengers in Indonesia are realizing this. It’s up to us to achieve these low costs.”

Satar, a CEO panel member at the AAPA Assembly of Presidents, articulated what the region’s airline chiefs realize: the lines between full-service and budget operators have blurred and often merged, as the true LCC model has morphed into hybrid forms.

In a recent study, airline IT provider, Amadeus, reported Bangkok’s LCC capacity rose 30%, which increased its total traffic share at the city’s airports by four per cent, to 26%. At Kuala Lumpur, the home city of the region’s first low-cost carrier, AirAsia, LCC capacity expanded by 15%, but the total share of budget business only climbed one per cent to 52%. In Singapore, which has demolished its low-cost only terminal and is building a fourth terminal in its place, recorded a 17% increase in LCC capacity and an expansion of the budget fare market by three per cent, to 29%.

None of this concerns Emirsyah Satar, who believes the Indonesian aviation market is big enough to accommodate everyone. “While Indonesian LCCs are expanding rapidly, they are only keeping pace with rising demand, especially in the domestic market,” he said.

“For about the last five years passenger traffic in Indonesia has been experiencing double-digit growth, driven by a rising number of Indonesians switching from ferry, road and rail transport to air. LCCs are bringing in people from other modes of transport, such as boats or trains. They are not just taking other airlines’ business. The pie is big enough.”

Regional LCC growth is set to continue. Garuda and its low-cost subsidiary, Citilink, are planning to add 120 new aircraft to their combined fleet. Jakarta based rival, Lion Air, has outstanding orders for more than 500 aircraft, although not all of these will be flying in Indonesia. Lion also launched a new subsidiary, Thai Lion Air, last month and is operating its joint venture, Malindo Air, in Malaysia.

All Nippon Airways’ (ANA) new LCC, Vanilla Air, the replacement carrier for the defunct AirAsia Japan joint venture with the AirAsia Group, will begin operations this month. Ambitious Vietnamese LCC, VietJet Air, which also plans to launch flights to Thailand in the first quarter of 2014, has discussed setting up Thai VietJet Air. It has placed a provisional order for up to 92 Airbus jets, worth $9 billion, at list prices. In India, Malaysia’s AirAsia has been cleared by regulatory authorities to launch AirAsia India, in partnership with the local Tata group. Also in India, Air Costa, an operator of domestic regional routes, intends to apply for a licence that will allow it to compete with IndiGo and SpiceJet on mainline routes.

In Taiwan, one of the few major full-service carriers in the region without a budget subsidiary, China Airlines (CAL), appears set to enter the LCC fray. At a press conference in November, CAL’s new president, Samuel P. Lin, said the airline “will not shy away from the emerging market”. “China Airlines is in an advantageous position to tap the emerging business, which promises to improve services to cities with more than one airport, especially in Asia,” he said.

There are clear signs that Mainland China, the region’s biggest future aviation market, may be on the cusp of an LCC explosion. Only one Chinese budget carrier, Spring Airlines, has been reasonably successful, mainly because the regulatory environment limits true budget operations. Rules set minimum and maximum airfares, inhibiting LCCs revenue management and fare offerings to customers.

In recent months, China’s aviation authorities have started planning a new range of measures designed to support the development of low-cost carriers. Agreement has been secured between the Civil Aviation Administration of China (CAAC) and the National Development and Reform Commission (NDRC) to eliminate base fares to allow airlines to structure pricing on market demand.

A deputy director of the CAAC, Xia Xinghua, said it plans to simplify the application process for new Chinese LCCs, with policies introduced to encourage private capital, along with funding to boost the LCC sector. Specific policies are expected to be announced by the end of this year, including aircraft procurement, airport surcharges and new routes.

Reacting to the regulatory relaxation, Hainan Airlines restructured its Chongqing-based subsidiary, West Air, to the low-cost model and Shanghai-based Juneyao Airlines will set up a budget carrier, 9 RMB Airlines, in Guangzhou, where there are currently no LCCs.

“We have submitted our application to the CAAC. We are waiting for approval,” said Wang Junjin, the airline’s chairman. China Eastern Airlines is partnering with Qantas in an attempt to create Jetstar Hong Kong, with a decision on its right to launch in Hong Kong now postponed to mid-2014, according to sources.

The CAAC is considering building a budget terminal at Beijing’s new airport, which is scheduled for operations in in 2018.

Dragonair, which has a major network from Hong Kong into China, thinks all of this is good for the industry and doesn’t fear competition. The airline’s chief excutive, Patrick Yeung, pointed out at the AAPA Assembly that the authorities had stopped airline applications between 2007 and 2010. “Now, it is changing and the pricing mechanism is changing. You can see the regulator making changes. I believe there will be more support from provincial governments to start airlines. People are seeing opportunity. We are seeing more applications coming through, he said.

Yeung said China’s size and the government’s policy of encouraging aviation development in western China will provide plenty of opportunity for all players. “There are lots of places airlines don’t fly to. Demand is building up and a lot of money is being poured into the West. This emphasis means that even international carriers are flying to China’s secondary cities. These LCC start-ups will operate some of the green routes city-to-city and build their operations,” he said.

Some observers point out that despite the government’s encouragement it still may not be easy for Chinese LCC start-ups. Robert Martin, chief executive of aircraft lessor, BOC Aviation, said there had not been any start-up activity in the last four or five years. Four airline groups control 91% of the China fleet. Spring Airlines is a successful LCC, but it shouldn’t be forgotten that other budget airlines in China haven’t been so successful, said Martin.

“So the question is this time round: What are the new entrants going to do differently to make sure they are able to succeed? Firstly, they will need experienced people who understand the business and are able to access experienced pilots and engineering staff. Also, they will need sufficient capital,” Martin said.

BOC tracks airline bankruptcies world-wide and the most dangerous period is from start up to achieving 10 aircraft. “During that period, if you look at the bankruptcies, 77% of all airlines that have gone bankrupt have less than 10 aircraft. This has important implications for that first stage of their growth and obviously incumbents aren’t going to be offering to give up market share during that period. The start-up phase for these airlines is very important and that’s going to tell us whether the market actually does open up,” Martin said.