Asiana Airlines' plan to possibly set up a new low-cost carrier in South Korea could help the airline defend its market share at a time where it is facing rising competition from budget operators, even if it means stepping into an already crowded space.
The privately-owned carrier made the news recently when it disclosed that it is mulling the launch of a new LCC in Seoul, operating out of Gimpo and Incheon International airports. Though it already has a 46% stake in budget player Air Busan, having a new low-cost arm in Seoul could help the carrier capture passengers from the country's capital, and to compete more effectively with Jin Air, which is owned by rival Korean Air.
Analysts Flightglobal spoke to say the Korean domestic market, which is already dominated by LCCs, is small and well served by an efficient and inexpensive high speed rail network. New operators looking to enter should thus set their sights on capturing a slice of the international market.
There are currently five homegrown budget players in South Korea: Jin Air, Air Busan, Jeju Air, T'way and Eastar Jet. Of these, Jeju, Jin and T'way are the only LCCs operating domestic services.
Data from South Korea’s Ministry of Land, Infrastructure and Transport shows that 5.12 million passengers traveled on LCCs in the first half of 2013, increasing the market share of these operators from 43.1% to 47.8%.
The three LCCs operate six domestics routes, of which they have a market share of above 50% on four. On the Gimhae-Jeju route, LCCs have an impressive 72.7% share of the pie, while on the Gimpo-Jeju route, it has a healthy 59.3% share.
Routes operated by LCCs out of South Korea
On international routes, MILT data shows that although LCCs saw a 46.5% growth in passenger numbers in the first half of 2013, their combined market share stood at a relatively modest 9.3%.The top three international routes where LCCs enjoy the highest market shares are: Incheon-Guam (53.2%), Gimhae-Fukuoka (52.5%) and Gimhae-Osaka (28.5%).
There are a total of eight budget operators with services out of Seoul: Jeju Air, Jin Air, Juneyao Airlines, Peach Aviation, Scoot, Star Flyer, Cebu Pacific and AirAsia X.
South Korea could soon see the entrance of three more LCCs, as AirAsia and VietJet have also expressed interest in the market. Analysts say that though the international market shows potential for more LCC growth, consolidation can be expected as smaller airlines may struggle to stay afloat amid the rising competition.
"Asiana's strategy (for its new LCC) should be to focus on the short-haul international market, where the penetration for LCCs is not yet there. Being based at Seoul will also be more effective, with existing infrastructure they can leverage on and also mainland connectivity to Asiana," says Sagar Shahane, aviation consultant at Frost & Sullivan.
Asiana is not the first carrier in the region to consider a multi-brand strategy. Japan's All Nippon Airways already had a stake in Peach Aviation when it launched Vanilla Air, while Singapore Airlines has interests in Tigerair and long-haul LCC Scoot.
Launching a new budget arm could also help Asiana find a new growth engine.The carrier tumbled to an operating loss of W11.2 billion ($10.4 million) in 2013, a reversal of the W179 billion profit the year before. Asiana also has the advantage of having Air Busan's former chief Kim Soo Cheon as its new CEO.
“Air Busan has been profitable for the last couple of quarters. Asiana already has a stake in that, so they can learn from it and take the new carrier forward,” says Shahane.