Low-cost carriers are leading the way in the integration of Australian and South-East Asian airline markets

Australian and South-East Asian airlines are moving in on each other's markets. On the strength of trade and traffic growth, they are adding routes and launching cross-border operations that will merge the two regions, as already seen between Australia and New Zealand, and in Europe.

Paradoxically, it is not the legacy airlines such as Qantas or Singapore Airlines that are making these moves. Instead it is the low-cost carriers that are bridging the divides that traditionally separated Australia and South-East Asia.

The Asian entrant likely to generate the most South-East Asia-Australia traffic is AirAsia. Already Asia's biggest low-cost carrier, AirAsia is launching Airbus A330-300 flights later this year to Australia's Gold Coast from its Kuala Lumpur base (see p13). Other route announcements are imminent, but AirAsia's founder Tony Fernandes says they will not include Sydney, which he views as too expensive. Melbourne is on the carrier's radar, but Fernandes says this will be further down the road because the city's secondary airport, Avalon, is not yet ready for international operations.

In one of the boldest moves yet, Tiger Airways - partly owned by SIA - plans to launch its own flights by November within Australia. Taking advantage of Australia's liberal aviation regime, which allows 100% foreign-owned airlines to operate within Australia, Tiger has announced a number of Australian internal routes at very low introductory fares.

SIA chief executive Chew Choon Seng describes Tiger's Australian entry as "repaying the compliment". He stresses that Tiger's venture in Australia is no stalking horse for Singapore Airlines. But he cannot suppress the urge to draw parallels between the Qantas foray into South-East Asia with Jetstar Asia, and Tiger's foray into Australia. "If they play in my backyard, surely I have the equal right to play in their backyard," he says.

The ease with which Tiger has gained entry into Australia speaks volumes about how much Australia and South-East Asia have integrated. Low-cost carriers have been flying across borders in Europe since launching. But the Australia-South-East Asia phenomenon is more than simply cross-border it is cross-regional. It may not be long haul, but with stage lengths of up to eight hours, it is longer haul. This is a natural progression as regions integrate and low-cost carriers extend their reach. It is similar to, but a step ahead of, the cross-regional growth in low-cost carriers such as Click Mexicana, JetBlue Airways, Spirit Airlines and WestJet, all of which are pioneering routes between North and Latin America.

In the past five years economic ties between Australia and South-East Asia have accelerated. Historians would say this has its roots in Australia's changed perspective after World War II, when it stopped relying exclusively on Europe and began to open doors to its northern neighbours. Simultaneously, conflicts ended in Indonesia and Vietnam, and stability spawned the "New Tigers" that have since rewritten Asian economics. Like stars that finally aligned, the time arrived for Australia and South-East Asia to take notice of each other.

Singapore and Australia signed a free-trade agreement in July 2003, and two months later a new air services accord was signed giving Qantas more onward rights to Europe, and Singapore Airlines unlimited access to Australia. Singapore is now Australia's largest trade and investment partner in South-East Asia.

Two years later Australia and Thailand signed a free-trade agreement, and Australia is now in advanced talks with Malaysia about another one. Malaysia is already Australia's second largest trade partner in South-East Asia and its ninth largest in the world, with nearly A$7 billion ($6 billion) in annual trade. Thailand is not far behind.

Regional trade pacts
The Association of South East Asian Nations, which comprises 10 member countries, is looking beyond bilateral to regional trade pacts. It has started bloc negotiations with several neighbours, including Australia and New Zealand. Meanwhile, Austrade, Australia's trade agency, predicts region-wide accords within two years, leading to fully fledged free-trade agreements by 2015.

Trade is not only the tie that binds, but it has helped create an Asian middle class eager to travel. In anticipation of this, Qantas chief executive Geoff Dixon predicts: "Asia will soon provide Qantas with more aviation traffic than the rest of the world combined."

So why are low-cost carriers rather than legacy airlines leading the way? The answer lies partly in the general reasons behind the success of low-cost carriers much of the cross-regional traffic is point-to-point and demand is price-sensitive. Expansion further afield is also a natural next step for low-cost carriers that have already picked most of their own low-hanging fruit. Low-yield tourist routes are better suited to a Jetstar, for example, than a Qantas.

However, some routes are suitable for both. For instance, Brett Godfrey, chief executive of Australia's Virgin Blue, says low-cost and legacy carriers may serve separate markets even when they operate the same city pairs. He adds that if low-cost and legacy carriers appeal to separate customer segments, they are "not actually competing because they have different clientele even when flying between the same cities".

For all these reasons, low-cost ­carriers are the new integrators between Australia and South-East Asia. "The balance of power in Asia is quickly shifting," says Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation. "Especially as low-cost carriers take delivery of huge amounts of new capacity and set their sights on intercontinental markets."

Southbound, Valuair and Tiger Airways became the first South-East Asian low-cost carriers to serve Australia, but they do not operate on the major routes. However, this recently began to change with the launch of flights to Sydney by long-haul low-cost carrier Viva Macau.

Tiger now flies from Singapore to Darwin and Perth and Jetstar Asia plans to replace Qantas at the end of October on the Singapore-Darwin-Cairns route. Another Singapore low-cost carrier, Valuair, also served Perth for one year before dropping the route in 2005 after it was acquired by Jetstar Asia.

Indonesian low-cost carriers Adam Air and Lion Air also have revealed intentions to launch services to Australia. New aircraft orders mean several Asian low-cost carriers will soon have the capability to operate into Australia.

Airlines such as Qantas and Singapore Airlines have played a significant part in developing low-cost carriers in this part of the world. Silk Air, for instance, was an early effort by SIA to create a lower-cost cross-border subsidiary tailored to leisure routes.With Jetstar, Qantas has taken this idea further.

The conversion of low-yield Qantas routes into profitable Jetstar routes has proved successful. By the end of this year, Jetstar will be serving seven Asian cities from Australia, five of them in South-East Asia. Jetstar chief executive Alan Joyce says his airline's international operations are "ahead of expectations".

Singapore Airlines was also first with the idea of creating its own cross-border airline. Early on it tried to launch an Australian domestic carrier by looking at taking a stake in Virgin Blue, bidding against Air New Zealand to buy the now-defunct Ansett, and then studying whether to create its own Australian start-up. It ended up instead making a costly investment in Air New Zealand and losing it all in 2001.

Again, Qantas has scored limited but better success with its cross-border venture. It launched Singapore-based Jetstar Asia in 2004 with management rights and a 44.5% stake. Competition authorities have approved close co-ordination between Jetstar Asia and Qantas, allowing Qantas to operate the Singapore unit as part of its own group.

More recently, Qantas completed its purchase of an 18% stake in Vietnam's Pacific Airlines and plans to reach 30% in instalments within two years. Pacific will take the Jetstar name, convert from Boeing 737s to Airbus A320s - the same aircraft operated by Jetstar and Jetstar Asia - and is likely to become a Jetstar franchisee. Qantas chief financial officer Peter Gregg says Qantas would like Pacific to "reposition" itself as a low-cost carrier and "harmonise its operations with Jetstar".

The interest shown by Qantas in South-East Asian equity links extends beyond Singapore and Vietnam. A year ago Gregg revealed Qantas was seeking other ventures in the region. The carrier talked to Adam Air and put out feelers in the Philippines and Thailand. It also agreed to a cargo project in Thailand.

But nothing happened with Adam Air, the Philippines or Thailand, and the Thai cargo venture was disbanded. Instead, Qantas took a stake in Pacific. Even though Qantas has been quiet for the past year about other Jetstar-like aspirations, if an opportunity arose, especially in Indonesia or Thailand, it would probably give it a hard look.

Market barriers
The ASEAN nations are open with each other in many ways, but Singapore's aviation prowess appears to frighten the others into fortress mode. As a result, Qantas has been frustrated by Singapore's inability to gain major regional routes for Jetstar Asia.

As LAN's Latin American experience shows, cross-border ventures offer a detour around restrictive bilaterals. Jetstar-like units in Indonesia and Thailand would give Qantas access to large and growing domestic markets. Unlike Malaysia, which is also large and growing, they do not have a home-grown low-cost carrier with the muscle of AirAsia, therefore a Jetstar based in Bangkok or Jakarta would likely face an easier time than one in Kuala Lumpur.

But the possibility of a major ­regulatory change within the region might dissuade Qantas from further Jetstar ventures. ASEAN nations have pledged to form an Open Skies regime by the end of next year. Those plans are behind schedule and Indonesia may opt out, but the prospect of unlimited rights that would turn Jetstar Asia and Pacific loose could end the need for Qantas to seek more regional ventures.

One major player in this unfolding story has yet to be heard. So far the northward expansion from Australia has been all Jetstar and Qantas. Virgin Blue is saying nothing, but there are reasons to suspect that it is only waiting for the right moment to make a move.

Virgin Blue's first priorities are to fend off Tiger and launch its transpacific US service next year. Yet, by ordering six Boeing 777-300ERs, agreeing to lease a seventh and optioning six more, Virgin Blue quietly reveals it is eyeing other routes. Godfrey declines to disclose details, but says Virgin Blue's long-haul plans are not limited to the USA.

This is just one more example of the potential Australia and South-East Asia share - two regions that aviation is helping to merge.

Source: Airline Business