Asia-Pacific is awash with new startups and domestic carriers expanding off shore. Tom Ballantyne looks at how big a threat they are to the region's majors.They are like bees attracted to the honey pot, says one executive from a major Asian airline of the rash of new startups swarming to join the biggest feast global aviation may ever witness - the Asia-Pacific's ongoing air passenger boom.

Wherever you look, from Taiwan to Thailand and South Korea, from New Zealand and the Philippines to India, the pace appears to be quickening. Fledgling domestic and international airlines are in fashion and some of them are beginning to make serious inroads into the balance sheets of their larger rivals.

Indonesia's Sempati, the Philippines' GrandAir International, New Zealand's Kiwi International, a handful of youthful Chinese domestic carriers, CNAC's China Hong Kong Airlines and Singapore's Region Air are all overflowing with international ambition, while other would-be startups wait impatiently in the wings in Malaysia, Thailand and Pakistan.

Says Kiwi owner and chief executive Ewan Wilson, whose airline has only one jet: 'About 10 or 15 years ago the US industry described Southwest Airlines as a niche carrier. Today it is a major carrier that threatens other US airlines. Given time and the right management and imagination we can make Kiwi an airline people can take seriously.' The comment typifies this new breed of fledgling operator, though how many of them will ultimately survive is another matter.

Already, India has seen newcomers such as Jet Airways, Damania, East West, ModiLuft, NEPC and Archana capture some 40 per cent of the domestic market, battering government-owned Indian Airlines' profitability. In Pakistan, Shaheen Air International has been operating domestically and internationally for 18 months and plans to acquire two more B737s before the end of the year.

As startups vie for route rights all over Asia, they are presenting aviation authorities - sensitive to the needs of their national flags - with a dilemma: just how much leeway should the newcomers be given?

For decades, many Asian mainline operators were government-owned and though the trend is now towards privatisation, or at least partial privatisation, there is still a tendency for them to be treated as national assets.

Governments are gradually easing away from this approach, opening the door to new opportunities as they realise a measure of deregulation and fresh competition can lead to greater numbers of inbound visitors. Although in many places this is a slow process, the ranks of new entrant airlines, particularly on short to medium-haul regional routes, are growing.

Accustomed to competing with one another, carriers like Philippine Airlines, Korean Air, Garuda Indonesia and Qantas are now having to contend with smaller rivals invading their international routes, and startups seeking to siphon off vital traffic at a time when every passenger is critical to profitability. The new carriers want access to some of the majors' most lucrative routes, a move that will almost certainly dilute existing operators' income. Worse, there is a 'multiplier affect'. National flags not only face a new local airline, but competitors from other Asian countries are also arriving on their turf.

Individual new entrants may win a tiny share of traffic on a particular route but, across entire networks, a percentage point lost here and there quickly adds up to a significant dent in a major's business - a fact Cathay Pacific, for example, knows only too well. The days are long gone when the Hong Kong-based carrier faced only Korean Air and Qantas on flights to Seoul and Australia. Now it has to compete with Asiana and international newcomer Ansett. And Manila-based GrandAir, which recently won Hong Kong rights, will soon take another nibble from available traffic. Meanwhile Cathay faces the more serious prospect of competition from China's CNAC which is due to be granted a licence to operate as a Hong Kong-based carrier from early next year. The new carrier will be known as China Hong Kong Airlines, and has appointed a former Cathay executive to head it up (see Newsline).

The problem with small airlines is that they often get bigger - much bigger. The rapid growth of Korea's Asiana and Taiwan's EVA Air is a case in point. A few years ago they didn't even exist. In 1994 Asiana revenues leapt 61.2 per cent to just over US$1 billion, taking it from 62nd to 49th place in the Airline Business top 100 ranking. In 1994, with $737.5 million in sales, EVA was ranked 63rd. China Airlines' market share has fallen from 32 per cent to 27 per cent since EVA's launch.

Despite these substantial gains, the attitude of the established flags to the new competition remains strangely unchanged. More often than not they act as if the newcomer simply doesn't exist. Even now, six years after Asiana launched and despite its impressive growth, Korean Air virtually refuses to comment on its competitor. 'Our real competition is not small airlines like Asiana or EVA, our competition is United or JAL and Lufthansa,' says a spokesman.

Dan Hellberg, transport analyst at Asia Securities in Taipei, suggests CAL also treats the whole question of EVA 'very lightly', even though the new carrier's aggressive marketing and high levels of service have won it passengers and market share.

Dismissive comments or not, fledgling operators are getting under the skin of their giant rivals.

In the Philippines GrandAir (run by former PAL executives) launched domestic services from Manila to Davao and Cebu in September last year using two leased Airbus A300s, and is aiming for a 20 per cent market share on these routes. 'Let me say that we would have been happy with that but what we have actually achieved is far superior. Our load factors are much higher than PAL's and we have been flooded with inquiries from passengers wanting to know when we are going to begin on other domestic sectors,' claims the airline's chief operating officer Mario Pabilla. He boasts GrandAir's service is far superior to PAL's and says there are imminent plans to add more aircraft and domestic sectors.

Meanwhile Pabilla hopes Hong Kong flights will be underway in time for the Christmas rush and the carrier has also applied for Singapore and Tokyo rights, where it plans to inaugurate services next year. GrandAir also views South Korea and Thailand as future targets.

The response from Rene S Campo, PAL officer-in-charge, marketing and sales, is that the flag welcomes competition both domestically and internationally, though he complains the government 'should require new entrants in the industry also to serve the unprofitable (domestic) routes as it requires PAL'.

Yet GrandAir's success has undoubtedly shaken PAL at a time when its finances are in a dire situation. Pabilla laughs at PAL's words of 'welcome', saying the flag has opposed its international applications and is putting difficulties in its way domestically. The travel agencies are controlled by PAL, he explains, and only allowed to sell PAL tickets. 'GrandAir had to open its own outlets. If we were able to sell tickets through all those other travel agents it would give the public a choice,' says Pabilla.

Although it has its own terminal space in Manila, GrandAir faces difficulties elsewhere because it has to use PAL's baggage systems and operate in terminals it describes as 'inadequate'. Despite this GrandAir carried around 100,000 passengers in its first six months of operations.

Helped by excellent government connections, Indonesia's Sempati has also established itself on domestic routes and launched flights to Singapore and Australia. Sempati operates to Singapore, Perth, Penang, Taipei and Kuala Lumpur and has its eye on Bombay and a second Taiwanese destination. Like PAL, Garuda is unhappy that its small rival does not share its obligation to operate on unprofitable domestic sectors.

Kiwi International is also causing some angst to incumbent Air New Zealand. It became New Zealand's second international operator in August, with scheduled services from regional centres Hamilton and Dunedin to Sydney and Brisbane, using a single wetleased Boeing 727.

Load factors are high and forward bookings heavy because regional travellers in New Zealand previously had to drive or fly to Auckland, Wellington or Christchurch to catch international flights to Australia.

Despite the minuscule size of Kiwi's operation, Air New Zealand reacted by offering regional passengers NZ$599 return trip packages to Australia, including free accommodation and hire cars. The normal low season air fare is NZ$749 and the high season NZ$849. 'Air New Zealand has done everything to stop us. They were the only carrier that protested when we filed for international rights,' says Wilson.

Kiwi is now carrying more than 2,500 passengers a week across the Tasman, and Wilson adds that 'it is without a doubt our desire to expand into such markets as Asia and the UK.'

But not all proposed startups have succeeded in getting off the ground. Singapore's Region Air recently returned its Air Operator's Certificate (AOC) to the Civil Aviation Authority of Singapore (CAAS). Basically an aircraft leasing company - it leases A320 jets to Vietnam Airlines and China Airlines - Region Air was operating regular 'scheduled' charter services to Vung Tau in Vietnam and the resort of Koh Samui in Thailand using de Havilland Dash 8s. The Vietnamese services have now ceased due to poor load factors and the Thai flights are operated only as seasonal charters through an affiliated travel company, Travel Bug.

Nonetheless, Region Air is reputed simply to be reassessing its plans and still aims to become a fully fledged regional airline whose targets would include China, India, Japan, Malaysia and Myanmar. Singapore Airlines says the proposed operator is viewed like any other. 'We regard all competition, whether from secondary or existing airlines, seriously,' comments SIA assistant director corporate affairs Karmjit Singh.

Another start-up currently on hold is Malaysia's Asia Airlines, whose AOC has been held up following pleas from Malaysia Airlines for more time without local competition to repair its ailing finances. In Thailand too, where at least two prospective new entrants are awaiting approval, clearance has so far been denied.

Officially, however, the Thai government has agreed to the entry of a second carrier. 'We want competition and the liberalisation of the airline industry,' says transport and communications minister Dr Vichit Suraphongchat. He adds that a new operator would operate on the same routes as Thai both domestically and internationally.

The new operator could be 15 per cent owned by foreign investors and must have at least US$135 million in registered capital to operate domestically, and double that to operate internationally, says Suraphongchat. Thailand's existing second airline, Bangkok Airways, at one stage operated flights to Cambodia but has never been recognised as an official second operator.

Thai International itself is still suffering from the effects of the recession as well as management problems and has, like MAS in Malaysia, appealed for time to recover before being forced to face head-to-head competition.

However, the government's view is that a new entrant would force Thai to be more competitive. 'The new domestic and international carrier will target the most profitable routes. This will provide an added incentive to Thai to cut out less profitable activities,' says one Bangkok analyst.

Other more enterprising flag carriers have foreseen the danger of local competition and moved to fend off the possibility. Singapore Airlines set up SilkAir to corner the regional markets a newcomer might covet, while Hong Kong's Cathay Pacific bought a share of Dragonair.

While there is no doubt Asia is experiencing a boom in the number of potential new entrants, there are at least two restraining factors on the level of competition. First, growth of most of the new operators is likely to be curtailed for the forseeable future simply because of the extremely cautious approach of many Asian countries to deregulation, says Australian based aviation analyst Peter Harbison, of BDW Aviation Services. 'It really becomes a matter of where they can fly to and where they can't. Limits on air rights, lack of capacity and airport congestion will hold them back from meaningful entry into many major markets,' he says.

Second, very few will emerge as significant long-haul competitors without the enormous financial backing of an Asiana or an EVA Air, needed to purchase new jets with the economics to take on established operators, adds Harbison. 'Many a new airline has found to its peril that you can't take B747-200s and compete effectively with major airlines flying B747-400s,' he says.

On the other hand, the region's high growth rates - particularly on short-haul flights of up to approximately three hours - offer the newcomers a real opportunity to find a substantial market niche. As a result national flags need to keep a very close watch on their development.

The message for established airlines is clear. With cost cutting and rationalisation vital to sustained profitability and yields continuing to decline, startups have the potential to damage the majors' business. While some ambitious young rivals will certainly fall by the wayside, others will undoubtedly succeed in winning some market share at the majors' expense and could initiate unwelcome price wars.

As more of these brash new operators emerge, spurred on by increasingly liberal bilateral air service agreements, Asia-Pacific's national flag carriers cannot afford to be complacent.

Source: Airline Business