The low-cost vogue is capturing imaginations in the Asia-Pacific. But as hopeful new start-ups pour on to the market, questions remain over whether there will be room for all
When Singapore-based low-fare start-up carrier Tiger Airways presented its chief executive to the media for the first time late in February, he was asked whether he had ever flown on a no-frills airline. "No" replied industry newcomer Patrick Gan, who has spent most of his career in the pharmaceutical industry. But he quickly added that he expects to do so a lot from now on.
The reply perfectly captures the mood across Asia. While few have yet actually had the chance to fly on a discount carrier, there is growing expectation that low-cost is poised to take the region by storm, just as it has in the USA and Europe.
Much of the buzz has come as a result of Malaysia's AirAsia, which has been a runaway success since new owners acquired the loss-making full-service airline and transformed it into a true low-cost, no-frills operator in January 2002. Its rapid expansion has prompted others in the region to target the low-cost (the preferred term in Asia) segment, and several new carriers have either already launched or are being planned in virgin markets such as Indonesia, Singapore and Thailand.
This is not an entirely new concept to Asia. After all, Philippine carrier Cebu Pacific adopted the no-frills model when it launched in the 1990s. But until AirAsia came along it was not seen as something that could be applied to the international arena. This is in part due to regulatory issues and the fact that there is a lack of cheaper-to-use secondary airports serving major cities. Indeed when Cebu Pacific launched international services late in 2001, it departed from the traditional model of having a single aircraft type to control costs and added Boeing 757s to its fleet of McDonnell Douglas DC-9-32s.
But AirAsia has proved that international services are possible for pure no-frills carriers in Asia. The airline now operates to Thailand from Malaysia and will soon be flying to other international destinations. It has also added another base through the establishment of a 49%-owned associate carrier in Thailand. Thai AirAsia is now operating domestically, as well as between Bangkok and Singapore.
With more new airlines launching in Asia, the lines are blurring between those that offer on-board frills but call themselves low-cost carriers, and those that do everything possible to cut out the frills and offer the cheapest fares. Planned Singapore-based Valuairs has been branded a low-cost, low-fare carrier, for example, but it will offer some frills, such as meals and also in-flight entertainment, perhaps borrowing from the message of New York's stylish jetBlue that low-cost does not have to mean low service.
At the other end of the extreme is Singapore Airlines (SIA)-linked Tiger, which will adopt a starker model with absolutely no frills except when they are paid for separately.
Whatever the preferred model, a fundamental change is taking place in the Asian airline sector that is forcing the majors to look at further cutting costs and adapting their operations.
What is required of the traditional carriers, say analysts, is a strong push towards improving productivity, upgrading premium products where justifiedto help differentiate themselves from no-frills operators, and streamlining fare structures, particularly for economy-class tickets.
"The low-cost airline phenomenon, overlaid on a more liberalised marketplace, will have a major influence - both as an agent of change and as a growth element in itself," says the Centre for Asia Pacific Aviation (CAPA), an industry consultancy based in Australia. "There can be no room for complacency, regardless of market growth, with such change in store. Any airline which has not successfully restructured its operation by the end of 2004 will be at risk."
Most analysts appear generally satisfied with the progress the "legacy" carriers are taking. They also note that major airlines in Asia are for the most part in much better financial shape than their counterparts in the USA and Europe, giving them the resources needed to survive any fare wars that may break out.
"The new low-cost, point-to-point thinking is already helping make complacent airlines much more efficient, which, by reducing their costs and prices and improving the airlines' customer targeting, will help them stimulate traffic growth well above forecast levels," says CAPA managing director Peter Harbison, who sees the fast-changing environment as a prime opportunity for the majors, rather than something they should fear.
Some of the incumbent airlines are also now seeking a piece of the low-fare pie. SIA is 49% owner of Tiger, which it is establishing with US and Irish partners and hopes to launch in the third or fourth quarter of this year. Thai Airways International is also launching a low-fare associate airline called Nok Air with partners in the coming months. Outside Asia proper, Australia's Qantas Airways is planning to launch a low-fare unit called Jetstar in May to challenge Virgin Blue at home and stop its rival from boosting its 30% domestic market share.
Does Qantas fear cannibalising its own full-service domestic operation with Jetstar? Perhaps, but Jetstar chief executive Alan Joyce says Qantas' view is that if it is inevitable "the carrier should cannibalise itself, rather than be cannibalised".
Jetstar head of airport and ground operations Bill Jauncey adds: "Virgin Blue has done us a favour as it has educated the Australian people about the difference between a network carrier and a low-cost carrier and that makes our job easier. People now understand the fare and service differentials between the two."
However AirAsia group chief executive Tony Fernandes, a former music business executive-turned airline owner, believes the majors should stick with what they do best and focus on their premium offerings, rather than launch discount carriers. He says they do not need to fear a loss of passenger traffic to new carriers as has happened in Europe and the USA, as low-fare airlines in Asia - where the middle class is growing rapidly - will be creating growth for all.
"What happened in America and Europe is a completely different situation. Number one, in Asia the industry is intact. Even during SARS they lost money but bounced back. Cathay Pacific, SIA and Thai are good airlines and they are growing - they have by no means reached their market saturation," says Fernandes.
"Secondly, their prices aren't so out of whack with ours. In America you can be paying $2,000 to fly from one side of the coast to the other, while JetBlue is charging you $100. Fares are already fairly low here in Asia so they will still attract a market. I think it's a fad. It's a panic because of what happened in Europe and America. Why should they be diluting their yields? It's a big enough market for all of us," he says, adding: "If they really want to have a low-cost carrier they have one at the back of their plane." The point is that many Asian airlines already offer hefty discounts in economy class.
First-time air travellers
Fernandes says a good percentage of AirAsia's passengers are first-time air travellers and insists that flag carrier Malaysia Airlines (MAS) has not lost domestic business. MAS says this is indeed the case, particularly in business class, although AirAsia has taken away the opportunity for domestic growth. MAS also says that if the situation changes it will react.
"Our initial experience is that this is not occurring as our business passengers are generally avoiding the low-cost carrier, as it does not offer the required frequency, has limited ticket flexibility, there is the hassle of rechecking and no frequent-flyer points," says MAS manager of network planning and revenue management Christos Saw. "But if there is a dilution of business traffic in the future we will introduce different fares and advertise our superior business product extensively."
Some full-service network airlines are, meanwhile, defending their business model in the face of the buzz caused by the new carriers. Mike Barclay, SIA's former general manager in Germany who took over as chief executive of regional subsidiary SilkAir in January, says: "I believe we have a very robust business model" and there are no plans to change it.
Barclay says there is still sufficient demand for a full-service economy product as well as a business class on regional routes within Asia, while the "leisure" routes SilkAir primarily serves do not attract low-fare airlines.
He also says a key point that SilkAir and other full-service carriers should not forget is that low-fare airlines do not carry interline traffic, and many travellers from abroad have multiple-sector itineraries when visiting Asia. Around half of SilkAir's business comes from interline traffic, he says, and this "will not be under threat from the low-cost model".
Some airlines are, however, anticipating losing economy class travellers on short-haul flights within Asia to low-fare carriers and are looking to adapt their operations to counter the threat. Royal Brunei Airlines, for example, is one that is looking at changing its service offering, saying AirAsia already competes indirectly with it as it has flights from Kuala Lumpur to Miri in East Malaysia, on the border with Brunei. And with more liberal air services policies being adopted, new traffic rights will become available to the newcomers leading to further competition.
As a result Royal Brunei is to simplify its service offerings in its economy class cabins on short-haul flights so it can reduce costs and cut ticket prices. Fewer frills will be offered at the back of the aircraft and fare schemes simplified, it says.
Some argue that low-fare airlines cannot ever be as successful in Asia as they have been in Europe, given that there are few secondary airports serving major cities that enable costs to be reduced - and because of the regulatory hurdles associated with international operations. Unlike Europe, which is effectively an open market for air services, Asia still has many restrictions on international operations, in part due to the fact that several national carriers remain state-owned.
But in favour of new entrants is the fact that Asia has a massive population with a rising middle class and a growing penchant for travel, while labour costs are relatively low. Supporters of low-fare operators also point out that in every new market where such carriers have been launched, the naysayers predicted different market conditions would prevent them from being successful.
Governments are starting to recognise that the environment is changing, however, and that because of the economic benefits that come from growth in air travel they need to adapt airport operations to suit the new players. Singapore's Changi airport, for example, is looking at building a no-frills terminal, as is Kuala Lumpur International Airport in Malaysia.
Singapore's transport minister Yeo Cheow Tong says a dedicated no-frills terminal under study for Changi would be "tailored to the most basic needs of low-cost carriers". It would have limited amenities - no boarding bridges - and lower passenger service charges. "Going by the low-cost terminals I have visited in the UK, I expect the low-cost terminal in Changi, if we do build one, to have the same physical attributes as some of our bus terminals," says Yeo. "This new form of air travel will, therefore, require not only a change in mindset on the part of the Civil Aviation Authority of Singapore, but also the travelling public who have long experienced the high standards of Changi airport."
The new airlines are also spurring a further liberalisation of air services agreements in the region, and some believe there will be more fundamental changes in the marketplace in future as the pool of operating rights expands.
Karmjit Singh, chief executive of SATS Airport Services, a unit of ground handling and catering company Singapore Airport Terminal Services, says: "One of the biggest challenges yet to come is when there is complete deregulation within Asia and an end to the bilateral fragmentation. Asia is a follower in the international airline industry and the region needs to conform as full deregulation is still three to five years away and there is a lot of structural change yet to occur."
Tony Ryan, who founded Ryanair back when it was an Irish regional carrier and whose family has taken a minority stake in Tiger, says his family's investment vehicle decided to become involved in the new airline because "low-cost travel is taking off all over the world and I'm sure it will be successful" out of Singapore as well.
He believes that "10 or 15 years from now, maybe 10% of the traffic [in Asia] will be low-cost". He points out that Southwest started operating well before the US domestic market was deregulated while Ryanair did the same "before there was freedom of the skies in Europe". "Freedom of the skies evolves," says Ryan. "I think over time it will evolve in this region as well."
But Fernandes warns there will be casualties, and the lines will become more clear between what makes a true low-cost or low-fare airline, and what is a traditional airline simply striving to operate with a lower cost base. "Every day there is a new low-cost carrier and I'm sure there are going to be many others," says Fernandes. "But remember that a lot started in America and there are now probably only about two successful ones and many others on the fringe. In Europe you really only have Ryanair and easyJet. I think pragmatism will win out." n
John F O'Connell is a PhD student in the air transport department of the UK's Cranfield University. He has been focusing on competition between incumbent airlines and low-cost carriers and recently spent time in Asia and Australia for his research.
REPORT BY NICHOLAS IONIDES IN SINGAPORE WITH JOHN F O'CONNELL AT CRANFIELD UNIVERSITY
Source: Airline Business