Asia's budget airlines fly high

despite global turbulence

February 6, 2010
Singapore - The timing said it all. In the same week that Japan Airlines filed for bankruptcy protection, shares in Singapore's low-cost carrier Tiger Airways climbed on their first day of trading on the stock exchange. Last month's insolvency of Asia's oldest full-service airline on one hand and the successful initial public offering of the 2003-founded budget carrier on the other provided for "quite an interesting contrast," said Peter Harbison, executive chairman of the Sydney-based Centre for Asia Pacific Aviation.

It was "probably in many ways a very nice little symphony of the way the world is changing at the moment," he said at a conference ahead of this week's Singapore Airshow, which ends Sunday.

While Asia's full-service carriers have struggled to stay afloat over the past two years of global recession, the outbreak of swine flu and record oil prices, no-frill airlines like Tiger Airways, Jetstar, Air Asia and Cebu Pacific have posted enormous growth rates.

"The low-cost carrier model, if well executed, will grow market share even in times of economic uncertainty," said Garry Kingshott, chief executive adviser of Philippines-based Cebu Pacific.

For the first half of 2009, which was described as an "annus horribilis" by the industry group International Air Transportation Association, Cebu Pacific posted profits of 1.82 billion pesos (39 million dollars).

"Against an industry backdrop of despair," said Kingshott, Cebu Pacific added aircraft, routes and destinations while lowering costs, and its aggressive approach made it the domestic market leader with a share of more than 50 per cent.

Other budget carriers posted similar good news. Malaysia's Air Asia posted a net profit of 130 million ringgit (38 million US dollars) for the quarter through September while Tiger Airways just announced its 21st-straight quarter of year-on-year passenger growth for the period from October to December.

Low-cost carriers in the Asia-Pacific accounted for 15.7 per cent of the total airline seats in the region last year, according to the Centre for Asia Pacific Aviation, a sharp contrast to 1.1 per cent in 2001.

The rise in gross domestic product (GDP) in the region is a key driver of the boom for budget airlines.

Asia's GDP was expected to grow by 5.75 per cent in 2010, the International Monetary Fund said, compared with 1.7-per-cent growth on average in Europe.

"Asia is the place to be," Tiger Airways chief executive Tony Davis said, noting that the region has a population base six times that of the European Union.

With rising GDP, more people in Asia are able to travel by air, he said, "provided you push your airfare to a level they can actually afford."

For Davis, only the price counts in the highly competitive budget-airline business.

Low-cost carriers in their purest form are retailers like Sam Walton, founder of the US company Wal-Mart, he argued.

"Don't add complexity - don't try to be Tiffany as well as Wal-Mart," he said. "Death, taxes and lower airfares are the only three certain things in life."

Heads of other low-cost carriers, however, are seeking different ways to push their business.

"Our focus is very much to establish a brand," said Jetstar chief executive Bruce Buchanan, adding that the airline upgraded its marketing investment to bridge the business and leisure market segments.

Moreover, Jetstar, owned by Australia's flag carrier Qantas Airways, just signed a deal with Air Asia aimed at cutting costs by cooperating on aircraft maintenance and passenger handling and designing the next generation of aircraft for low-cost operations.

"The only way to survive in this business is to run faster than the environment you are in," Buchanan said. "It is hard to sustainably grow."

Other aviation experts shared Buchanan's concern, pointing to the danger of profitless growth for the fast-rising number of low-cost carriers.

Harbison said he hoped "most of the low-cost carriers" had a sustainable business model in one form or another.

Brett Godfrey, founder of Australia's Virgin Blue, said he was sure that the business would change.

"We will see more real consolidation, real merging and real exits," he said. -Earthtimes

No comments:

Post a Comment