Asia’s full-service airlines go low-cost

The market share (in terms of seats) of low-cost carriers within Asia is expected  to reach nearly 20 percent by the end of 2011. However, LCC penetration in the region is still behind that of the USA and Europe, while the middle class across Asia is growing rapidly, creating new demand for affordable air travel. Furthermore, the upcoming ‘open skies’ policy amongst the ASEAN countries, as well as increasing liberalization in Japan and South Korea will further boost air travel in the region. 

These new market opportunities, plus strong competition from the likes of AirAsia, Cebu Pacific, Lion Air, IndiGo, Spring and Skymark, has led several full-service airlines in the region, such as Qantas (Jetstar), Singapore Airlines (Tiger), Malaysian Airlines (Firefly) and Korean Air (JinAir) to set up their own low-cost subsidiaries in recent years. Joining these airlines in the next year will be Thai Airways and All Nippon Airways, while Singapore Airlines just announced plans to establish a long-haul low-cost subsidiary. 

Singapore Airlines: Long-haul low-cost
Singapore Airlines (SIA) new budget airline will start operating within a year and be based in Singapore. Although fully owned by Singapore Airlines and likely to operate some of SIA’s older model B777s, the new carrier will operate independently. Initial routes of the long-haul budget airline are expected to be to East Asia (China, Japan, South Korea), Australia and India. Other details, such as its name and just how ‘no frills’ the low-cost subsidiary will be, have not yet be announced. 

According to analysts, SIA has little choice but to start a low-cost long-haul subsidiary because its mainline operation is not growing. In 2010, the airline carried 16.6 million passengers, compared with 19 million in 2007/8. In the same period, Singapore’s Changi Airport saw its passenger traffic growing from 36 million to 44 million. Given the more open air regulations in Singapore vis-à-vis other Asian locations, SIA faces more competitive pressures than some of its peers. For examaple, according to Nomura Investments, LCCs have a market share of 27 percent in Singapore compared with ess than 5 percent in Hong Kong. 

With its new long-haul low-cost subsidiary, Singapore Airlines is aiming at Qantas’ Jetstar Asia and Malaysia’s AirAsia X as well as Gulf carriers such as Emirates, which have picked up the bulk of new long-haul traffic from Singapore.

Dual brand strategy
According to the Center for Asia Pacific Aviation (CAPA), SIA’s new carrier would lower its unit costs on less profitable routes, as well as target the fast growth markets of India and China, resulting in a better match to current yields – while freeing up SIA mainline aircraft for higher yielding routes. 

This is a similar strategy as pioneered by Qantas (pdf), which Jetstar subsidiary now generates a third of the Qantas Group’s annual profit. Qantas recently said that its expansion plans would further centre on Jetstar as opportunities for the mainline Qantas brand were limited. Qantas is also believed to be planning the start of a full-service airline at Singapore, called Qantas Asia

Tiger Airways, Silk Air
Singapore Airlines already has a 33 percent stake in budget carrier Tiger Airways, which it set up in 2003. Tiger operates a fleet of 26 A320s on regional routes from Singapore and within Australia. Tiger has also partnered with SEAir in the Philippines and will set up a joint venture with Thai Airways, as part of its ambition to become a pan-Asian low-cost carrier. SIA also owns Silkair, which flies to a more upmarket set of regional destinations than Tiger and is more expensive than the budget airline. 

Thai Airways: Thai Tiger, Thai Wings
Another Asian full-service carrier planning to launch a low-cost carrier is Thai Airways (THAI), which last year announced a joint venture with Tiger Airways to establish Thai Tiger. Thai Tiger will offer short-haul services out of Bangkok’s Suvarnabhumi International Airport and planned destinations include Chiang Mai, Phuket, Penang, Kuala Lumpur, Macau, Shenzhen and Chennai. THAI will have a 51% share in the new carrier and the JV is expected to commence operations in the 3rd quarter of 2011. 

THAI also has a 39 percent stake in regional low-cost carrier Nok Air and just announced it will set up a full-service regional carrier as well, called Thai Wings, similar to the regional operations of Singapore Airlines (Silk Air) and Cathay Pacific (Dragonair). 

All Nippon Airways: Peach
Meanwhile, ANA in partnership with Hong Kong investors First Eastern and Japan’s Innovation Network Corporation, will set up a low-cost subsidiary called ‘Peach’ (which happens to be an anagram of ‘cheap’). Peach will start flying from Osaka’s Kansai International Airport to Fukuoka and Sapporo in March 2012, followed by Seoul in May 2012. Fares are expected to be some 50 percent lower than those offered now by ANA and JAL. With Peach, ANA aims to stimulate additional demand for air service within Japan — whose economy is barely growing — by pricing tickets at levels that make them competitive with high-speed rail. 

Japan Airlines: Jetstar Japan?
Japan Airlines (JAL) is reportedly considering to establish a low-cost carrier for domestic flights together with oneworld partner Qantas, in order to capitalize on the know-how of Qantas’ subsidiary Jetstar. Jetstar and Jetstar Asia already fly long-haul low-cost routes from Australia and Singapore to Japan, and the carrier has been emphasising its intention to form other joint ventures in Asia in order to expand its footprint in the world’s fastest growing aviation market. Qantas also part-owns a stake in Vietnam’s second-largest airline, Jetstar Pacific

Related articles:
Asia-Pacific long-haul low-cost airlines getting ready for further expansion
Long-haul low-cost carrier AirAsia X goes lie-flat in Business Class
Thai Airways and ANA to set up low-cost airlines with partners
Japanese low-cost carrier Skymark to operate A380 with just 394 seats


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