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Low-cost airlines in Asia - Too much of a good thing

2014-05-22 12:56:01

After a binge of aircraft-buying and airline-founding, it is time to sober up

May 17th 2014 | SINGAPORE

SOUTH-EAST ASIA S low-cost airlines have gone from feast to famine. Cheap,

short-haul, no-frills flying came late to the region, but people have taken to

it eagerly. In just ten years, according to the Centre for Asia Pacific

Aviation (CAPA), a research firm in Sydney, low-cost carriers share of the

region s aviation market has soared from almost nothing to 58%. In Europe,

where cheap airlines have been flying for much longer, easyJet and its fellows

account for only about 40%. Now South-East Asia s skies are looking crowded.

The rise of low-cost carriers reflects pent-up demand for flying in an

increasingly well-off part of the world. This year another 12 such airlines may

join the 47 already flying in the Asia-Pacific region. This week it was

reported that Beijing is planning a new, $14 billion airport. In South-East

Asia growth has been particularly strong: many of its 600m people live in large

archipelagic countries, such as Indonesia and the Philippines, where flying is

the easiest way to get around. Of the world s 15 busiest low-cost international

routes, nine are in South-East Asia. All this demand requires aeroplanes: CAPA

says South-East Asia is the only region where there are more planes on order

than in existing fleets.

However, the expansion of airlines capacity seems to be getting ahead of the

growth in demand. Some low-cost carriers are struggling to fill their seats.

Plusher airlines are feeling the pinch, too: this week Cathay Pacific said that

despite strong long-haul profits, competition from budget airlines was starting

to hurt it on short-haul routes. Singapore Airlines expressed similar worries

earlier this month. Con Korfiatis, former boss of Jetstar Asia, the low-cost

arm of Australia s struggling Qantas, believes that the growth in the market

will definitely be there, it s just a matter of introducing too much capacity

too soon.

On May 2nd Singapore-based Tigerair announced a loss of $177m in the year to

March, up from $36m the year before. Several of its national affiliates,

notably in Indonesia and Singapore, have fared particularly badly. The company

is grounding planes and cancelling orders. AirAsia, usually the most bullish of

low-cost flyers, has also said it is deferring deliveries of new planes and

concentrating instead on cutting costs. Jetstar Asia says it has suspended all

growth plans until market conditions improve.

Tigerair blames the industry s overcapacity for its difficulties. But another

problem is that the carriers costs are not as low as they would like. Most of

South-East Asia s showy, expensive airports are running at full capacity,

overwhelmed by unpredicted millions of passengers. New landing slots are

desperately hard to find. Unlike Europe, the region has few smaller, cheaper or

disused airports that low-cost carriers can use.

Despite the gloom, part of the market still looks promising. Two of the

carriers expected to take off this year, NokScoot and AirAsiaX, both joint

ventures based in Thailand, will be offering medium- to long-haul flights (ie,

lasting more than four hours). Although the short-haul market is saturated,

this business still has plenty of room to grow.

Scoot, the low-cost arm of Singapore Airlines, and Cebu Pacific of the

Philippines have also been exploring this business. Campbell Wilson, Scoot s

boss, says that adding just one Scoot flight a day to the existing seven

full-service trips between Singapore and Sydney pushed up total passenger

numbers on the route by 32% in six months. That is impressive, but margins are

tight on low-cost long-haul, because passengers expect more comfort on longer

journeys. No one has yet worked out how to make money on these flights. Two

new, fuel-efficient aircraft, Boeing s 787 Dreamliner and Airbus s A350,

could just change that. Let battle commence.