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Changing the game Low-cost carriers have transformed many markets in the Asia-Pacific region, but there remain diverse differences in regional growth, writes Mark Haneke.

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ow-cost carriers (LCCs) have burst onto the scene in Asia-Pacific in the past decade and are now a major competitive force in the region’s five sub-regions: northeast Asia (Japan, Korea), China, South East Asia (ASEAN countries), South Asia (Indian subcontinent) and Oceania (Australia, New Zealand and the Pacific Islands). Unlike some other regions, Asia-Pacific’s broad and diverse geography creates unique challenges and opportunities for airlines and Asia alone accounts for over 60% of the world’s population, with 3.8 billion people. Plus, many countries in the region have disparate economic interests and aero-political objectives. As a result, the region has more stakeholders and is less homogeneous than either North America or the EU. Asian island nations are also spread out across the region, and are indicative of the region’s reliance on air travel to support commerce and tourism. Today, Asia-Pacific accounts for 32% of the world’s travel volume and this is forecast to grow to 41% of the world total by 2028, producing a robust 6.5% average annual growth rate during the next 20 years. Currently, the Asia-Pacific region accounts for 25% of world GDP and is expected to grow 4.4% during the next 20 years, resulting in the region representing 33% of total world GDP by 2028. This outstrips the global GDP growth figure of 3.1% during the same period. Economic growth, coupled with a rising middle-class with more disposable income and cheaper travel options, means that there will be a demand for 8,900 new aircraft, valued at $1.1 trillion,

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LCC Asia-Pacific routes in December 2000

in the region. Significantly, 62% of these aircraft will be single-aisle, narrowbody aircraft and a large number are destined to join the fleets of existing and future LCCs in the region. Looking at the domestic markets, the Philippines is the country with the highest percentage of LCC market share in terms of published seats, closely followed by Malaysia. In both these countries LCCs control more than 50% of the published seats. However, on the other end of the spectrum are China, Cambodia and Japan, where LCCs have less than a 10% presence in the domestic markets. Looking at country-to-country market share (seats), of the top 35 country pairs, Indonesia–Singapore has the highest

volume of available seats, while Indonesia– Malaysia, Malaysia–Singapore, Malaysia– Thailand and Australia–Indonesia have the highest concentration of LCC seats available in their respective markets.

Swift growth Back in 2000, LCCs in Asia were just beginning to take shape, and operated on only a handful of routes in the region. By 2005, LCC carriers in Asia had made significant inroads in key domestic and regional markets, spurred by economic growth and aero-political liberalisation. Now, in 2010, Asian LCCs have established significant footholds in key domestic and regional markets and some, like AirAsia X, have turned their attention further afield to longer-haul operations.

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LCCs in Asia-Pacific LCC Asia-Pacific routes in December 2010

Graphics courtesy of InterVISTAS.

Northeast Asia The sub-region of northeast Asia is based around the economies of Japan and Korea and the GDP for this sub-region is expected to grow 1.3% a year during the next 20 years. This is much lower than the 4.4% projected growth for the entire Asia-Pacific region during the same period. Of the two countries, Japan has the more mature economy, with further traffic stimulation, most likely tied to airport expansion, easing of operating restrictions and further liberalisation. Air traffic between northeast Asia and other Asia-Pacific sub-regions is projected to grow at 5.8% per year between now and 2028 and to date, only a few LCCs based in northeast Asia have been established. Most northeast Asia-based network carriers are focused on growing their long-haul networks with large, widebody aircraft such as the A380, and ultra long-haul aircraft like the A350 or B787. Only 41% of the sub-region’s 1,180 new aircraft over the next 20 years are single-aisle narrowbody airplanes. To date, Japanese LCC carriers have failed to make a significant impact on domestic routes but Korean LCCs like Jeju Air, Air Busan and Jin Air have been more successful in establishing their brands and gaining market share. In the near- to

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medium-term, the greatest opportunity for LCC growth in this sub-region will come through LCCs based in other sub-regions – like JetStar or AirAsia – expanding their presence into northeast Asia. However, these carriers’ ability to expand is closely linked to the premise of liberalisation and easing of access to market entry.

China With over 20% of the world’s population and a projected GDP growth rate of 7.2% per year during the next 20 years, China is poised to overtake Japan to become the world’s second-largest economy. China currently accounts for 24% of the Asia-Pacific region’s economic output, but that figure is expected to rise to 42% by 2028. The country’s enviable economic output, growing middle-class and increasing disposable income will ensure continued demand for air travel. Illustrating this is the fact that domestic air passenger traffic within China is expected to grow 7.9% annually during the next 20 years. To support this expansion, China’s combined fleet is expected to more than triple in size during the next 20 years, with the country taking delivery of 3,770 new aircraft, 70% of which are single-aisle, narrowbody aircraft.

To date, LCCs have played a minimal role in aviation growth within China, due to the country’s strict aviation policy over decisions on which routes airlines are permitted to operate. This lack of free-market growth has stifled LCC development and means that traffic growth continues to be shared among China’s established legacy carriers. It is most likely that any initial foothold that LCCs may gain in China will come through expansion in provincial routes, rather than China allowing LCCs to form organically and compete against the established carriers on key trunk routes within the country. Consolidation of Chinese carriers, such as the recent acquisition of Shanghai Airlines by China Eastern, could open additional opportunities for LCC carriers to expand their market share in China. Aside from the astounding domestic growth in air travel within China, the country’s warming ties with Taiwan will lead to significant growth in trans-Taiwan Strait flight activity, facilitated by a liberalisation of air services between China and Taiwan. Taiwanese visitor traffic has grown 8.1% per year during the past 10 years and is projected to nearly triple within the coming 10 years. Historically, this traffic has been funneled through Hong Kong and Macau, but an increasing number of non-stop

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LCCs in Asia-Pacific South East Asia

Information Sources Boeing Current Market Outlook 2009-2028, Airbus Global Market Forecast 2009-2028, Global LCC Outlook 2009: The World Has Changed (Centre for Asia Pacific Aviation).

routes between Taiwan and China will open enormous opportunities for LCC carriers – if they are permitted to apply for authority to operate and compete on such routes. However, for now, this market remains highly political and highly regulated. China has wisely invested in a number of transportation-related infrastructure projects throughout the country. Though some of these funds have been earmarked for high-speed rail and highways, a sizable portion will benefit aviation and related sectors. In 2010, China announced investments of $59 billion in airport construction and expansion related projects and the country aims to increase its number of civilian airports from 160 to 244 by 2012.

South East Asia South East Asia is really the darling of the Asia-Pacific sub-regions, as it has displayed the most dynamic growth. LCC carriers such as AirAsia, Lion Air and Cebu Pacific have made significant market share gains at the expense of established carriers like Malaysia

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Airlines, Philippine Airlines and Garuda Indonesia. These younger LCCs have also compelled their older rivals to cut costs and compete more efficiently, resulting in improved service for the entire travelling public. LCCs have captured 62% of domestic ASEAN air travel markets, compared with 14% domestic market share for LCCs in Asia as a whole. Further, LCCs account for 27% of all intra-ASEAN country traffic, based on seats offered in the market. AirAsia is probably the best example of an LCC success in the entire Asia-Pacific region. AirAsia was born in business and free market-friendly Malaysia by a dynamic aviation entrepreneur, Tony Fernandes, in 2002. Fernandes benefited from observing the successes and failures of LCCs around the world prior to his own carrier’s launch. The wisdom gained from modeling his airline after the likes of Southwest Airlines, easyJet and Ryanair, and remaining true to the core LCC principles has contributed to his company’s success.

AirAsia has proved so successful that the company has created affiliate carriers in neighboring countries including Thai AirAsia, Indonesia AirAsia and long-haul carrier AirAsia X. In February 2010, AirAsia purchased a 30% stake in Hanoi-based VietJet and changed the carrier’s name to VietJet AirAsia. South East Asia has a projected GDP growth of 4.6% per year over the next 20 years, with traffic (RPKs) expected to grow 6.6%. This sub-region is expected to take delivery of over 2,100 airplanes during this period, 52% of which are single-aisle, narrowbody aircraft. The success of AirAsia and other LCCs in the sub-region is attributed not only to economic output, but also the infrastructure development and regulatory changes, which facilitated this rapid and continued growth. Liberalised trade agreements among these ASEAN countries have also fostered growth in commerce and tourism, and the LCC growth has opened a world of opportunities to residents of these countries. No longer is a weekend shopping spree in Singapore or Bangkok costprohibitive to the average consumer. The geography of this sub-region dictates that air travel will continue to be the most efficient and cost-effective means of transporting people within the sub-region, fuelled by low fares and frequent non-stop service by LCC carriers.

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LCCs in Asia-Pacific South Asia India has a population of nearly 1.2 billion people, or over 17% of the world’s total. India and its neighbouring countries have experienced significant gains in economic output and efficiency in recent years, and that economic growth is projected to continue to rise by 6.1% through 2028. Air travel within South Asia is expected to grow an amazing 8.7% per annum – a higher rate than that projected for internal China growth during the same period. This is partly attributed to India’s inter-city infrastructure (highways, trains, etc) being dated, so the most efficient means for the country to catch-up with this enormous growth is through improvements to the country’s aviation infrastructure. This sub-region is expected to take delivery of nearly 1,200 aircraft by 2028, 76% of which are for single-aisle, narrowbody airplanes. RPK traffic will grow at 7.5% annually during this period, spurred by tremendous growth in India’s middle-class, and its associated increase in disposable income. With half of India’s population under the age of 25, coupled with an expected middle-class population of 600 million by 2025, a steady supply of new and repeat customers will eagerly await the growing fleets of the country’s current and yet-to-be-formed airlines. A few of the LCC carriers in South Asia at the moment are Spicejet, IndiGo, Air India Express and Kingfisher Red. India’s carriers were, however, affected by the global economic slowdown, which meant several airlines had to re-evaluate their strategies, and continuing consolidation is likely among India’s airlines. Increased political stability and security in neighbouring Sri Lanka will also yield strong traffic growth to and from that country.

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Air travel within South Asia is expected to grow an amazing 8.7% per annum – a higher rate than that projected for internal China growth during the same period Oceania The economic growth of Australasia is largely driven by Australia and New Zealand. This sub-region’s GDP growth is forecast to be 2.9% annually through to 2028. RPK traffic growth is expected to rise 5.1% per annum during the same period. Over 650 new aircraft will be delivered to this sub-region, some 63% of which will be single-aisle, narrowbody airplanes. Singapore-based Tiger Airways launched an Australian subsidiary in 2007, which was possible due to liberalised ownership and operating agreements, which has injected additional competition into the Australian domestic market, in addition to homegrown LCCs Jetstar and Virgin Blue. AirAsia X has also added widebody non-stop LCC flights between Kuala Lumpur and the Gold Coast, Melbourne and Perth.

Meanwhile, the trans-Tasman market has long been liberalised and has served as a prototype for liberalisation between other country pairs in the Asia-Pacific region and beyond. The largest growth potential for Oceania for the foreseeable future will be increased non-stop links with points in South East Asia, including both widebody and narrowbody LCC services, depending on flight stage length. Australia and New Zealand have liberalised trade agreements with the ASEAN countries, facilitating further growth in air travel between these two sub-regions. The surge of LCC airlines in the Asia-Pacific region during the past 10 years has made an indelible impact on travel habits and tastes and countries that have embraced liberalised aero-political policies, most notably in the ASEAN countries and Australia/New Zealand, have reaped the benefits of increased air passenger volumes. The Jetstar–AirAsia alliance, which was announced in January 2010, is indicative of LCCs working across sub-regional lines in mutual cooperation to achieved increased cost savings and operational efficiencies. More mature markets like Japan and controlled ones, such as China, could be revitalised through increased liberalisation and acceptance of the LCC philosophy as a permanent fixture in intra-regional and international aviation. RN

About the author Mark Haneke is vice president of network and strategic planning at InterVISTAS Consulting, based in Vancouver, Canada. InterVISTAS Consulting is the Washington, DC representative for the Association of Asia-Pacific Airlines (AAPA).

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Changing the Game