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Asia’s budget airlines: Only fittest will survive

SINGAPORE — Asia’s skies are becoming more crowded as regional budget carriers ramp up capacity and launch new routes to exploit the growing demand for air travel.

Passenger growth in Asia is expected to add about 380 million travellers between 2012 and 2016 to 1.2 billion people. Photo: Bloomberg

Passenger growth in Asia is expected to add about 380 million travellers between 2012 and 2016 to 1.2 billion people. Photo: Bloomberg

SINGAPORE — Asia’s skies are becoming more crowded as regional budget carriers ramp up capacity and launch new routes to exploit the growing demand for air travel.

But as the dogfight for passengers intensifies, it looks increasingly likely that some airlines may struggle.

Mr Moshin Aziz, aviation analyst at Maybank, cautioned that only the fittest may flourish: “In this competitive environment only the big and efficient can survive and prosper. We will hear of smaller ones either going bankrupt or being bought over.”

Indonesia’s Batavia Air was the most recent regional budget airline casualty. It was declared bankrupt in January, weighed down by debt and after a deal for AirAsia to acquire it fell through. And the country’s Mandala Airlines was forced to stop flying in 2011 as it was also struggling to sustain its debt. Since then, an investment by Singapore’s Tiger Airways has given the Indonesian carrier a new lease of life.

Still, despite the headwinds, it is clear that there is plenty of growth potential for the region’s budget airlines: A recent report by the Centre for Aviation (CAPA) pointed out that low-cost carriers now account for 30 per cent of seat capacity in Singapore compared to virtually nothing a decade ago.

And across the whole of Asia, passenger growth is expected to add about 380 million travellers between last year and 2016 to 1.2 billion people, the International Air Transport Association forecast in December.

This trend is set to continue, Mr Aziz pointed out, with a relatively faster pace of economic growth in Asia resulting in the expansion of the emerging affluent class who want to take to the skies for both leisure and business. This, combined with Asia’s friendly regulatory environment and the relative youth of the budget segment compared to Europe and America, should mean the region’s low-cost airline industry has room to grow even more, he said.

Against this backdrop, budget carriers are positioning themselves to exploit the favourable conditions.

Indonesia-based Lion Air placed an eye-popping order for 234 planes earlier this year, Singapore’s Scoot is waiting for delivery of 20 Boeing 787s, and Tiger Airways recently announced plans to fly to new destinations in the Philippines and Indonesia.

As regional budget airlines expand, it is likely that demand will keep up, said Mr Michael Burns, Global Transport and Logistics Advisory Leader at PricewaterhouseCoopers, who nevertheless, cautioned that filling seats is not a guarantee of success.

“We are seeing that airline failures are less attributable to demand issues but much more to costs — whether they be rising fuel costs, operational fees and charges, or financing costs undertaken to grow fleet,” he said.

Still, with the price of tickets being a key factor when passengers are deciding which airline to fly, yields may come under pressure as competition intensifies.

That may force airlines to pay greater attention to other revenue generators, said Mr Brendan Sobie, Chief Analyst at CAPA.

“Ancillaries, such as food and entertainment charges, are a very important component of the LCC (lowcost carriers) model,” he said.

“As fares decrease, LCCs will need to try to increase their ancillaries in order to ensure they have sufficient total revenues to offset their costs.”

That is something that Singapore budget carriers are already embracing: Scoot is offering gourmet meals on medium-to-long haul flights to try to persuade passengers that its food offerings are worth paying for and as a way of differentiating itself from its competitors. And Jetstar was the first budget carrier in the world to offer tailored technology for iPads so that its passengers can rent an entertainment device with diverse offerings to keep them occupied.

Nevertheless, as competition intensifies in the region, Singapore’s budget carriers should benefit from the nation’s strategic location, reputation as a major air hub, strong governance and safety infrastructure, said Mr Burns.

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