Escalating fuel costs, plunging travel demand amid the global economic downturn, and last year's H1N1 flu crisis, all conspired against the region's full-service carriers (FSCs), causing many to cut routes and trim staff - or, in the case of JAL, to crash and burn under the weight of heavy debts.
JAL, although an extreme case, was not alone among Asia's premium carriers in struggling amid the global financial downturn. Singapore Airlines (SIA), the world’s largest airline by market value, last year reduced its capacity by 11%, delayed the delivery of eight new Airbus planes, slashed staff salaries and working hours - and still incurred losses of S$428 million (US$304 million) in the first six months of the fiscal year, representing the first back-to-back quarterly loss incurred by the top carrier in more than seven years.
Thai Airways also incurred heavy losses on lower passenger loads and top-level mismanagement, raising concerns that the once-proud national carrier could go the way of bankrupt JAL without a major overhaul of its operations. Indonesia's Garuda was forced to defer its plans last year to list on the stock exchange due to a declining financial performance.
Against that grim background, Asia's no-frills, low-cost carriers (LCCs) have used the global economic crisis as a golden opportunity to gain market share and consolidate their positions vis-a-vis premium airlines. That upbeat outlook was evident at an industry conference this month in Singapore, where several LCC senior executives spoke of record profits, ambitious expansion plans and potential stock market listings.
LCCs accounted for 15.7% of Asia's aviation market last year, or just under one in every six seats sold in the region, according to the Center for Asia Pacific Aviation. That was up from just over 14% in 2008 and continues the upward trend from the mere 1.1% LCC's accounted for in 2001. Those market gains, analysts say, have come at the direct expense of the region's premium airlines.
LCCs have done more than change the industry's underlying economics; they've reacted more quickly to changing consumer preferences and trends. When the global downturn hit in 2008, Asian travelers scaled back significantly on luxury seats and increasingly sought out the lowest fares.
Premium airlines, many burdened with rigid fixed-cost structures and high debts, were slow to respond to the shift and as a result lost out to nimbler LCC competitors. In part, that's because LCCs operate on a different set of economic and financial assumptions.
Tony Davies, chief executive officer of Singapore's recently listed Tiger Airways, says his airline has followed in the strategic footsteps of US hyper-market retailer Walmart: "[LCCs] are essentially retailers," he said. "Our business is to sell seats."
Like many regional LCCs, Tiger Airways has beaten down costs by eliminating frills, including on-board meals and on-the-ground ticketing counters. LCCs have traditionally flown routes of four or fewer hours, enabling them to use the same flight crew for return flights on the same day. That has allowed LCCs to hire fewer staff and avoid the significant expense of overnight accommodation for crew members.
Most LCCs also maintain comparatively streamlined fleets, with most deploying a single, fuel-efficient jet type, such as the Airbus 320 or Boeing 787. That's allowed them to save on maintenance, spare parts and training expenses. With such costs driven down, LCCs can charge substantially lower fares than premium airlines without incurring losses, especially in a crisis environment.
LCCs have also found creative ways to raise non-ticket-related income. Known on their balance sheets as "ancillary" revenues, certain LCCs have profited by unbundling products and services that allow passengers to pick and pay for what they want. Lim Kim Hai, executive chairman of Australia's Regional Express budget airline, refers to the unbundling process as "profits without the pain".
They can be collected simply by charging five times the cost for an optional on-board meal, or through more sophisticated tie-ups with the likes of insurance companies that allow LCCs to collect each time a passenger purchases travel insurance with their ticket.
LCC pioneer AirAsia recently established a special financial service and loyalty department to tap into the potential of tying up with banks and hotels to offer jointly issued credit cards, special hotel room rates and other travel-related services. "This way we earn our revenues and also nurture loyalty from our flyers," said AirAsia's department head Johan Aris Ibrahim.
New air frontiers
The International Air Transport Association (IATA), an industry body, said at the recent aviation conference in Singapore that the Asia-Pacific region had overtaken North America as the world's largest air travel market, with 647 million passengers in 2009. That was just slightly more than the 638 million people who flew on commercial flights last year in North America.
Asia's biggest market is China, but the Southeast Asian region also has great potential with its combined market of 600 million-plus people. Industry analysts note that a large percentage of the region's population has yet to travel on an aircraft and at current prices will probably never be able to afford a seat on a full-service airline.
This is the same underserved market segment that LCC executives claim has massive growth potential, especially if the region's per capita income rises as projected. When Malaysia's AirAsia pioneered regional budget travel in 2001, only 6% of Malaysians had flown on a plane. Under a "Now everyone can fly" marketing slogan, the budget carrier has frequently offered ticket prices lower than some bus fares.
"The LCCs have certainly changed the way people travel," said Kris Lim, associate director of the Pacific Asia Travel Association's strategic intelligence center in Bangkok. "They empower travel for more young people with limited travel budgets or simply less-affluent people who cannot afford to pay for full-service carriers."
The recent deregulation of Southeast Asia's skies has opened the industry to genuine price competition after decades of monopolistic collusion among national flag carriers. The Malaysia-Singapore route, for example, was only recently opened to competition after SIA and Malaysia Airlines dominated the route for over 35 years.
Duopolistic behavior resulted in one of the most expensive routes in the world for a 55-minute flight, with ticket prices routinely over US$400. LCCs now offer fares for a quarter that amount and with much higher frequency. AirAsia travels between Kuala Lumpur and Singapore around nine times per day.
Further market liberalization is on the way through Southeast Asia's so-called Open Sky Agreement, which will come into full effect by 2015 and is expected to benefit the region's LCCs. The agreement will allow regional air carriers to make unlimited flights to all 10 Association of Southeast Asian Nations (ASEAN) members and promises to boost intra-regional tourism, trade and investment among member countries - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
While the implementation of the agreement will no doubt encounter protectionist grumbles, industry analysts believe the trend towards deregulation is well on track. Singapore Transport Minister Raymond Lim this month called for a more level competitive playing field for the region's airlines. "A liberalized regime would also result in greater prospects for economic growth all round," he said.
Whether greater openness will lead to more aviation market entrants is still unclear, given the flagging fortunes of many premium airlines. A recent report from the Sydney-based Center for Asia Pacific Aviation predicts future industry consolidation among smaller players, many of which it predicts will be forced to merge or close as competition heats up.
"Aviation is a highly competitive industry and, not unlike in the banking sector, mergers or consolidations between LCCs are always a possibility due to the cutthroat competition," said Ng Sem Guan, an aviation analyst at the Kuala Lumpur-based OSK research.
For now, many LCCs are aggressively bidding to lure consumers, including higher-paying business travelers, away from their financially troubled premium peers. In that direction, Chong Pit Lian, chief executive officer of Jetstar Asia, ventures that LCCs' cheaper fares mean corporate travelers can fly more frequently to meet their global partners and send junior staff for more training and other exposure purposes.
Still others are bidding to break into premium fliers' once-exclusive domain of long-haul travel, including flights from Asia to Europe at unprecedented low fares. Last year, Malaysia’s AirAsia X introduced long-haul routes from the region to London for a fraction of what premium airlines charge.
If, as expected, other LCCs follow AirAsia X's long-haul lead, the increased competition will make it even more difficult for the region's indebted and loss-making premium carriers to make up lost ground, industry analysts say.
"There will always be a market for premium carriers for travelers who are willing to fork out more for better goods and services," said analyst Ng. "But at the end of the day the survival of airlines will ultimately depend on the management of their balance sheets."