Asia's skies are about to become more crowded. At least 10 new budget carriers are expected in the region by the end of next year, expanding fare choices for consumers but squeezing airline profit margins even more.
The growth in new routes is shifting east to highly congested and expensive centers such as Taiwan and Hong Kong, though Southeast Asia remains a lucrative market as more people turn to budget travel.
On Monday, Taiwan's China Airlines Ltd. said it would team up with Singapore's Tiger Airways Holdings Ltd. to launch Taiwan's first budget carrier, hoping to link neighboring tourist and business hot spots when it starts service in the fourth quarter of 2014.
TransAsia Airways Corp. in Taiwan is also planning its own low-cost airline, while two other budget operations are being launched in neighboring Hong Kong, a first for the Chinese city.
"Taiwan is in an ideal location for low-cost carriers because the flight time to most destinations in Southeast and Northeast Asia is within four hours," said Huang-Hsiang Sun, chairman at China Airlines. The carrier will own 90% of Tigerair Taiwan, with the rest to be held by Tiger.
Taiwan has been slow to embrace budget-airline travel because of a small domestic market, while earlier restrictions on air rights made it difficult for airlines to develop regional and international services.
The popularity of budget flights has forced many national carriers to slash fares to better compete against low-cost carriers.
In Southeast Asia, where bustling economies and thrifty passengers have kept budget airlines profitable, low-cost carriers account for more than 52% of air capacity, according to consultancy CAPA-Centre for Aviation.
That is more than double their share for all of the Asian-Pacific region. Fares between routes such as Singapore to Kuala Lumpur in Malaysia go for as low as US$20 on budget airlines, making the rates comparable with those of road-based transportation.
Faced with increased competition at home, established budget-airline brands in Southeast Asia have expanded business into more costly locations in East Asia such as Japan, while South Korean airlines have started their own budget ventures. The new low-cost airlines in Hong Kong and Taiwan reflect an extension of their eastward push.
But analysts and industry executives say that market still remains largely unproven, given the challenges of achieving scale alongside high airport fees and traffic bottlenecks. An executive at low-cost carrier Jetstar Japan Co. said earlier that ground-handling fees at the nation's airports are "several times higher" than those in Singapore, adding to the airline's cost burdens.
"Profit margins are very thin in East Asia because of high operating costs. Unless there's strong government support, it will be very difficult for budget airlines here to achieve high utilization rates and turnaround times for their planes in order to turn profitable," said Kelvin Lau, an airline analyst at Daiwa Securities. Adding to the constraints are the limited takeoff and landing slots at airports such as Hong Kong during daytime and evening peak hours.
But there is significant room for growth. In Hong Kong and Taiwan, budget airlines account for only 5% of available seat capacity, according to some market estimates, compared with about 30% to 35% in Singapore.
Budget carrier Hong Kong Express Airways Ltd. sold more than 200,000 seats in just two-and-a-half months since its launch, after the former full-service airline converted into the city's first short-haul budget airline.
"We've sold nearly 50% of our entire seat inventory for the winter season from November through March. That really shows that Hong Kong people are hungry for low-fare opportunities," said Andrew Cowen, deputy chief executive at Hong Kong Express. Fares between Hong Kong and Tokyo are selling for as low as 736 Hong Kong dollars (US$95) round trip, about one-fourth of what is being charged by premium carriers on the route.
Mr. Cowen said the difficulty of securing slots in Hong Kong and other airports because of congestion is a stumbling block. "One of the biggest constraints to us is the airports. We've obviously got congested terminals. We're having difficulties getting the slots that we need."
By contrast, many Southeast Asian airports have the capacity to handle much more budget-related traffic. At Kuala Lumpur's airport—home to AirAsia Bhd.—budget-airline flights often exceed those of full-service airlines. AirAsia has kept its costs low and stayed profitable despite rapid expansion and intense competition.
The eastward expansion among budget airlines is taking place even as they continue to ratchet up their presence in Southeast Asia. In Thailand, four new low-cost airlines are being launched, fueling more rivalry between the region's two biggest no-frills operators, Lion Air and AirAsia.
The Thai unit of Indonesian discount carrier Lion Air started operations last week, taking on the local operations of AirAsia. Scoot, the low-cost long-haul unit of Singapore Airlines Ltd., said Monday it will start a Bangkok-based carrier with local budget airline Nok Air, to be called NokScoot.
Two other Thai low-cost carriers are waiting in the wings, likely adding to the competition, analysts say.
"Competition will be intense. Consolidation is inevitable," said Brendan Sobie, an analyst at CAPA.
"The [low-cost carrier] groups in Southeast Asia have a lot of aircraft coming in and have a need to find new markets. Thailand is in some respects the easiest solution," he said.
Source: Wall Street Journal by Joanne Chiu and Gaurav Raghuvanshi
