Budget carriers drive the competition

IT looks like the way to fly in the present climate – to take advantage of the growing popularity of budget air travel, as evidenced by the major airlines in the Asia-Pacific region scrambling to set up budget carriers under their wings.

Qantas has ambitious plans to grow Jetstar as a long-haul budget carrier. Chief executive Alan Joyce of the Australian flag carrier hoped “to successfully expand our footprint to new markets throughout Asia.”

Singapore Airlines (SIA) is a major shareholder of Tiger Airways, which is actively increasing its presence beyond Southeast Asia in Australia, India and China.

Thai Airways International, which already owns a budget carrier – Nok Air, which flies domestic services – has entered into an alliance with Tiger Airways to set up a second budget carrier. The new carrier, Thai Tiger Airways, will operate regional routes out of Bangkok. Thai Airways president Piyasavasti Amranand said: “If we don’t do anything, our market share will decline further.”

Following on the heel of the Thai Tiger announcement, All Nippon Airways said it would like to set up a budget carrier jointly with a foreign partner.

Not to be left out of the game, rival Japan Airlines now announced it would also set up a budget carrier.

The motivation is not so much the apparent pull of profitability of the no-frill business as the push to preserve one’s market share, as recognized by Mr Piyasavasti. Budget carriers are beginning to present a real threat to the major carriers as the market shifts downward in a price-sensitive economy following the recent global recession.

Full-service airlines can no longer boast they are catering to a different market and are forced to recognize that there is but only one market that is offering the customers more choices, and that this same market is susceptible to the temptations of much lower fares. Thus, setting up a budget carrier under their wings is a simple strategy of retaining the business within the family.

It is, however, not something new. Other airlines in Europe and America have tried and given up – Go by British Airways, Ted by United Airlines and Song by Delta Airways as some examples. This being the experience, the question is: Is this strategy sustainable in the Asia-Pacific region?

There are positive indicators that the budget air travel business will continue to grow – the huge potential presented by Chinese and Indian markets, more liberal regional aviation policies with full implementation of Asean Open Skies by 2015, and new destinations yet to be adequately linked.

Budget carriers backed by strong parent airlines are likely to grow while independent budget carriers may face stiffer competition. There will be hurdles – the continuing uncertainty of the global economy, concerns about rising fuel costs, pilot shortages and market saturation despite the optimistic growth forecasts as more carriers enter the arena. Some budget carriers may grow beyond their capability and become victims of their success. In the end, a few of them will emerge larger and stronger while others fall out.

However, while parent airlines celebrate the success of their budget offshoots, the strategy may yet deliver an ironic twist. The budget offshoot may turn out to be the monster baby that grows at the expense of the parent airline, which, by actively driving the competition in the wings, may well be perpetuating the market downshift from premium to budget instead of working at market recovery.

Much also depends on how the parent airlines and their budget offshoots complement or compete with each other. Some experts have questioned the wisdom of Qantas and Jetstar competing with each other on some routes as it does not necessarily work out to an additional slice of the pie.

Interestingly, Cathay Pacific Airways – one of the region’s key players – has not announced any plan of setting up a budget carrier. It is, however, supported by subsidiary airline Dragon Air with spokes from Hong Kong into the lucrative China market. Really, does it even need to include a budget carrier in its strategy? Besides, it has seen the failure of compatriot Oasis Airlines and neighbor Macau’s Viva Macau Airlines. An added risk is that going budget on the long-haul is still an untested ground.  

Besides budget carrier Tiger Airways, SIA is also supported by subsidiary airline SilkAir, which started operations as Tradewinds to destinations outside the SIA network, then competed with the parent as it grew, and has since switched back to the complementary mode.

Like most things in life, the aviation business is apt to move in circles. The day is already in sight when we are back to where we began – it does not matter if it goes by the name “budget” or “full-service”, it is the best bang for the buck that will seal the deal.

Also published in Airways Aviation News.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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