Scramble for the budget pie

“GO budget” seems to be the gold-rush message for Asia-Pacific carriers. There has been a slew of news supporting the euphoria to dig into a growing lucrative market. While existing budget carriers are competing to extend their wings further and wider, new ones continue to enter the arena (even as some came and went). Full-service airlines that used to turn their nose up at the budget market have also decided they can no longer stay out of the action.

Jetstar and AirAsia are two examples of budget incumbents that have ambitious plans.

Jetstar, a subsidiary of Qantas, is increasing flights to China and Vietnam and investing US$500 million (S$604 million) in fleet expansion, hoping to operate more than 3,000 weekly flights to over 60 destinations in 17 countries by the end of the year.

Malaysia’s AirAsia announced recently a joint venture with All Nippon Airways (ANA) to set up Air Asia Japan, which will be based in Tokyo’s Narita Airport to serve both domestic and international routes connecting China, Taiwan and South Korea. ANA had already earlier formed another budget carrier named Peach Aviation with Hong Kong-based First Eastern Investment Group. AirAsia too already has similar joint ventures in Thailand, Vietnam and the Philippines, and operates budget long-haul under the AirAsia X banner flying from Kuala Lumpur to as far as Paris and London.

Not to be outdone, Qantas has decided to form a budget joint-venture with Japan Airlines and Mitsubishi Corporation – to be named Jetstar Japan.

Top of the news is Singapore Airlines (SIA)’s decision to start a fully-owned budget subsidiary although it already has a 32.9 per cent stake in Tiger Airways.

According to International Air Transport Association (Iata), Asia-Pacific is the only region where demand is expected to outstrip capacity, and budget carriers will be the main driver of that growth.

In line with the forecast, Singapore Changi Airport for one reported passenger movements of budget carriers growing 25.2 per cent for the first six months of the year, compared to 6.6 per cent by full service airlines. One in four passengers arrived or departed on a budget carrier. The authorities are expecting budget carriers to perform even better in the second half of the year.

AirAsia chief Tony Fernandes said in a BBC report: “Aviation is far from reaching a saturation point in Asia. There is definitely space for new players and for the expansion of existing ones.”

However, the optimism is only the obvious half of the story.

Asia-Pacific budget airlines are comparatively young. The large market potential offered by China has yet to be fully tapped, and as skies become more open across the region, opportunities abound. In 2007, Japan embarked on an “Asian Gateway Initiative” that relaxed restrictions on capacity and ports of call, signing agreements with Korea, Thailand, Macau, Hong Kong, Vietnam, Malaysia and Singapore. Other countries in the widely disparate region have also become more open to competition to meet the rising demand, which is expected to escalate when Asean Open Skies kicks in by 2015.

Yet Cathay Pacific Airways, the region’s most profitable airline, is resisting the temptation to follow in the footstep of archrival SIA, and would be introducing premium economy instead. Also, Virgin Blue rebranded as Virgin Australia is shedding its budget identity for a more upmarket image, eyeing not just the leisure but also the corporate market as it ventures into the long haul.

This is where the other half of the story reflects a less sanguine picture – that of an industry still struggling to stabilize after 2009 as Iata ever so often keeps revising its forecast. The original western budget model is changing its form as the incumbents become ambitious and more aggressive, as new upstarts enter the competition and as full-service airlines feel the threat of the market shifting downwards. Budget carriers are no longer content with serving only remote destinations, operating the short haul of no more than four hours, catering to cost-conscious leisure travellers and competing with land transport (as in Europe and the United States but less a cogent factor in this part of the world except in large densely populated land masses like China and perhaps Japan.)

The budget market used to be distinct from that of full-service airlines, but today the competition has crossed over. In Europe, Easyjet reported its revenue increasing by 23 per cent for the three months to June partly attributed to a new strategy of attracting business customers. In Asia-Pacific, Jetstar has introduced business class.

SIA’s budget decision signals an inevitable transformation of the aviation landscape as full-service airlines act to protect their turf and perhaps hopefully beat budget carriers at their own game. Reporting a tumble of Group’s profit by 82 per cent and the airline itself incurring a loss for the first quarter of FY 2011/12, SIA recognizes it needs new initiatives – although strictly this late decision is not exactly new considering how the writing has long been on the wall – to recapture its leadership position. (See “What could be ailing Singapore Airlines?” Aug 9, 2010). The move nonetheless demonstrates some diversion of policy that is already evident in SIA’s greater involvement in the management of Tiger Airways (See “Tiger Airways’ future hangs in the balance”, Aug 12, 2010). The competition is not what it seems. Full-service airlines are not only concerned about the encroachment of budget carriers on their turf but also how their full-service rivals are working with budget offshoots to retain or increase market share of the overall aviation pie. The competition is not as clearly defined as it used to be, as the line between budget and full-service begins to blur. A new hybrid model may evolve, but that is not going to influence significantly the choice of the travelling public, who will decide not between budget and full-service (or yet another classification in the nomenclature), but between airline A and airline B – whichever one offers the best value for their money.

Come to think of it, in reality the game has not changed. It has come a full circle back to the basics.

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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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