A low-cost carrier or low-cost airline is an airline that generally has lower fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the airline may charge for extras like food, priority boarding, seat allocating, and baggage etc.
The term originated within the airline industry referring to airlines with a lower operating cost structure than their competitors. While the term is often applied to any carrier with low ticket prices and limited services, regardless of their operating models, low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares.
In due course, some airlines have actively sought to market and advertise themselves as low-cost, budget, or discount airlines while maintaining products usually associated with traditional mainline carriers services which often result in increased operational complexity.
Among these products which tend to increase complexity to reduce efficiency are preferred or assigned seating, catering other items rather than basic beverages, differentiated premium cabins, satellite or ground based wi-fi internet, and in-flight audio video entertainment. As such by advertising themselves as low-cost, this branch and category of airlines seek to gain a competitive marketing advantage over other similarly priced air transportation carriers products; even though in actuality fare prices for the passenger may be parallel to that of other airlines.
While tour and package operators have been offering lower-priced, lower frilled traveling for a large part of modern airline history, not until during the post Vietnam War era did this business model really escalate and take off. Through various ticket consolidators, charter airlines and innovators in low frills airline business such as Channel Airways and Court Line, the traveling public had been conditioned to want to travel to new and increasingly further away and exotic locations on vacation, rather than short-haul trips to nearby beach resorts or resorts.
The first low-cost airline was Southwest Airlines which started flying in 1971.
The first airline offering no-frills transatlantic service was Freddie Lakers Laker Airways, which operated its famous Skytrain service between London and New York City during the late 1970s. The service was suspended after Lakers competitors, British Airways and Pan Am, were able to price Skytrain out of the market.
In the United States, airline carriers such as America West Airlines which commenced operations after 1978, soon realized a cost of available seat mile advantage in relation to the traditional and established, legacy airlines such as Trans World Airlines and American Airlines.
Often this CASM advantage has been attributed, solely to the lower labor costs of the newly hired and lower pay grade workers of new start up carriers, such as People Express Airlines, ValuJet, Midway Airlines, and their like. However, these lower costs, can also be attributed to the less complex aircraft fleets, and less complex route networks these new carriers began operations with, as well as the vastly less costly and freshly trained labor force.
To combat the new round of low cost and start up entrants into the very competitive and deregulated United States airline industry, the mainline major carriers and network legacy carriers strategically developed no frills divisions within the main airlines brand and corporate structures. Among these were Metro Jet and Continental Lite. These so-called airlines within an airline however, proved to be very short lived, for the most part and a financial burden which were quickly disposed off when economic rationalization or competitive pressures subsided.
Story of Air Asia
Air Asia, as the second Malaysian National Airline, provides a totally different type of service in line with the nations aspirations to benefit all citizens and worldwide travellers. Such service takes the form of a no frills low airfares flight offering, 40%-60% lower than what is currently offered in this part of Asia. Their vision is Now Everyone Can Fly and their mission is to provide Affordable Airfares without any compromise to Flight Safety Standards.
Air Asia is Asias largest low-fare, no-frills airline and a pioneer of low-cost travel in Asia. Air Asia group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. Its main hub is the Low-Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA). Its affiliate airlines Thai Air Asia, Indonesia Air Asia, Air Asia Philippines and Air Asia Japan have hubs in Suvarnabhumi Airport, SoekarnoHatta International Airport, Clark International Airport and Narita International Airport respectively. AirAsias registered office is in Petaling Jaya, Selangor while its head office is at Kuala Lumpur International Airport.
Air Asia was established in 1993 and began operations on 18 November 1996. It was originally founded by a government-owned conglomerate, DRB-Hicom. On 2 December 2001 the heavily-indebted airline was bought by former Time Warner executive Tony Fernandess company Tune Air Sdn Bhd for the token sum of one ringgit (about USD 0.26 at the time) with USD 11 million (MYR 40 million) worth of debts. Fernandes turned the company around, producing a profit in 2002 and launching new routes from its hub in Kuala Lumpur, undercutting former monopoly operator Malaysia Airlines with promotional fares as low as MYR 1 (USD 0.27).
AirAsia operates with the worlds lowest unit cost of USD 0.023/ASK and a passenger break-even load factor of 52%. It has hedged 100% of its fuel requirements for the next three years, achieves an aircraft turnaround time of 25 minutes, has a crew productivity level that is triple that of Malaysia Airlines, and achieves an average aircraft utilization rate of 13 hours a day.
All scheduled Air Asia departures from Kuala Lumpur use the Low cost carrier terminal. AirAsia had abolished its fuel surcharges on November 2008, but, due to rising oil prices, the fuel surcharge was re-introduced in May 2011.
Fernandes was born on 30th April 1964 into a family that had no prior knowledge or
experience of business; his father was a physician from Goa (India) and his mother was a music teacher of Malaccan-Portuguese descent. In other words, Fernandes came from an Indian-Malaysian family of professionals; the new middle class that emerged in Malaysia from the 1960s. Like many other middle class families, the Fernandes had sufficient wealth to send Fernandes to study in England.
Fernandes, at the age of 12, went to London in 1976 to study at Epsom College and attended the London School of Economics in which he graduated in 1987 with a degree in accounting. In total, he spent some 11 years in London, a painful separation from his parents who could not afford to pay for his flights back to Malaysia. It was this experience, according to Brown that gave him an insight into the benefits of perhaps developing cheap international carriers. However, at this stage his career path did not take him into the airline business.
Upon graduation from the London School of Economics Fernandes took the normal route of working in accounting jobs. Fernandes worked briefly at Virgin Communications, a television division of the Virgin Group of companies. What did Fernandes learn from Virgin?
The main benefit was the experience of working in a global company, acquiring insights into the running of an international business, and developing an impressive resume which worked in his favour in being appointed to the position of Senior Financial Analyst at Warner Music International.
in London. At Warner, Fernandes showed strong business acumen. He started in 1989 as Senior Financial Analyst, and by 2001, when he resigned from Warner, he was the Vice President, ASEAN region. Within 12 years at Warner he was promoted four times that is on average he was promoted every three years.
Fernandes time at Warner Music was significant because it was during this period that Fernandes matured and transformed himself from being a mere accountant into a strategist with an analytical mind.
Fernandes ability to think strategically, and understand his environment from a macro perspective, was the reason why Fernandes felt compelled not to be part of Warners ill-fated merger with America Online Inc. in 2001. This incident was said to be the catalyst for Fernandes decision to switch careers after 12 years with Warner and begin his journey with Air Asia.
It was through Datuk Pahamin A. Rejab, the former secretary-general of the Malaysian Domestic Trade and Consumer Affairs Ministry that Fernandes came to meet with then Prime Minister, Tun Dr. Mahathir Mohamad in October 2001.
Instead of starting from scratch, Mahathir advised Fernandes to buy an existing airline instead. Air Asia, the heavily-indebted subsidiary of the Malaysian government-owned conglomerate, DRB-Hicom, was quickly losing money. Fernandes mortgaged his home and used his personal savings to acquire the company, comprising two ageing Boeing 737-300 jets and US$11 million (RM40 million) worth of debts, for one ringgit (about 26 US cents), and transformed it into an industry player.
Coming just after the September 11 attacks of 2001, everyone thought that Fernandes had gone crazy, predicting that the company would fail miserably. Yet, just one year after his takeover, Air Asia had broken even and cleared all its debts. Its initial public offering (IPO) in November 2004 was oversubscribed by 130 per cent.
Fernandes says his timing was in fact perfect after 11 September 2001, aircraft leasing costs fell 40%. Also, airline lay-offs meant experienced staffs were readily available. He believed Malaysian travelers would embrace a cut-rate air service that would save them time and money, especially in a tight economy. That was why he copied one of the worlds most successful no-frills carriers, Irelands Ryanair (which is in turn modeled after Southwest Airlines in the United States). Fernandes estimates about 50 per cent of the travellers on Asias budget airlines are first-time flyers. Before AirAsia, he estimated that only six per cent of Malaysians had ever travelled in a plane.
Strategies Adopted to Compete with Rivals
1. Single Class No Frills Service
As with most low-cost airlines, Air Asia operated a single class-service, without frills and at substantially lower prices: passengers are not allocated seats, do not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program points, or access to airport lounges. Air Asias aircraft are designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies and resulted in lower costs all around.
2. High Aircraft Utilization & Efficient Operations
Compared with other airlines, Air Asias usage of its aircraft and staff is more efficient. Such (high) efficiency and utilization means that the overhead and fixed costs associated with an aircraft are lower on a per flight basis. For example, seating configurations to Air Asias Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors.
In addition, Air Asias aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. Its point-to-point services enabled Air Asia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for Air Asias aircraft is lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes).
3. Single Aircraft Type
Operating a single aircraft type enabled Air Asia to have substantial cost savings: maintenance was simplified and cheaper, the spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. For instance, its large purchase of A-320s would make Air Asia one of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airlines profitability.
4. Low Fixed Cost
Air Asia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled Air Asia to reduce its overheads and investments in equipments substantially in the absence of fringe services.
As a result of its successful negotiations, Air Asias contractual lease charges per aircraft decreased by more than 60% over the years. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving Air Asia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airlines high safety and maintenance standards allowed Air Asia to procure rates that were favorable on its insurance policies.
5. Low Distribution Costs
By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), Air Asia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket).
6. Minimizing Personnel Expenses
As a high portion of costs was the salaries and benefits for its employees, Air Asia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled Air Asia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees productivity, as process efficiencies are improved. Air Asias employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards.
Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options). In addition, rather than an hourly pay scale for its pilots, Air Asia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
7. Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, Air Asia received regular coverage from media outlets. Air Asia managed to promote brand awareness without incurring high sales and marketing expenses. In all of his media appearances, Air Asia Group CEO Tony Fernandes always appeared wearing a red Air Asia baseball cap and his statements reinforcing Air Asias positioning to offer low prices generating media attention for the airline.
However, Air Asia also invested heavily where required Air Asias major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond its traditional regions. This exposed to the airline to eyeballs around the world. The sponsorship generated awareness for the airline amongst foreign travelers. This is especially important as a lot of tourists frequent south east Asia at different parts of the year whether it be for business or pleasure.
8. Use of Secondary Airports
Air Asia, as with most low-cost airlines, usually operated out of secondary airports which allowed Air Asia to charge lower fares, as operation costs were lower. Landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs.
9. Low fare of Indonesia-Malaysia trip
The fare for a Jakarta-Johor Baru trip costs Rp 100,000 whereas the fare is Rp 150,000 for a Bandung-Kuala Lumpur flight, and Rp 300,000 for a Surabaya-Kuala Lumpur trip. But this is nothing when compared to the airfare of a Jakarta-Kuala Lumpur air ticket from Malaysia Airlines available at travel agents for as much as Rp 1.4 million. Meanwhile, Lion Air on the same route, charged Rp 1.05 million. The low fare provided by Air Asia helps it open the Indonesia market. Due to this huge difference in the priced we can see how Air Asia has opened and monopolised the Indonesian market for itself.
10. Low fare of Singapore-Bangkok service
Air Asia will increase its services between Singapore & Bangkok by introducing a 2nd daily flight to its existing schedule. This recent development came barely a month after Thai Air Asia operations started its first international flight to Singapore in early February this year. Air Asia is offering its guests promotional fares to/from Singapore- Bangkok from SGD$23.99 (Rs.1055). It is much lower than the lowest fare SGD$56 (Rs.2461) offered by full-service carrier. This difference is crucial for Air Asia as Singapore is the Asia Pacific headquarters for many multinational corporations and therefore business travel would be inevitable.
11. Political connections
Air Asia holds 49% of Thai Air Asia with 1% being held by a Thai individual. The remaining 50% is held by Shin Corp. which is owned by the family of Thailands Prime Minister, Thaksin Shinawatra. Shin Corp. with its dominance of the Thai information and technology sector supports Air Asias Internet and mobile phone bookings facilities.
Shin Corp. allows subscribers of the Shin mobile phone flagship, Advanced Information Service, to reserve tickets through its short-messaging service (SMS). This is a huge competitive boost to the airline in this part of the world. Not only does Shin Corp have the financial muscle to aid Air Asia if need be but also help them from a strategic point of view. Overall its a win win situation for Air Asia. This allows Air Asia to dominate the Thai market.
12. Malaysian government support
The Malaysian government supported the establishment of Air Asia in 2001 to help boost the under-used Kuala Lumpur International Airport. Air Asias flights from Senai are meant to develop Johor into a transport hub to rival Singapore. Air Asia, therefore, can provide an alternative route to travel to Bangkok, by using Senai Airport in Johor Bahru, in southern Malaysia.
Although this is strategically advantageous to the Malaysian government in terms of revenue generated from the use of the airport, Air Asia stands to benefit as well due to its dominance of the low cost market. Visitors coming from the west may one day prefer Kuala Lumpur to Singapore as a transit hub. The opportunity is huge as the ultimate destination i.e. Bangkok attracts tourists and business travelers all year round.
13. Political Connections
Thai AirAsia is a join venture established by AirAsia with Shin Corp. Shin Corp. is owned by the family of Thailands Prime Minister, Thaksin Shinawatra, and about 900 million baht will be invested in Thai Air Asia over a five-year period. Shin Corp. oversees the finance and administration of Thai Air Asia while Air Asia shoulders the responsibility for marketing and operations. Shin Corp. has financial strength and supports AirAsia to grow.
14. Low cost Philosophy
To reinforce its low-cost structure, Air Asia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating in-flight ovens. Such cost saving measures enabled Air Asia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004.
Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labour, facilities and overhead costs, Air Asia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
Overcoming Challenges to Survive
1. Indonesian Habit
Preferences of Indonesian passengers are quite different from the concept of cheap air travel without extra service for the passengers (free snacks and drinks), and also their reluctance to bring light baggage. Air Asia prefers passengers with very light and minimum baggage. If this is the case, it may not before long face difficulties.
Indonesian domestic airline companies are able to provide value-added extras like food and beverages as part of their service to the passengers, although at a relatively higher cost. Air Asia will have to overcome this challenge if it wishes to maintain its position in the Indonesian market. Air Asia must be flexible with its strategy and possibly tailor it to the needs of the concerned market in order to gain an advantage.
2. Singapore government rejection
Initially, AirAsia wanted to start flights from the southern state of Johor, near Singapore. It was hoping to attract passengers by running a convenient bus service to the city-state. However, Singapore quickly quashed that idea. The Singapore government said it would not approve a bus link for Air Asia because it was not in her national interest, reflecting fears that Singapores Changi airport would lose business to Johors new Senai airport. This means Air Asia cannot abandon the use of Changi airport, and therefore has to incur a higher cost.
This is because Air Asia suffers due to delays faced at Changi airport. AirAsia finds it stuck between big planes, circling to wait for a slot to open up, which means extra fuel costs. Moreover, the SGD$21 (Rs.923) departure and security tax of Changi is too high for Air Asias low-cost operation. Air Asia had asked the Singapore government to waive the fees, however, a request that was not only rejected but also criticized.
Besides Singapore Bangkok, Air Asia now provides an alternative route to travel to Bangkok, by using Senai Airport in Johor Bahru, in southern Malaysia. Seeking to cater to the different markets, fares for Johor Bahru- Bangkok are generally 20 % lower in comparison to Singapore Bangkok.
AirAsia currently operate daily flights to Bangkok from Johor Bahru. However, the choice proved unpopular, as the route failed to attract Singaporeans because of the additional cost and inconvenience of having to travel in and out of Malaysia by road. All these affect Air Asia external growth. If it is to flourish in this lucrative part of the world Air Asia has to face the competition and adapt to the ground realities of the South East Asian countries.
3. Minimum air-fare rates
Air Asia faces challenges finding open takeoff and landing slots at opportune times, and Thailands regulation that sets minimum air-fare rates. Although Transport Minister Suriya Jungrungreangkit said the current minimum air-fare regulations will be scrapped to open up the market, he couldnt name a date when this will be done. This seems to be favoritism toward Thai Airways Internationals domestic operations, and affects Thai Air Asia to compete in the Thailand market.
4. Asias middle class growth
Low cost airlines are anticipated to have greater potential in Asia as there are many Asian cities with a population above one million people each as well as a rising middle class population. This growth of middle class in Asia provides a huge market potential for Air Asia to grow.
However, as the market is becoming larger, more airlines or new comers would like to get a piece of the action. For example, budget airlines, it is estimated, will capture at least 25% of Asias air travel market within next 10 years and a lot of that will be new, not diverted, traffic. Therefore, AirAsia will face more competitions at the same time.
Besides the low cost airlines, Air Asia still needs to compete with the conventional carriers. Although extra passengers of the low cost airlines will be coming from the new demand to be created by the low fares, the growth may not be entirely stolen from big flag carriers.
5. Actions of Changi International Airport(Singapore) and others
The growth of low cost airlines in south-east Asia has a significant effect on which airports will dominate the regional aviation market. Low cost airlines are seen as helping funnel more passengers to airport hubs. Therefore, there is a realization among regional governments that they need smashing airports and feisty carriers or they are going to miss out big time. Therefore, these governments are more willing to support low cost airlines.
For example, the Malaysian government supported the establishment of Air Asia in 2001 to help boost the under-used Kuala Lumpur International Airport, and Thai premiers Shin Corp. forms a join venture with AirAsia that would benefit Bangkoks new airport and create a new hub at Chiang Mai. Therefore, under this situation, it helps AirAsia grow in Asia.
Moreover, as there is a growth of several south-east Asian airports, this poses a challenge to the status of Singapores Changi airport as a regional aviation hub. These airports include Johors new Senai airport in southern Malaysia and Bangkoks new Suvarnabhumi airport. To maintain Changis position as the air hub in the region, Singapore is proposing a budget airline terminal at Changi and lower passenger taxes to attract low cost airlines. This helps AirAsia grow and lower the cost.
6. Actions of existing airlines
The existing airlines in south-east Asia have several actions to compete with AirAsia, for example, some have launched a low cost airline to fight with Air Asia.
Singapore Airlines launched a low cost airline subsidiary, Tiger Airways, in the second half of 2003, only months after the scheduled launch of ValuAir set up by one of its former executives.
Orient Thai Airlines launched a new low cost airline subsidiary, One-To-Go. One-To-Go operates with a fleet of six Boeing 757-200s and match any fares that Thai Air Asia offers. They also have the frequency and capacity to offer to their 13 domestic destinations. They also have, during the past two years, worked to improve operational efficiency, slashing unprofitable domestic routes, increasing flights on busy routes, strengthening yield management and controlling costs. All these make Air Asia face a huge competition.
Low cost airlines are anticipated to have greater potential in Asia as there are many Asian cities with a population above one million people each as well as a rising middle class population. It is time for AirAsia to exploit the potentials of affordable air travel by Asias growing middle class. Besides starting services to the Pearl River Delta in south China Air Asia can expand its services to the coastal cities in China.
Besides the growth of Asian middle class, the liberalization of aviation sector of India is another reason for Air Asia to open more Asian market. The Indian government has liberalized the aviation sector long dominated by the national carriers. Now, only a few low cost airlines, e.g. Indigo, Go Air and Spice Jet have launched their services there.
Moreover, the national carriers, Indian Airlines or Air India, despite their domination of the Indian skies, do not seem to be much interested in operating low-cost services. Air Asia has recently announced its arrival in India by tying with industrial giants Tata Group who incidentally pioneered aviation in the country.
Air Asia should put more effort to set up a pan-Asian low cost airline with Virgin Blue, which is a low cost carrier of Virgin Group serving Australia and New Zealand mainly. Virgin Blue has suggested it may extend services to south-east Asia. Therefore, setting up a join venture with Virgin Blue can help AirAsia to grow in Asia even further, and help Virgin Blue to extend services to south-east Asia. This partnership could bring synergy between the two airlines and carry the same advantages for Air Asia as with its partnership with Shin Corp. in Thailand.
A study by the Centre for Asia Pacific Aviation confirms that Asia continues to offer attractive conditions for the air transportation industry. With thirteen out of worlds top twenty-five major urban centres located in the Asia Pacific region and a rapidly increasing urbanization trends, the Asian air travel market is bound to continue to grow. Urbanization is highlighted as one of the key drivers for the growth in air travel. It is estimated that Asia would account for 30% of the world market by 2019, or one third of growth between now and then.
Low Cost Carriers in Asia
Over the last few years, lost cost carriers in Asia have been rapidly expanding and steadily eating into the market share of full service carriers. This trend shows no signs of abating as the regions LCCs (low cost carriers) continue to order new aircraft at ferocious rates. By global standards, Asian LCCs are relatively small, but their growth profile is more extreme. For example, Air Asia has nearly 300 aircraft on order and Indias Indigo has more than 200, Lion Air (a low-cost, but full service airline not listed in this ranking) has well over 100 in the pipeline, each with international intentions, including plans for cross-border joint ventures.
As the definition of LCC becomes more blurred, data in this area need to be looked at with some care thus for example, Virgin Blue/Virgin Australia would no longer describe itself as a low-cost carrier, having evolved its product, while Lion Air displays many of the low-cost characteristics. Low-cost operations still account for only a small proportion of the regions aviation activity relative to other regions. But this lower quantum should be viewed against the fact that most of the international LCC operations are confronted by bilateral constraints, in fact making the near-20% level impressive.
The overall market in Asia is also growing much faster than other regions. The total Asian passenger market is expected to grow at a rate of about 10% per annum, reaching about 900 million passengers (excluding China) by 2020. As LCCs continue to increase their share of this market, by about two percentage points per annum, they are poised to grow at rate of about 20% per annum. The 20% figure is feasible based on current order books and fleet plans. The LCC growth rate in Asia could even accelerate in the latter portion of this decade and early portion of next decade based on orders recently placed for new narrow body aircraft.
Asian LCCs account for a remarkable 65% (488 of 753) of the Airbus A320neos acquired by airline customers worldwide since Airbus launched the A320neo programme late last year (this figure includes MOUs and orders and is of the end of Jun-2011). Leasing companies have also so far committed to 276 A320neos, a large portion of which are expected to be placed with fast growing Asian LCCs. Not a single Asian full service carrier has yet ordered the A320neo (Garudas A320neo order is for its low-cost carrier unit Citilink). As Airbus has already sold all delivery slots for the A320neo until late 2018, the growth gap between Asias low-cost and full-service carriers on short/ medium-haul routes is likely to accelerate.
The A320neo is scheduled to enter service in the fourth quarter of 2015, giving its operators a 15% improvement in fuel burn compared with the current-generation A320. As a result, Asias low-cost carriers which have acquired the A320neo will be able to further reduce their already world-leading unit costs. This will widen the competitive advantage LCCs already enjoy and push down fares within Asia further, allowing LCCs to potentially capture all the growth in short-haul markets.
Asian full service carriers continue to place orders but these are predominantly for wide body aircraft which will be used on intercontinental routes. Within Asia, full service carriers are stuck in a position where ceding more market share to low-cost carriers is inevitable. It is possible that low-cost carriers could even control 50% of capacity within Asia sometime in the next decade. [pic]
At the same time Asia could overtake Europe and North America as the largest LCC market. This would not surprise Asias largest low-cost carrier group, Air Asia. The group already expects to grow its fleet to about 500 A320 equivalent aircraft, which would make it the second largest low-cost carrier group in the world after Southwest. Even the 200 A320neos ordered in Jun-2011 may be insufficient to meet Air Asias growth requirements. The company is now committed to adding aircraft at a fairly conservative rate of 13 to 20 per year during 2012-2020. Air Asia Group CEO Tony Fernandes has said the group will be able to support 36 deliveries per year once the pending IPOs at its Indonesian and Thai affiliates are completed.
The regions appetite for low fares remains largely unsatisfied. This is evident in the widening load factor gap between LCCs and full service carriers. Load factors at several Asian flag carriers have slipped in recent months into the 70% range, while most low-cost carriers are experiencing loads well above 80% and in some cases even above 90%. All three of the big Asian low-cost carrier groups Air Asia, Jetstar and Tiger are currently expanding at rates exceeding 20% per annum. Some low-cost carriers have seen their profits slip this year as it can be difficult for LCCs to pass on rising fuel costs through fare increases.
But LCCs have focused on improving ancillary revenues and load factors, allowing them to offset most of the increase in fuel costs. As long as fuel remains at or below its current level, Asias low-cost carriers should have a very profitable 2011 and outperform many of the regions larger full service carriers, in the process again expanding market share. While it is hard to predict profits over the long term, the outlook for low-cost carriers in Asia is generally rosy and their rapid growth is expected to generally be profitable.
The information for this project has been obtained from the following sources:
1) Airline Leader
4) Mayasian Journal of Media Studies
5) IBS Center for Management Research
6) Berg Consulting