Flag carriers join battle for low-cost sector

[June 02, 2011]  KUALA LUMPUR, Malaysia (AP) -- Three Asian flag carriers have announced plans to set up new low-cost airlines, jumping on the budget airline bandwagon as their cheap and cheerful rivals grab an ever bigger share of passengers and make inroads into the long-haul business.

The region's full-service carriers have rebounded from the global economic downturn. But they are in a dogfight with each other for lucrative premium-class passengers while low cost airlines like AirAsia and Qantas-owned Jetstar aren't ceding any of the ground they gained from aggressive expansion during the recession when cheap flights gained extra appeal.

Now, national flag carriers are increasingly deciding that if you can't beat them, join them. Some analysts say that shows the traditional airlines are finally facing up to the major strategic challenge that has been looming for the past decade: the incursion of low-cost carriers into short-haul flights and, more recently, into bread-and-butter long-haul routes -- flights longer than 6 hours.

"Ten years ago, low-cost carriers only accounted for one percent of the market" in Asia, said Brendan Sobie, analyst at the Sydney-based Centre for Asia Pacific Aviation.

"Five years ago, they accounted for about nine percent. This year, they will account for almost 20 percent," he said, predicting the figure could double within the next decade.

The proliferation of budget airlines, and their new moves into intercontinental flights, spells good news for travelers: increased competition will further drive down air fares as the line between low cost and full-service airlines becomes increasingly blurry.

But it will also mean an even tougher fight to stay profitable for both budget and regular carriers as they grapple with high fuel costs. The International Air Transport Association has forecast Asia-Pacific Airlines to earn combined profits of $3.7 billion this year, down from $7.6 billion in 2010.

In Malaysia, budget airlines account for nearly half of seat capacity, in Singapore, they account for 22 percent and in Thailand about 17 percent, eating into the business of flag carriers in the three Southeast Asian countries.

Yet, it came as a surprise to the industry when Singapore Airlines Ltd. -- one of the world's most profitable carriers -- announced last month plans to set up a budget airline to operate medium and long-haul routes next year.

The move follows the appointment of new management this year and is a major gamble for the national airline, which relies heavily on business and first-class travelers who make up a small percentage of seats but account for up to 40 percent of revenue. It will be only the second flag carrier to launch a low-cost unit after Qantas Airways Ltd.

"It is a defensive move in a difficult market," said Rigan Wong, analyst at Citigroup Inc. in Hong Kong.

Singapore Airlines already owns a third of low-cost carrier Tiger Airways, which flies short-haul routes. It also owns SilkAir, which occupies a niche between premium and low cost for medium-haul flights. Singapore Airlines will be able to cater to travelers it currently doesn't reach by adding a budget long-haul airline, Wong said.

Singapore Airlines hopes to echo the success of AirAsia X, which started in 2007 and became profitable just three years later with flights to 15 cities in Asia, Australia, Europe and the Middle East.

While route details are unknown, CAPA said Singapore Airlines could target fast growth markets in China, India and Europe in a direct challenge to AirAsia X, which is partly owned by AirAsia and Richard Branson's Virgin Group, and JetStar.

Elsewhere in Asia, other flag carriers are only just getting around to venturing into the low cost approach to short-haul routes.

In Japan, All Nippon Airways is to tie-up with Hong Kong-based First Eastern Investment to set up the country's first budget carrier. Peach Aviation is expected to start flights in March 2012, offering fares on short-haul international routes at 50 percent lower than current prices.

Thai Airways has also approved plans for a wholly owned budget carrier to operate two to three hour flights from Bangkok by early 2012. It has also been trying to form a venture with Singapore's Tiger Airways but resistance from Thai regulators and other hurdles may end up scuttling the long-delayed plan.

"In today's business, we cannot survive in the long run if we do not compete at every level. We have lost huge opportunities by not having a budget airline for two years now, so it is high time to get things moving fast now," Thai Airways chairman Ampon Kittiampon said last month, according to Thai media reports.

Analysts said more long-haul airlines aimed at travelers on a tight budget are likely to emerge in Asia, with plans in the pipeline by Indonesia's privately owned Lion Air and Japan's Skymark. Jetstar, which flies from Singapore to Australia and New Zealand, plans to begin flights to Europe and North Asia.

Outside Asia, CAPA said Air Canada is seeking approval for a proposed long-haul low-cost carrier, but success in the trans-Atlantic market is uncertain following the collapse of Canadian-British carrier Zoom. After seven years, Zoom file for bankruptcy in 2008 blaming rising oil prices.

Citigroup's Wong says low-cost carriers flying long-haul routes will in particular cause changes in the airline industry.

It may see full-service carriers cutting fares on long-haul routes in attempt to squeeze out budget airlines. Some may also adopt the low-cost model of giving customers the choice to pay for the additional services they want such as food and in-flight entertainment, he said.

"Until full-service carriers respond more aggressively to the competition, low-cost airlines may continue to build market share gains in the long-haul segment and generate good profits," Wong said.

[Associated Press; By EILEEN NG]

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