LCCs must evolve as competition streams in. Sim Kok Chwee rounds up key players in the region

Starting in 2002 with Malaysia-based AirAsia, ASEAN countries were among the first to adopt the idea of low-cost carriers (LCCs) in Asia. Naysayers were quick to point out that the unbending bilateral air services agreement, low Internet penetration rates, a lack of secondary airports and consumers’ reluctance to purchase travel products online doomed the LCC enterprise to failure.

Still, one after another LCCs sprouted, and carriers sporting names such as Tiger, Lion, Nok (‘bird’ in Thai) and Firefly began roaming the skies. And not only have LCCs thrived, these carriers have also become game changers within the travel industry, altering the behaviour of consumers, hotels and full-service competitors.

Because of the brief but attractive airfare offers by LCCs, more travellers are taking short, impulse holidays to nearby destinations more frequently. Bottomline-conscious small and medium enterprises are even booking their executives on LCCs instead of full-service carriers, slashing their budget for regional travel.

LCCs circumvented the stumbling block of low Internet penetration rates by working with convenience stores and post offices to facilitate bookings and payments via their websites, while consumers are now more willing to peruse, purchase and pay for travel products online.

However, it remains to be seen if LCCs are ready to tackle the changes on the horizon as new challengers close in.

Marking territory

AirAsia has been the most aggressive in milking the first-mover advantage, acting quickly to establish footholds in Thailand, Indonesia, the Philippines and Japan. Last week, Philippines’ AirAsia announced that it intends to invest in the Zest Air Group by acquiring 49 per cent of common stock of Zest Airways and 100 per cent of Asiawide Airways. This will allow PAA, which currently operates out of Clark, to benefit from Zest Air’s operations out of the Ninoy Aquino International Airport  and its strong domestic network that feeds into international routes.

Shareholders of PAA will infuse funds to augment working capital. India is also the new apple of AirAsia’s eye, where it is currently working on a joint venture with the Tata Group to establish an LCC.

Similarly, Jetstar Airways created Jetstar Pacific in Vietnam and Jetstar Japan, with ongoing plans for a Jetstar Hong Kong in partnership with China Eastern Airlines.

Ever on the prowl, Tiger Airways set up Tiger Airways Australia and acquired stakes in Mandala Airlines of Indonesia and SEAir in the Philippines. The latter is awaiting regulatory approval for its submission to rebrand as Tiger Airways Philippines in the second quarter of 2013. The LCC is reported to be in talks with Golden Myanmar Airlines to get a foot in the door.

ASEAN now also boasts two, soon to be five, longhaul LCCs: AirAsia X, Scoot, Lion Air’s work in progress Batik Air, Cebu Pacific’s longhaul operation to the Middle East and PAL Express. Cebu Pacific will face direct competition from the latter (a rebranded AirPhil Express) when PAL Express adds a fleet of up to eight Airbus A330s with premium economy and economy class seats operating to Doha, Abu Dhabi, Dubai and Jeddah. While AirAsia X and Scoot have Australia and North Asia in the crosshairs for now, both – along with Batik Air – intend to add more longhaul destinations judging by their fleet expansion plans.

Scoot and Batik Air have ordered 20 and five Boeing 787 Dreamliners respectively, and AirAsia X has ordered 10 A350-900s. Cebu Pacific will become the first Filipino carrier to operate directly to Dubai when it launches daily flights on October 7, 2013.

Nevertheless, protectionism still rears its ugly head occasionally and, taken with other challenges, has resulted in a number of failed ventures. AirAsia took a hit in its foray into Vietnam and likewise, Tiger faced fierce resistance from local LCCs during its venture into South Korean airspace. Its plan to partner Thai Airways International for a Thai Tiger also crashed.

A clash of titans

Malindo Air, a joint venture between Lion Air and Malaysia’s National Aerospace & Defence Industries, will launch in March 2013 in a face-off between Indonesian and Malaysian aviation giants.

The new carrier will operate domestic, medium and longhaul services, beginning with flights to Sabah, Sarawak, Trichy, New Delhi, Hong Kong, Guangzhou and Shenzhen this year by deploying the six B737-900ERs it is set to receive, with business class and economy class seats.

By end-2013, Malindo expects to operate a dozen B737-900ERs and has 
bullishly predicted a 100-strong fleet within a decade. It is also slated to receive 
five B787 Dreamliners that were originally intended for sister carrier Batik Air.

The upstart will initially operate out of Kuala Lumpur International Airport, and shift to the new budget terminal KLIA2 when it opens in June. As the international arm of Lion Air, both airlines are expected to cross-feed into each other’s network.

Malindo is expected to pose a threat to the AirAsia group, which has hitherto faced little competition from Malaysian carriers. Sensing the possibility of a clash, AirAsia has indicated that it is open to, and even desirous of, a collaboration.

Competitors close in

Though ASEAN’s LCCs today compete strongly against their counterparts and full-service carriers, Asian competitors are pressing in on the region’s market.

Chinese and South Korean carriers such as Spring Airlines, Jin Air and T’way Airlines are dipping their toes into the ASEAN region, beginning with Bangkok. With East Asia fast becoming nesting grounds for new start-ups, the number of LCCs attempting to tap the ASEAN market can only soar.

Mihin Lanka from Sri Lanka also briefly experimented with flights to Bangkok and Singapore, though it currently only flies to Jakarta.

LCCs thrive in an environment of tight cost control and only those with the lowest cost will fly high. It is therefore unsurprising that four of them – AirAsia, Thai AirAsia, Jetstar Asia and Cebu Pacific – were among the first airlines in the world to receive new A320s with sharklet wingtips that promise greater fuel efficiency. Should ASEAN LCCs lose the momentum to innovate and embrace change, the very traits that made them rise within the region, then it’s game over.

For a closer look at our cheatsheet detailing the routes and aircraft models of South-east Asia, click on the thumbnail of the cheatsheet above

This article was first published in TTG Asia, March 22 – April 4, 2013 issue, on page 12-13. To read more, please view our digital edition or click here to subscribe.

On a small island, the dominance of any one market is being felt tenfold more.

China is now by far the number one market for the Maldives, and it is no longer seasonal. Last year, there were around 350,000 Chinese visitors. The next biggest market, Germany, is four times smaller, with about 80,000 pax.

Mainland Chinese travellers are everywhere now of course, but on a small island, their dominance is as conspicuous as the heat. European tour operators such as Devan Kevan, a director at Chic Locations UK, make no bones about the danger of having any one market dominating the mix.

“It’s not being racist, it’s a fact that when any nationality goes beyond 25 per cent of the mix, it becomes an issue. It’s up to each hotel which way they want to direct their business. We can only say how this might impact you; we would be wrong to just sit back and say this is not going to impact you.”

Asked what the impact was, Kevan noted that even the top 10 per cent of the China market would move out. “So you’re not going to lose just your Europeans and other Asians, but the real luxury Chinese travellers.

“We have notes on our website that the profile of the clientele has changed, but the hotels we’re working with in the Maldives have given us the assurance that they will limit the number of any nationality – Brits, Russians, Italians – so that none will dominate.”

Hotels are equally aware and a full force was at ITB wooing the European market in earnest. However, the eurozone debt crisis is not helping. Thomas Barguil, general manager of The Residence Maldives, which opened in April last year, said his target mix was 60 per cent Asian and 40 per cent European, but admitted: “Even that is a huge challenge. The older resorts themselves are trying to hang on to their loyal clientele, but they too find it difficult.

“It does have an effect on European clientele, but it’s happening all over the world. Their (the Chinese) buying power is high and we hoteliers have to survive.”

Badr-Eddine Rakmi, Banyan Tree Hotels & Resorts sales manager Maldives, said: “Markets like Spain and Italy won’t come back. The UK, France Germany still give us good numbers. We’re lucky to have a lot of repeaters and are striving for a good mix – no one likes to have one big of anything, but it is hard, especially for the new resorts.”

That does not stop the newcomers, including Dusit Thani Maldives, which opened September last year, from luring loyal guests of older resorts their way while building their own markets.

Said Dusit Thani Maldives general manager Desmond Hatton: “The response to the Maldives and to our resort at ITB has been extremely positive.

“New resorts always attract interest and, by offering real value and excellent service, we’ve been able to get a lot of clients from the German-speaking markets to switch to Dusit Thani Maldives.”

Hatton eyes an occupancy of 62 per cent and an ARR of US$700 for this year.

Banyan’s Rakmi observed that competition was intensifying. “As more projects come online, five stars are selling at four stars. Many Europeans and Japanese now stay at three- to four-star hotels but stay longer. The Chinese market is the one that can afford real luxury though the stay is shorter,” he said.

This article was first published in TTG Asia, March 22 – April 4, 2013 issue, on page 4. To read more, please view our digital edition or click here to subscribe.