Wirraway
8th Jun 2004, 16:24
Wed "The Business Times" (S/Pore)
Low-cost airlines catalyst for change
The major airlines must react quickly to fundamental shifts says, PETER HARBISON
WHILE everyone is focused on the low-cost airline (LCA) phenomenon, we are overlooking the much more fundamental upheaval that is going on around these changes.
Making the pie bigger: low-cost airlines can help stimulate greater traffic growth and increase opportunities for all
These changes are necessary to permit a real expansion of the LCA movement but in the process, they will also quickly transform the regulatory profile of the region.
That means much more rapid liberalisation and much greater opportunities for the major airlines too.
As a result of the changes, the Asia Pacific aviation industry has entered a massive transition phase. We are just starting to recognise that what is happening here is much more than an attack on the nature of the existing airlines by the remorseless low-cost model.
The old competitive rules are disappearing fast. The opening of aviation markets - in which low-cost operating models are one ingredient of a cocktail for rapid change - is forcing every airline and government in this region to think again.
Interestingly enough, this is not a one-way process. As always, Asia is sending a message back to the rest of the world too. We have imported a low-cost operational model which is essentially domestic. Now we are sending back a formula which works in international markets.
That's because something vitally important happened to the global aviation industry last month. Qantas announced it would establish a low-cost airline in Singapore. Why is that so important, with all the other things that are going on? By announcing that it will establish in Singapore, Qantas has shown how easy it is to 'adapt' the restrictive bilateral foreign ownership rules to permit third country operation.
In this context it is not important that it is a low-cost airline. More importantly, Qantas will be partnering with three local financial partners (including Singapore's investment company Temasek Holdings, but that's another story) - who will between them hold 50.1 per cent of the stock.
Thus Qantas is setting up what will be, for all practical purposes, a foreign subsidiary. In doing so it remains within the technical - or at least accepted - meaning of the bilateral requirement for 'substantial ownership and effective control' to be vested in nationals of the country. No other major carrier has previously established a foreign subsidiary carrier, without a local airline partner being involved. Qantas is in effect asserting a hybrid form of the right of establishment. There has been no suggestion by any of Singapore's neighbours that they will object to the new airline's designation. This could change the way the airline system works.
Singapore Airlines CEO, Chew Choon Seng, succinctly summed up these events by saying the Qantas-led Singapore LCA is a 'manifestation of the new competitive paradigm which SIA has to learn to compete with'.
All that's required for this to happen is a government like Singapore which - genuinely, not just technically, like the US - supports international aviation liberalisation. And an airline with investors who are prepared to support a foreign carrier.
But even this innovation owes a precedent to the low-cost movement. The cross-border joint venture model was pioneered earlier this year in Thailand by the star of Asia's low-cost revolution to date, AirAsia. This is an excellent case study of how low-cost airlines and liberalisation are working together. (The new Thai AirAsia is a Thai airline, with majority local ownership, but is effectively AirAsia, with some influential local financial investors).
But we are not only entering a new competitive paradigm. It is also a new high-growth paradigm.
The LCA model itself has the potential to unlock massive growth throughout Asia - and especially in China and India - which will be vital to the success of the fledgling low-cost scene in this region.
Nonetheless, when we look back in a couple of years, we will see that the wider (and in fact most far-reaching) feature of these new developments is the enormous acceleration of the liberalisation process in this region.
This will have a major effect also on the growth of network airlines.
The LCA phenomenon is the catalyst for this rapid change. The Qantas precedent should be a major eye-opener for every major airline - and airport - in the region. And globally.
The new generation of low-cost airlines in Asia represents a remarkable opportunity for national carriers, but incumbent operators are wrong in treating the low-cost emergents as a serious threat.
It is in fact a remarkable opportunity - once they are able to emerge from the state of denial which many of them have retreated to. The new low-cost, point-to-point thinking is already helping make complacent airlines much more efficient - which, by reducing their costs and prices and improving the airlines' customer targeting, will help them stimulate traffic growth well above forecast levels.
Low-cost airlines clearly are a catalytic force in the push for regional liberalisation. They are sure to become increasingly influential in terms of both airline restructuring and the pursuit of an effective government aviation policy.
But the major airlines are still in the box seat. Also, in the special nature of the Asia-Pacific market, still dominated by government regulation on international routes, the majors have the box seat in establishing their own low-cost subsidiaries.
In this, they have perhaps a year's headstart over the independents - the flag carriers will have first bite at the international routes available under bilaterals, they have no difficulty in rasing adequate funding, they can often rely on the parent airline's infrastructure (including aircraft and services) and do not have to face the usual public doubts affecting independent start-ups.
And they should take every effort to make the best of that opportunity.
The writer is director of the Sydney-based Centre for Asia-Pacific Aviation
==========================================
Tues "Asia Times Online" (Hong Kong)
Crowded Thai skies could call mayday
By David Fullbrook
BANGKOK - Thailand\'s airline boom looks set to bust with eight airlines, and possibly more to come, battling for passengers. Different models may not be enough to save carriers from collateral damage spilling over from other sectors in a crowded market where no-frills jostles with feeder and luxury carriers.
Last December, low-cost carriers took to Thailand\'s skies, sending prices tumbling. Budget Malaysian carrier AirAsia\'s ahead of schedule entrance, arm-in-arm with Shin Corp, the mighty communications conglomerate owned by Prime Minister Thaksin Shinawatra\'s family, forced Orient Thai to launch its low-fare division One-Two-Go ahead of time.
Nok Air, Thai Airlines\' new low-cost offshoot, promises to start flying trunk routes by July. In response, AirAsia, which operates small Boeing 737s like Nok, has added a few more routes, grabbing headlines, but One-Two-Go carries more passengers using larger Boeing 757s and 747s.
Air travel was up 23.2 percent in the first quarter of 2004 against the same quarter last year. Komsun Suksumrun, a Phatra Securities aviation analyst, expects airlines to sell 9 million to 10 million domestic tickets this year, against 7 million for 2003, and rising to 12 million in 2005.
"The impact is similar to what happened in other parts of the world. Demand has been growing through the year," says Komsun. "Down the road demand could grow even faster as AirAsia adds more services and Nok Air starts."
However, such growth may not be enough to support so many airlines. "Thailand has sufficient room to grow, but I\'m not sure the market can bear more than two or three true low-cost carriers. There may be room for one more, Nok Air perhaps. Beyond that, there will be a shakeout," says Ravindran Devagunam, an aviation consultant with Deloitte.
Komsun agrees, seeing worrying parallels with Singapore. "My big concern is a shakeout. With a market growing 25 to 30 percent, there is only room for two to three carriers, not five or six. I\'m afraid we could end up with too many airlines like Singapore."
Singapore hosts Singapore Airlines\' (SIA) subsidiaries Tiger Airlines and SilkAir, a Qantas Jetstar sibling, ValuAir, and Lion Airlines, Indonesia\'s leading private carrier, which runs a pseudo-hub. Even for wealthy Singapore, with plenty of visitors, five or six airlines may be a few too many for its 4 million residents.
Nok\'s launch could burst the bubble. "The shakeout might take place faster, depending on when Nok Air launches. There will probably be a shakeout within six to 10 months, with two or three entrants exiting the market," says Devagunam.
If not, tough competition from Thai Airways will. It is already competing fiercely with One-Two-Go, a response seen elsewhere in the region. "If you look at the AirAsia, ValuAir model, the minute ValuAir came out the mainline carriers cut prices to match," says Devagunam. "Will the likes of ValuAir be able to sustain that kind of price competition if they are not truly low cost?" he asks.
One-Two-Go is responding by trying to replicate the casual walk-up approach taken by bus companies. In the works: a smart card holding personal information and a photo, replacing tickets, boarding passes and cash. Passengers will use it to pay for tickets by buying credits at convenience stores. Cardholders will receive bonus credits, special offers and more. One-Two-Go gets a powerful marketing database.
However Orient/One-Two-Go is not prepared to destroy itself fighting a potentially unwinnable battle against well-connected AirAsia and Nok Air. Such concerns influenced it to select 757s, as they can easily switch to medium-haul lucrative Asian chartered and scheduled routes.
Airlines reveal Achilles\' heal
With an increasingly crowded market, Thai AirAsia may need to tweak its model to survive because according to Devagunam, "The AirAsia model from Malaysia may not be completely relevant." Meanwhile Nok\'s heritage may be its Achilles\' heal. Thai managers, often divided by squabbles, could turn on Nok if it steals traffic, rather than picking up travellers new to flying.
Other carriers may fall victim to collateral damage as travellers come to expect low fares on all routes, and tourists wise up and start booking no-frills airlines online before they depart. "The survivors will be those that know the model well and how to drive costs down. I don\'t have high hopes for Air Andaman, Bangkok Airways and Phuket Air," says Komsun.
Air Andaman is aiming to cut a niche by developing new routes and offering a quality, frills service, akin to JetBlue. PB Air, a small airline founded by the president of Boonrawd Brewery, continues to struggle on by focusing on secondary routes using comfortable new regional jets that come with high price tags, which make cutting fares difficult.
Phuket Air is turning to medium-to-long haul routes, including London, while maintaining domestic services with turboprop aircraft that, while cheap to operate, are traditionally unpopular with jet-loving Asians.
Bangkok Airways labels itself "Asia\'s boutique airline" to justify its high prices. Whether travellers will agree in the medium-term is questionable. Meanwhile, its Bangkok-Samui Island route, one of the world\'s highest yielding, is under threat. Upset that Bangkok Air is dragging its heels about opening up Samui airport, which it owns, to other airlines, the government has threatened to build a bigger airport on the island.
Separation distances make that unlikely. Meanwhile an airport on nearby Pha Ngan Island is being considered, with Phuket Air rumored to be lobbying hard for the rights. If that airport materializes, Bangkok Air will be in trouble, especially as its routes to other tourist destinations around the region face growing competition.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact [email protected] for information on our sales and syndication policies.)
============================================
Low-cost airlines catalyst for change
The major airlines must react quickly to fundamental shifts says, PETER HARBISON
WHILE everyone is focused on the low-cost airline (LCA) phenomenon, we are overlooking the much more fundamental upheaval that is going on around these changes.
Making the pie bigger: low-cost airlines can help stimulate greater traffic growth and increase opportunities for all
These changes are necessary to permit a real expansion of the LCA movement but in the process, they will also quickly transform the regulatory profile of the region.
That means much more rapid liberalisation and much greater opportunities for the major airlines too.
As a result of the changes, the Asia Pacific aviation industry has entered a massive transition phase. We are just starting to recognise that what is happening here is much more than an attack on the nature of the existing airlines by the remorseless low-cost model.
The old competitive rules are disappearing fast. The opening of aviation markets - in which low-cost operating models are one ingredient of a cocktail for rapid change - is forcing every airline and government in this region to think again.
Interestingly enough, this is not a one-way process. As always, Asia is sending a message back to the rest of the world too. We have imported a low-cost operational model which is essentially domestic. Now we are sending back a formula which works in international markets.
That's because something vitally important happened to the global aviation industry last month. Qantas announced it would establish a low-cost airline in Singapore. Why is that so important, with all the other things that are going on? By announcing that it will establish in Singapore, Qantas has shown how easy it is to 'adapt' the restrictive bilateral foreign ownership rules to permit third country operation.
In this context it is not important that it is a low-cost airline. More importantly, Qantas will be partnering with three local financial partners (including Singapore's investment company Temasek Holdings, but that's another story) - who will between them hold 50.1 per cent of the stock.
Thus Qantas is setting up what will be, for all practical purposes, a foreign subsidiary. In doing so it remains within the technical - or at least accepted - meaning of the bilateral requirement for 'substantial ownership and effective control' to be vested in nationals of the country. No other major carrier has previously established a foreign subsidiary carrier, without a local airline partner being involved. Qantas is in effect asserting a hybrid form of the right of establishment. There has been no suggestion by any of Singapore's neighbours that they will object to the new airline's designation. This could change the way the airline system works.
Singapore Airlines CEO, Chew Choon Seng, succinctly summed up these events by saying the Qantas-led Singapore LCA is a 'manifestation of the new competitive paradigm which SIA has to learn to compete with'.
All that's required for this to happen is a government like Singapore which - genuinely, not just technically, like the US - supports international aviation liberalisation. And an airline with investors who are prepared to support a foreign carrier.
But even this innovation owes a precedent to the low-cost movement. The cross-border joint venture model was pioneered earlier this year in Thailand by the star of Asia's low-cost revolution to date, AirAsia. This is an excellent case study of how low-cost airlines and liberalisation are working together. (The new Thai AirAsia is a Thai airline, with majority local ownership, but is effectively AirAsia, with some influential local financial investors).
But we are not only entering a new competitive paradigm. It is also a new high-growth paradigm.
The LCA model itself has the potential to unlock massive growth throughout Asia - and especially in China and India - which will be vital to the success of the fledgling low-cost scene in this region.
Nonetheless, when we look back in a couple of years, we will see that the wider (and in fact most far-reaching) feature of these new developments is the enormous acceleration of the liberalisation process in this region.
This will have a major effect also on the growth of network airlines.
The LCA phenomenon is the catalyst for this rapid change. The Qantas precedent should be a major eye-opener for every major airline - and airport - in the region. And globally.
The new generation of low-cost airlines in Asia represents a remarkable opportunity for national carriers, but incumbent operators are wrong in treating the low-cost emergents as a serious threat.
It is in fact a remarkable opportunity - once they are able to emerge from the state of denial which many of them have retreated to. The new low-cost, point-to-point thinking is already helping make complacent airlines much more efficient - which, by reducing their costs and prices and improving the airlines' customer targeting, will help them stimulate traffic growth well above forecast levels.
Low-cost airlines clearly are a catalytic force in the push for regional liberalisation. They are sure to become increasingly influential in terms of both airline restructuring and the pursuit of an effective government aviation policy.
But the major airlines are still in the box seat. Also, in the special nature of the Asia-Pacific market, still dominated by government regulation on international routes, the majors have the box seat in establishing their own low-cost subsidiaries.
In this, they have perhaps a year's headstart over the independents - the flag carriers will have first bite at the international routes available under bilaterals, they have no difficulty in rasing adequate funding, they can often rely on the parent airline's infrastructure (including aircraft and services) and do not have to face the usual public doubts affecting independent start-ups.
And they should take every effort to make the best of that opportunity.
The writer is director of the Sydney-based Centre for Asia-Pacific Aviation
==========================================
Tues "Asia Times Online" (Hong Kong)
Crowded Thai skies could call mayday
By David Fullbrook
BANGKOK - Thailand\'s airline boom looks set to bust with eight airlines, and possibly more to come, battling for passengers. Different models may not be enough to save carriers from collateral damage spilling over from other sectors in a crowded market where no-frills jostles with feeder and luxury carriers.
Last December, low-cost carriers took to Thailand\'s skies, sending prices tumbling. Budget Malaysian carrier AirAsia\'s ahead of schedule entrance, arm-in-arm with Shin Corp, the mighty communications conglomerate owned by Prime Minister Thaksin Shinawatra\'s family, forced Orient Thai to launch its low-fare division One-Two-Go ahead of time.
Nok Air, Thai Airlines\' new low-cost offshoot, promises to start flying trunk routes by July. In response, AirAsia, which operates small Boeing 737s like Nok, has added a few more routes, grabbing headlines, but One-Two-Go carries more passengers using larger Boeing 757s and 747s.
Air travel was up 23.2 percent in the first quarter of 2004 against the same quarter last year. Komsun Suksumrun, a Phatra Securities aviation analyst, expects airlines to sell 9 million to 10 million domestic tickets this year, against 7 million for 2003, and rising to 12 million in 2005.
"The impact is similar to what happened in other parts of the world. Demand has been growing through the year," says Komsun. "Down the road demand could grow even faster as AirAsia adds more services and Nok Air starts."
However, such growth may not be enough to support so many airlines. "Thailand has sufficient room to grow, but I\'m not sure the market can bear more than two or three true low-cost carriers. There may be room for one more, Nok Air perhaps. Beyond that, there will be a shakeout," says Ravindran Devagunam, an aviation consultant with Deloitte.
Komsun agrees, seeing worrying parallels with Singapore. "My big concern is a shakeout. With a market growing 25 to 30 percent, there is only room for two to three carriers, not five or six. I\'m afraid we could end up with too many airlines like Singapore."
Singapore hosts Singapore Airlines\' (SIA) subsidiaries Tiger Airlines and SilkAir, a Qantas Jetstar sibling, ValuAir, and Lion Airlines, Indonesia\'s leading private carrier, which runs a pseudo-hub. Even for wealthy Singapore, with plenty of visitors, five or six airlines may be a few too many for its 4 million residents.
Nok\'s launch could burst the bubble. "The shakeout might take place faster, depending on when Nok Air launches. There will probably be a shakeout within six to 10 months, with two or three entrants exiting the market," says Devagunam.
If not, tough competition from Thai Airways will. It is already competing fiercely with One-Two-Go, a response seen elsewhere in the region. "If you look at the AirAsia, ValuAir model, the minute ValuAir came out the mainline carriers cut prices to match," says Devagunam. "Will the likes of ValuAir be able to sustain that kind of price competition if they are not truly low cost?" he asks.
One-Two-Go is responding by trying to replicate the casual walk-up approach taken by bus companies. In the works: a smart card holding personal information and a photo, replacing tickets, boarding passes and cash. Passengers will use it to pay for tickets by buying credits at convenience stores. Cardholders will receive bonus credits, special offers and more. One-Two-Go gets a powerful marketing database.
However Orient/One-Two-Go is not prepared to destroy itself fighting a potentially unwinnable battle against well-connected AirAsia and Nok Air. Such concerns influenced it to select 757s, as they can easily switch to medium-haul lucrative Asian chartered and scheduled routes.
Airlines reveal Achilles\' heal
With an increasingly crowded market, Thai AirAsia may need to tweak its model to survive because according to Devagunam, "The AirAsia model from Malaysia may not be completely relevant." Meanwhile Nok\'s heritage may be its Achilles\' heal. Thai managers, often divided by squabbles, could turn on Nok if it steals traffic, rather than picking up travellers new to flying.
Other carriers may fall victim to collateral damage as travellers come to expect low fares on all routes, and tourists wise up and start booking no-frills airlines online before they depart. "The survivors will be those that know the model well and how to drive costs down. I don\'t have high hopes for Air Andaman, Bangkok Airways and Phuket Air," says Komsun.
Air Andaman is aiming to cut a niche by developing new routes and offering a quality, frills service, akin to JetBlue. PB Air, a small airline founded by the president of Boonrawd Brewery, continues to struggle on by focusing on secondary routes using comfortable new regional jets that come with high price tags, which make cutting fares difficult.
Phuket Air is turning to medium-to-long haul routes, including London, while maintaining domestic services with turboprop aircraft that, while cheap to operate, are traditionally unpopular with jet-loving Asians.
Bangkok Airways labels itself "Asia\'s boutique airline" to justify its high prices. Whether travellers will agree in the medium-term is questionable. Meanwhile, its Bangkok-Samui Island route, one of the world\'s highest yielding, is under threat. Upset that Bangkok Air is dragging its heels about opening up Samui airport, which it owns, to other airlines, the government has threatened to build a bigger airport on the island.
Separation distances make that unlikely. Meanwhile an airport on nearby Pha Ngan Island is being considered, with Phuket Air rumored to be lobbying hard for the rights. If that airport materializes, Bangkok Air will be in trouble, especially as its routes to other tourist destinations around the region face growing competition.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact [email protected] for information on our sales and syndication policies.)
============================================