Wirraway
15th Dec 2004, 12:18
Dow Jones
Wednesday December 15, 5:20 PM (Singapore)
OUTLOOK 05: Low-Cost Carriers Take Off; Asia New Frontier
By Lilly Vitorovich
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--With U.S. and European skies crowded with low-cost carriers, Asia is a sure bet as the next frontier for cheap and cheerful travel. But the question on the mind of investors is who will lead the pack.
A flurry of new airlines backed by existing full-service carriers including Thai Airways International PLC and Malaysian Airline System Bhd are likely to emerge, analysts say. Others will have the backing of new investors looking to replicate the success of Australia's Virgin Blue Holdings Ltd. and Ireland's Ryanair Holdings PLC.
Airlines in Asia are moving away from questioning whether low-cost carriers will succeed in the region to asking if they can afford to miss out on the opportunities, said Peter Harbison, managing director at the Center for Asia Pacific Aviation. "I think there will be more subsidiaries (of full-service carriers) coming into the market," he said.
However, investors looking at Singapore as either a base or travel destination should think twice because three low-cost carriers - Tiger Airways, ValuAir and Jetstar Asia - are already based in the city-state of 4 million people. Malaysia's first budget carrier, AirAsia Bhd, also operates seven flights a week to Singapore.
Overpopulating Singapore, a major hub for international air travel, with budget airlines would risk a brutal fare war and with fuel prices ever susceptible to volatile swings, the onus is on industry executives to do their homework if they plan on being around for the long haul.
Low-cost carriers with financially strong parents such as Tiger, which is 49%-owned by Singapore Airlines Ltd. , and Jetstar Asia, which is 49%-owned by Qantas Airways Ltd. have a better chance of outperforming their peers and surviving for the long term.
The two low-cost carriers should also benefit from their parents' solid bargaining power when it comes to fuel. Singapore Airlines has hedged about 40% of its fuel requirements at US$34 a barrel for the 12 months ending March 31, 2005, while Qantas has hedged 70% of its fuel at US$32 a barrel for the year ending June 30, 2005.
Critical Size Is Key
"The key thing will be critical size and I think the (low-cost) airlines to survive will need to have a solid base in terms of financial backing, hubs and routes," said Shaw Stockbroking analyst Brent Mitchell.
Australia's flag carrier, Qantas, recently joined the fray by launching its second low-cost carrier, Jetstar Asia, less than seven months after its first budget carrier Jetstar, which operates domestic routes.
Jetstar Asia has commenced a daily flight from Singapore to Hong Kong, and will shortly begin flying to Taipei in Taiwan, and Pattaya in Thailand. It wants to be the first low-cost carrier to fly to Surabaya in Indonesia, Shanghai in China, and Manila in the Philippines.
Qantas has been a little slow to enter the low-cost market in Asia but is working hard to catch up, according to DBS Vickers Securities analyst Chris Sanda.
"They're doing what they can as far as expanding much more aggressively than the others, which means that they're doing the right thing but at the same time they have a higher risk profile," he said.
While the Asian aviation market is ripe for low-cost carriers, investors are divided on how many will take off next year.
A Sydney-based transport analyst expects the number of players to more than double to 10 in 2005, with several others to emerge in subsequent years.
But Sanda, who covers the aviation sector in Singapore, isn't so sure. "Ten I think is a little bit optimistic...the market is already saturated."
AirAsia, which started services in 2001 with three Boeing 737-300s, has built up its fleet to 23. It is looking to buy 40 new aircraft in the near future to service new destinations that may include the Philippines, China and India.
Tiger recently commenced flights to Bangkok, Phuket and Hat Yai in Thailand, with plans to fly to as many as 10 destinations in the first year, and up to 15 in the second year. Its closest homegrown rival, ValuAir, has been operating flights to Bangkok, Hong Kong and Jakarta since May 2004. The privately owned ValuAir also recently started services to Perth, Australia.
Macau Backdoor To China
With Singapore brimming with low-cost carriers, the next and most obvious base for operators appears to be Macau, a special administrative region of China with a booming casino market. Air Macau is the only airline flying from the Chinese territory at present.
"Macau is like the backdoor to China here, in the sense that Macau in its own right is a growing, booming market benefiting from globalization of the entertainment industry," said Sanda at DBS Vickers.
"With all the investment there, that place is quickly turning into the Las Vegas of the East, so that place by itself will become an attraction," he said. "It's also a way to get around" air rights, Sanda added, referring to international agreements that dictate where airlines can fly to.
After a rapid rise in Australia over the past four years following the collapse of Ansett, Virgin Blue is seeking growth in Asia, possibly by launching a low-cost regional carrier.
Virgin Blue has held talks with Air Macau's shareholders, including 51% stakeholder China National Aviation Co. and Hong Kong's Shun Tak Holdings Ltd., about operating a low-cost carrier from Macau. With some 13 projects under review, Virgin Blue Chief Executive recently said that talks in Macau are "progressing."
The much-touted push of the Richard Branson-founded Virgin Blue into Macau is a "good option", said the Sydney-based analyst, adding that it may get a direct feed from Branson's Virgin Atlantic Airways Ltd. The U.K. airline recently commenced services to Sydney via Hong Kong.
But as aviation history shows, rapid growth often comes at a price. The big and more financially stable budget carriers that vigilantly follow the low-cost model have a better chance of succeeding than others. The minnows will either be taken over or eventually crash-land, according to analysts.
Consolidation among the low-cost carriers could emerge next year, said Morgan Stanley's Singapore-based analyst Chin Lim.
Harbison at the Center for Asia Pacific Aviation, however, believes there is ample room in the Asian market for several full-service and low-cost carriers, saying: "This market has got so much potential, it's just untapped."
===========================================
Wednesday December 15, 5:20 PM (Singapore)
OUTLOOK 05: Low-Cost Carriers Take Off; Asia New Frontier
By Lilly Vitorovich
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)--With U.S. and European skies crowded with low-cost carriers, Asia is a sure bet as the next frontier for cheap and cheerful travel. But the question on the mind of investors is who will lead the pack.
A flurry of new airlines backed by existing full-service carriers including Thai Airways International PLC and Malaysian Airline System Bhd are likely to emerge, analysts say. Others will have the backing of new investors looking to replicate the success of Australia's Virgin Blue Holdings Ltd. and Ireland's Ryanair Holdings PLC.
Airlines in Asia are moving away from questioning whether low-cost carriers will succeed in the region to asking if they can afford to miss out on the opportunities, said Peter Harbison, managing director at the Center for Asia Pacific Aviation. "I think there will be more subsidiaries (of full-service carriers) coming into the market," he said.
However, investors looking at Singapore as either a base or travel destination should think twice because three low-cost carriers - Tiger Airways, ValuAir and Jetstar Asia - are already based in the city-state of 4 million people. Malaysia's first budget carrier, AirAsia Bhd, also operates seven flights a week to Singapore.
Overpopulating Singapore, a major hub for international air travel, with budget airlines would risk a brutal fare war and with fuel prices ever susceptible to volatile swings, the onus is on industry executives to do their homework if they plan on being around for the long haul.
Low-cost carriers with financially strong parents such as Tiger, which is 49%-owned by Singapore Airlines Ltd. , and Jetstar Asia, which is 49%-owned by Qantas Airways Ltd. have a better chance of outperforming their peers and surviving for the long term.
The two low-cost carriers should also benefit from their parents' solid bargaining power when it comes to fuel. Singapore Airlines has hedged about 40% of its fuel requirements at US$34 a barrel for the 12 months ending March 31, 2005, while Qantas has hedged 70% of its fuel at US$32 a barrel for the year ending June 30, 2005.
Critical Size Is Key
"The key thing will be critical size and I think the (low-cost) airlines to survive will need to have a solid base in terms of financial backing, hubs and routes," said Shaw Stockbroking analyst Brent Mitchell.
Australia's flag carrier, Qantas, recently joined the fray by launching its second low-cost carrier, Jetstar Asia, less than seven months after its first budget carrier Jetstar, which operates domestic routes.
Jetstar Asia has commenced a daily flight from Singapore to Hong Kong, and will shortly begin flying to Taipei in Taiwan, and Pattaya in Thailand. It wants to be the first low-cost carrier to fly to Surabaya in Indonesia, Shanghai in China, and Manila in the Philippines.
Qantas has been a little slow to enter the low-cost market in Asia but is working hard to catch up, according to DBS Vickers Securities analyst Chris Sanda.
"They're doing what they can as far as expanding much more aggressively than the others, which means that they're doing the right thing but at the same time they have a higher risk profile," he said.
While the Asian aviation market is ripe for low-cost carriers, investors are divided on how many will take off next year.
A Sydney-based transport analyst expects the number of players to more than double to 10 in 2005, with several others to emerge in subsequent years.
But Sanda, who covers the aviation sector in Singapore, isn't so sure. "Ten I think is a little bit optimistic...the market is already saturated."
AirAsia, which started services in 2001 with three Boeing 737-300s, has built up its fleet to 23. It is looking to buy 40 new aircraft in the near future to service new destinations that may include the Philippines, China and India.
Tiger recently commenced flights to Bangkok, Phuket and Hat Yai in Thailand, with plans to fly to as many as 10 destinations in the first year, and up to 15 in the second year. Its closest homegrown rival, ValuAir, has been operating flights to Bangkok, Hong Kong and Jakarta since May 2004. The privately owned ValuAir also recently started services to Perth, Australia.
Macau Backdoor To China
With Singapore brimming with low-cost carriers, the next and most obvious base for operators appears to be Macau, a special administrative region of China with a booming casino market. Air Macau is the only airline flying from the Chinese territory at present.
"Macau is like the backdoor to China here, in the sense that Macau in its own right is a growing, booming market benefiting from globalization of the entertainment industry," said Sanda at DBS Vickers.
"With all the investment there, that place is quickly turning into the Las Vegas of the East, so that place by itself will become an attraction," he said. "It's also a way to get around" air rights, Sanda added, referring to international agreements that dictate where airlines can fly to.
After a rapid rise in Australia over the past four years following the collapse of Ansett, Virgin Blue is seeking growth in Asia, possibly by launching a low-cost regional carrier.
Virgin Blue has held talks with Air Macau's shareholders, including 51% stakeholder China National Aviation Co. and Hong Kong's Shun Tak Holdings Ltd., about operating a low-cost carrier from Macau. With some 13 projects under review, Virgin Blue Chief Executive recently said that talks in Macau are "progressing."
The much-touted push of the Richard Branson-founded Virgin Blue into Macau is a "good option", said the Sydney-based analyst, adding that it may get a direct feed from Branson's Virgin Atlantic Airways Ltd. The U.K. airline recently commenced services to Sydney via Hong Kong.
But as aviation history shows, rapid growth often comes at a price. The big and more financially stable budget carriers that vigilantly follow the low-cost model have a better chance of succeeding than others. The minnows will either be taken over or eventually crash-land, according to analysts.
Consolidation among the low-cost carriers could emerge next year, said Morgan Stanley's Singapore-based analyst Chin Lim.
Harbison at the Center for Asia Pacific Aviation, however, believes there is ample room in the Asian market for several full-service and low-cost carriers, saying: "This market has got so much potential, it's just untapped."
===========================================