Asia’s low-cost carriers hit turbulence

November 12, 2013 1:33 am

Asia’s low-cost carriers hit turbulence

By Jeremy Grant in Singapore

“The People of India deserve to fly. Everyone should be able to fly,” Tony Fernandes, owner of AirAsia, tweeted recently. His comment was a call to arms typical of the Malaysian entrepreneur’s relentless drive to expand his low-cost carrier across the region – most recently to India. The ambitions of Mr Fernandes are another sign of how low-cost carriers (LCCs) have been aggressively growing in Asia as a rising middle class starts to afford air travel for the first time.Carriers such as AirAsia – the leading regional LCC with 140 routes and 76 destinations – have steadily eaten away at the market share of established carriers such asSingapore Airlines and Hong Kong-based Cathay Pacific.

In the decade since they emerged as a force in southeast Asia, an area with a combined population of 600m, LCCs now account for more than half the seats available in the region, according to the Centre for Aviation, an Australia-based research company.

By contrast the likes of easyJet and Ryanair account for 40 per cent of that market in the EU. And low-cost players have been around in Europe for at least twice as long as their peers in Asia.

Yet as impressive as the growth of companies like AirAsia has been, the low-cost sector is starting to feel the strain of overcapacity as overambitious orders for aircraft collide with clogged airports and intensifying competition among no-frills players, analysts warn.

Indonesia, with a population of 250m, is on paper one of the world’s most promising aviation markets.

Yet its leading no-frills airline, Lion Air, has about 550 aeroplanes on order from Boeing, Airbus and ATR – a number that has raised questions about how the airline plans to deploy them profitably. The latest order came in March, when it agreed to buy 234 single-aisle jets from Airbus for $24bn.

The country’s main airport in Jakarta was built to handle 22m passengers but with international passenger traffic growing at an annual compound rate of 11.5 per cent over the last five years, it actually handled over 50m people in 2012, according to CLSA, a Hong Kong-based broker.

Indonesian demand for flights still sky high

Offering 19 direct flights every day between Jakarta, the capital, and Medan, the biggest city on the resource rich island of Sumatra, Indonesia’s Lion Air is more akin to a bus service than an airline.

With so many flight options, and return tickets on the 2 hour and 20 minute route selling for less than $100, it would appear hard for other airlines to compete.

But Tony Fernandes, the chief executive of rival Malaysia-based low-cost carrier AirAsia, says that although his Indonesian subsidiary only has three flights a day on the Jakarta-Medan route there is more than enough demand to go around as consumer spending continues to grow despite the recent macro-economic turbulence.

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“There’s huge potential for LCC growth but there’s too much capacity and some of the growth in some cases has been too fast,” says Brendan Sobie, an analyst at the Centre for Aviation in Singapore.

“A lot of aircraft are coming in at the same time and airlines are launching as well. The outlook is pretty good but competition is intense right now.”

He says that southeast Asia – which also includes Thailand, Vietnam and the Philippines – is the only region in the world where there are more aircraft on order than planes in service.

Such pressures mirror the pain felt in Europe by Ryanair and easyJet, Europe’s two largest LCCs, which face a growing challenge from a group of budget airlines including Norwegian Air Shuttle and Budapest-based Wizz Air.

Industry analysts estimate there are 45 LCCs operating in Asia, some of them – like Vietjet, a Vietnamese carrier – very recent entrants.

Established airlines have also entered the fray and account for about a third of the overall LCC number. Last year Singapore Airlines launched Scoot, a low-cost carrier that competes with AirAsia X, a long-haul, low-cost affiliate of AirAsia.

While the smaller carriers may be more vulnerable than more established operators, even the latter face challenges.

Shares in AirAsia – founded by Mr Fernandes in 2001 with only two aircraft – have fallen by almost 9 per cent in US dollar terms this year amid investor concern over increasing competition from Lion Air. Tiger Airways has suffered more; its shares are off by 25 per cent.

Established carriers Singapore Airlines and Cathay Pacific have done relatively better. Singapore Airlines’ shares are off 6.3 per cent in the period, while those of Cathay have risen by more than 7 per cent.

Indar Dhaliwal, analyst at CLSA, adds that AirAsia is being tested in its home market asMalaysia Airlines has added capacity.

In the Philippines, where AirAsia started flights last year, the airline recently abandoned Clark airport, an hour’s drive outside metro Manila, consolidating operations at Manila’s main airport with Zest, a local LCC with which AirAsia did a share swap earlier this year.

That should help it better compete with Cebu Pacific, the country”s dominant airline. “There’s been a lot of consolidation in the Philippines,” says Mr Dhaliwal.

Tiger Airways, in which Singapore Airlines has a 32.7 per cent stake, is “struggling with overcapacity” at its main hub of Singapore, according to Raymond Yap, analyst at CIMB. The airline’s Singapore unit made its first loss in six quarters in the second quarter, of S$18m ($15m).

“Tiger Airways will struggle to make headway in the Philippines and Indonesia as late entrant and its Australian operations are beset by yield pressures,” Mr Yap added.

Meanwhile in coming months, Thailand will see three new LCCs enter the market, one each from Lion Air, Vietjet and AirAsia X.

And in Hong Kong, Australia’s Qantas Airways, with China Eastern Airlines, are waiting to see whether the Hong Kong government will grant a licence for Jetstar Hong Kong, which would be the territory’s only low-cost airline.

Mr Sobie says some consolidation is possible. “That would be a healthy outcome, because capacity and profitability would become more rational”.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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