Budget airlines spread their wings
A proliferation of budget airlines in Japan has helped entrench the low-cost carrier model in Asia, leaving full-service airlines with a tough choice - to tap into a dynamic market or watch from the sidelines.
This month alone has seen launches from three low-cost carriers - Peach Aviation, a joint venture between Hong Kong-based direct-investment fund First Eastern Investment and All Nippon Airways, which launched its debut flight from Osaka to Nagasaki on March 1; followed by a joint venture between Japan Airlines and Jetstar; and another between AirAsia and ANA.
The rapid growth will come as a challenge to regulators in Asia, as Japan - the most regulated and under-exploited aviation market - embraces the model and liberalises restrictions on access and ownership of low-cost carriers, or LCCs.
'What is now happening in Japan will create even more powerful agents for change, not just for Korea but also for China, which has been very reluctant to allow the local establishment of LCCs,' said Liz Thomson, head of research at the Centre for Asia Pacific Aviation (Capa), an Australia-based aviation consultancy.
Spring Airlines is currently the only mainland LCC operating international destinations including Hong Kong and Japan. None of the big four mainland operators has an LCC at present.
To date, the penetration rate of LCCs in Asia has been exceptionally and unreasonably low, accounting for about 5 per cent of total air traffic capacity, compared with 25 per cent on average globally, according to Capa data. In Japan, budget airlines account for only 2.8 per cent of total international flights.
'The main disadvantage of Asia, as opposed to North America or Europe, is that there is no multilateral open skies policy,' said Campbell Wilson, the chief executive of Scoot, an LCC subsidiary of Singapore Airlines, which will launch its inaugural flight to Sydney around June.
'But on the other hand, Asia has much faster economic growth, a larger population and a rapidly developing middle class.'
The growth trend of LCCs is striking, with the budget travel segment having gone from zero market share to 26 per cent of Changi's passenger throughput over the past eight years. About 50 per cent of the seats sold in Malaysia are by LCCs at present.
Capa estimates that an additional 200 million passengers could be travelling in north Asia per year, given substantial liberalisation of access in the Japan-Korea-northern China triangle, which will allow a much more aggressive growth for LCCs, added Thomson.
'Premier carriers will struggle with limited growth if they don't expand into LCC segment in the next five years,' a transport analyst said.
The only exceptions, the analyst added, were Cathay and mainland carriers, which presently enjoy strong traffic growth out of China and can afford to keep out of the budget segment. But when mainland growth starts to decline they would likely turn to the LCC model.
For Cathay, that call might be closer since the three Japanese LCCs expanded their services to Hong Kong and the mainland, said Andrew Orchard, a transport analyst at Royal Bank of Scotland.
Cathay is set to launch a premium economy class in April to capture the trade-up in demand from economy-class users, as well as the trade down from business-class users. Strong traffic demand from the mainland could buy it time before it responds to the competition from LCCs, Orchard added.
Meanwhile, carriers that do not have distinct brand recognition are setting up low-cost subsidiaries to compete with the new arrivals on the LCC scene. Hong Kong Express Airways, which is controlled by HNA, recently announced plans to transform itself into a budget carrier.