Where Next for Asia's Low-Cost Airlines?

Low-cost carriers have only scratched the surface of their potential within Asia, argues Gordon Bevan of our consultancy business ASM.

It still amazes me that so many airports see low-cost carriers (LCC) as a recent phenomenon despite it being a model that has been working in every other sector for so long.  There is nothing mysterious about it; if you keep airport fees down, LCCs will go and find passengers.

Ryanair started back in 1985.  easyJet started in 1995, while AirAsia has been flying since 2001.  JetBlue started operations in 1999. Don’t forget that Southwest has been operating low-cost flights since 1971, and in 2011 it carried more domestic passengers than any other US airline.  Even in Asia, LLCs are hardly ‘new’.  The trend is clear, and has been for many years: LCCs are a permanent fixture and they are growing.  Asian airports cannot afford to be sniffy about them as part of their customer base.

Globally, Asian markets, with their huge order book of Boeing 737s and Airbus 320s, echo a global trend for LCCs to take up to 30 per cent of seats on scheduled services.  But an interesting disparity is clear in the potential growth of LCCs within Asia and on routes to and from Asia-Pacific.  In fact, it is far easier to enter the LCC market if you operate in a single region and stick to narrowbody aircraft that can sustain both international and domestic services.

Many LCCs start on domestic routes, where regulatory approval is easier and they pose less threat to prestigious national carriers.  But LCCs have slowly overcome policy constraints to operate largely between ASEAN states, following a path already blazed by US and European LCCs.  Success in the LCC path rests on: a sizeable source market; a significant price differential with incumbent competitors; being the first into the market; efficiencies of new aircraft; a sympathetic national aviation authority; sizeable markets within two to three hours from your base; and a rising level of discretionary spend within your source markets.  Yet the evidence is clear, even within Asian economies: LCC expansion is rapid and tangible.

One aspect in which Asia differs from Europe or the US is the lack of airport competition.  Asia has few out-of-town airports.  Even secondary airports can be much smaller than those of a primary city, as urbanisation is heavily focused on capital cities.  So, inevitably, LCC operations go head-to-head with national carriers.

In Japan, domestic LCC operations have followed a stuttering but upward trend in capacity, which will continue with AirAsia’s expansion in the country.  South Korea’s domestic and international markets have grown exponentially. Although domestic expansion has faded over the last three years with the availability of high-speed train services, the international market still seems hungry for LCC operations.

The same can be said for Taiwan, where LCC growth is following the trend in other North Asian markets, despite a sticky political regulatory environment, particularly for flights to/from or over Mainland China.  Even China has LCC rapid growth trajectories.  While growth has been measured, this huge market clearly holds great potential at least on domestic routes, which are less heavily regulated than the international market.

All markets behave the same.  In a restrictive airfare environment, introducing LCC products makes a significant impact on an airport’s throughput. AirAsia estimates it has expanded the Taiwan–Malaysia market by 87 per cent, bringing airport traffic that simply could not exist under the legacy airline model.  But it is tougher to drive the LCC model past the three-hour range of narrowbody aircraft.  While some airlines operate between five and eight hours, legacy carriers dominate beyond this threshold.

Several factors work against the business model on longer distances: they involve more uncontrollable costs, such as en route costs and fuel burn; yield drops dramatically with distance, especially in long-haul; scheduling freedom evaporates as airlines become subject to curfews, unsocial hours arrival/departure limits; crews need to be scheduled in different ways; airlines have to enter non-core markets such as airfreight to generate revenues;  fleets need to introduce other aircraft types, raising complexity; legacy airlines can compete on price, as there is always an inventory at the back of the plane to deep discount; traffic right issues become obstructive; few long-haul markets require and can deliver traffic on a regular, year-round basis; a feeder market starts to become essential when you enter smaller, more seasonal or directional markets.

And there are many more daunting obstacles.  If long-haul low-cost operations were as simple to replicate as short-haul, it seems certain that Condor/Thomas Cook, Air Transat and TUI would have branched into this business. Jetstar, a unique success in this market, gets a leg-up from Qantas in terms of cross-selling and frequent flyer participation.

So, unsurprisingly, lessons can be learnt from a graveyard of long-haul LCCs, including Air Comet, Air Madrid, Air Europe, Oasis and Zoom.  Australian Airlines was closed down and Flyglobespan’s entry into the long-haul scheduled market was swiftly overwhelmed by cost.  All these airlines tried to corner tight market niches to focus their resources, but in doing so restricted their earning potential and lost their ability to grow.  The growth trajectory of short-haul airlines provides an instructive contrast to the ultra-cautious growth of surviving European long-haul leisure airlines over 15 years.

Aside from identifying the market, airports need to actively play their part – and not exclusively through airport charges.  In fact, discounting airport charges is probably the simplest part of the equation and provides no guarantee of LCC participation, although it does get an airport on the list of potentials.  Analysis shows that some of Asia’s largest passenger markets already have cheap airport charging regimes.  Some of the largest airports with some of the biggest congestion issues do not differentiate between peak and off-peak pricing – so operations to Hong Kong, Taipei, Singapore, Manila and Guangzhou airports could be considered a bargain. Indian airports also appear to offer value for LCCs.

The real savings come through airports creating more efficient operational procedures for LCCs.  Although much of this is outside the control of airport companies, ramp licences for airport-handling companies should reflect the opportunity to provide more efficient work practices.  Another area where airports can expand their appeal to LCCs is handling.  If market conditions permit, handling can be opened up to non-airline handling companies, free from ingrained airline operating procedures suited to fully laden widebody aircraft operating to long-haul destinations.

Non-airline handlers can cope with the flexibility of offering multi-tasked personnel that can turn a plane around without wing-walkers, with dual door entry and with bulk-loading baggage practices.  Many turnarounds can be handled by a team of five or six, rather than the 10 that traditionally cover a legacy airline turnaround, bringing a huge cost-saving for the LCC.  The traditional model is not sustainable and will either result in an LCC leaving, or curtailing any expansion opportunities.  LCCs like power-in/power-out operations.  A slab of ramp concrete that enables this form of operation is cheap, low-tech and efficient, cutting pushback time and costs.

Despite the weather challenges, LCCs love their passengers to walk out to their aircraft.  A central holding area and ground-level gates enable faster and cheaper turnarounds. Although it requires greater marshalling efforts, the LCC can control the speed of embarkation – especially if dual-door embarkation is also enabled.  Much of this runs counter to the trend for Asian countries to construct larger and more complex – as well as more costly – airport infrastructure.  So far, few airports have included bespoke LCC facilities within their redevelopment plans.  In fact, airport planners acknowledge the importance of terminal design to legacy alliances, whose membership and commitment are extremely fluid, but not to LCC operations.

Much airport development is proposed in order to avoid offending incumbents, rather than to embrace a business model that has demonstrated its viability in Asia every year for more than a decade.  Some airports are only now starting to take LCCs seriously.  But Asia needs LCCs.  We are conditioned into thinking that growth at Asian airports is unstoppable.

 Yet strip away the ‘China Effect’ and some Asian airports would have no growth.  This is worth remembering when you next chat to an Asian LCC – they may bring a balance to your network that creates a more sustainable airport operation.

This story was modified from an original feature that appeared in the latest issue of Routes News and which contains additional statistical analysis.

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