Competition Takes Off in Asia's Budget-Airline Market

JULY 22, 2011   the wall street journal

By ERIC BELLMAN

Asia's budget-airline market is getting increasingly crowded, as AirAsia expands and other players, including Qantas, ANA and Lion Air, move in. Who will be left standing? Hong Kong Bureau Chief Peter Stein discusses with Andrew LaVallee.

Competition in Asia's budget-airline market is heating up as rival carriers raise more money and launch services to take on Malaysia's AirAsia Bhd., the undisputed heavyweight of low-cost flying in the region.

A decade ago, AirAsia was the upstart, bringing the no-frills airline model to Asia after it succeeded in Europe and the U.S. Although some doubted it would work in Asia, where many residents don't earn enough to fly, AirAsia took off. Now Asia's other carriers are fighting back more aggressively.

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Flying on a Budget

Take a look at key players in Asia' budget-airline market.

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Mick Tsikas/Reuters

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Airlines such as the Philippines' Cebu Pacific have raised hundreds of millions of dollars over the past year to expand their fleets, while several of Asia's biggest flagship carriers have announced plans to start low-cost carriers in recent months. Singapore Airlines Ltd., Thai Airways International PCL and Japan's All Nippon Airways Co. have all unveiled intentions to back new budget carriers recently.

Last week, the low-cost Jetstar Airways unit of Australia's Qantas Airways Ltd. said it will spend $500 million on its Singapore operations by buying seven additional aircraft by year's end and will add 40 weekly flights by then.

Analysts aren't convinced all the efforts will be successful in a crowded market. Still, the success of AirAsia and Asia's other big low-cost carriers has proven that the budget-airline model can earn money in Asia. This has given AirAsia's rivals more confidence and fueled an aggressive push by the best-funded among them to grab as much of the Asian-Pacific region as they can.

"The demand for air travel will grow further," said Rusdi Kirana, president director of Lion Air, Indonesia's largest airline, which is waiting for delivery of 134 new aircraft. Although new carriers will emerge, "we believe that with our strong presence we will be able to face the competition as we have in our 10 years of operation," he said.

The battle for frequent frugal fliers in Asia—home to more than four billion people and the world's fastest-growing economies—is expected to keep rates low and traffic growth high in the region and possibly decide the leading global airlines of the future. In the five years to 2014, the number of people flying in Asia will rise by 360 million to one billion, according to International Air Transport Association estimates.

While many details of the new budget carriers are still unclear, ANA-backed Peach Aviation is expected to start flights by March 2012, with fares on short-haul international routes targeted at 50% below current prices.

Singapore Airlines' new budget airline is expected to handle medium- and long-haul routes starting sometime over the next year, while Thai Airways is expected to start its low-cost carrier by the second quarter of 2012.

AirAsia says it believes the market is big enough for a few large competitors—but it intends to fight hard to remain on top.

"We opened up a huge lake of demand in Asia. People wanted to travel but couldn't afford it," said AirAsia founder Tony Fernandes. "We estimate that we could have up to 500 planes."

The no-frills-flight model was first attempted in a big way in Asia by AirAsia. Back when it first took off as a budget carrier a decade ago, it had to struggle with regulators who were suspicious of a newcomer and hoping to protect their state-run flagship carriers. Using publicity, politics and a bit of pushiness, Mr. Fernandes has now become a big dog of the Asian skies. AirAsia now has a fleet of 100 planes and earlier this month placed orders for an additional 300.

As flagship carriers target the market with new budget offerings, Mr. Fernandes is fighting them the way he used to be bullied as the up-and-comer. Last year, AirAsia poked fun at low-cost carrier Tiger Airways—which is about 33%-owned by Singapore Airlines—after Tiger announced a spate of flight cancellations by running an advertising campaign saying "If Tigers were meant to fly, they would be born with wings."

Mr. Fernandes criticized Tiger's management as "a bunch of white guys" in one interview, triggering an accusation of racism from Tiger.

Since Singapore Airlines announced plans to launch another budget carrier in May, Mr. Fernandes hasn't been shy about saying in the media and through his Twitter account that the state-owned carrier was making a mistake.

He is also planning stock listings in Thailand and Indonesia to help finance his growing empire, and once his plane order comes through he will have one of the biggest budget fleets in the world. AirAsia also plans to create new hubs in Vietnam and the Philippines, and it has started the airline AirAsia X to focus on longer flights.

But AirAsia isn't the only one building a bigger fleet backed by a big war chest. Cebu Pacific raised more than $600 million last year that it will use to expand its fleet. The company, which had only 200,000 international passengers in 2005, expects to carry three million this year.

"I know I am going to be one of the survivors. I think others will struggle," said Lance Gokongwei, president and CEO of Cebu Pacific. "Low-cost carriers will always grow market share at the expense of traditional carriers," he added.

Other low-cost carriers that might be raising money on the stock market include Lion Air and India's IndiGo and Go airlines, analysts say. IndiGo placed an order for 180 Airbus aircraft at the Paris Air Show late last month, valued at more than $15 billion at list prices.

Indonesia's state-owned carrier, Garuda, ordered 25 new planes at the air show, 10 of which were scheduled to be used by its low-cost arm Citilink.

Some analysts say it will be difficult for any new competitors to catch up with the industry leaders. While those backed by full-service flagship carriers may have easy access to capital and management, their high-end brands and experience can actually end up being a liability in the cut-throat, low-cost carrier business.

"These businesses require very different management styles. Just because you are good at one does not mean you can do the other," said John Rachmat, analyst at Royal Bank of Scotland Asia Securities in Singapore. "The successful budget carriers have already found their own niches and strategies, so it will be very difficult for a newcomer to break in."

"We wouldn't be getting into this if we didn't think it was going to be a profitable venture," said Nicholas Ionides, a Singapore Airlines spokesman. "We see this as a largely untapped new market."

—James Hookway and Yayu Yuniar contributed to this article.

Write to Eric Bellman at eric.bellman@wsj.com