For Asia's legacy airlines, the rapid rise of low-cost carriers is something of a double-edged sword. The LCCs offer both threat and opportunity for the full-service giants—and which outcome prevails depends on how deeply they embrace the trend and shape it to their advantage.
The Asia-Pacific region is experiencing by far the quickest growth in LCCs. This can obviously be a major headache for established legacy carriers, as their home markets become battlegrounds for the budget upstarts. And the challenge is only increasing thanks to new developments in the long-haul low-cost segment, which could seriously eat into the majors' revenue streams.
But the irony of the situation is that most of the Asian LCCs have been spawned by the majors themselves. Many have been launched to combat the threat of large independent LCCs like, but the major airlines have also found that their low-cost subsidiaries present new ways to attack their legacy rivals. Creating LCC joint ventures has enabled them to establish offshore bases that would be prohibited for the mainline parent.
Taiwan is the latest Asian market where the incumbent full-service airlines are entering the low-cost sector. Overseas LCCs have been steadily encroaching on key international routes into Taiwan, and more are planning to start service soon. So Taiwan'sand TransAsia Airways have each revealed plans to launch LCCs of their own, which will help them compete against budget carriers based elsewhere.
TransAsia says it will set up a wholly owned subsidiary within a year, which will fly-family aircraft from Taipei. China Airlines, meanwhile, is forming a joint venture with Singapore-based Tigerair—an LCC that is, in turn, partly owned by .
One of the overseas budget carriers that has begun operating to Taiwan is Japan's Vanilla Air, which is owned by(ANA). Just a few years ago Japan was at the same stage that Taiwan is now—with two major carriers looking to establish LCC joint ventures to ensure that others did not beat them to it.
The first three Japanese joint ventures began operations in 2012. ANA established two; Peach Aviation and AirAsia Japan. The latter airline was a rare example of a major carrier allying with one of the independent LCC giants, in this case AirAsia. However, this was short-lived, as the two parent airlines found that their LCC and full-service DNA did not match and the partnership was dissolved. ANA started Vanilla Air in December 2013 as a wholly owned subsidiary.
ANA's rival,(JAL), also has set up an LCC joint venture in collaboration with low-cost subsidiary Jetstar Airways. Like other major carriers, JAL can take advantage of its LCC partner's expertise and branding, as well as draw on its massive narrowbody aircraft order backlog.
The new Japanese LCC joint ventures have been slower than projected to reach financial breakeven. However, with the notable exception of AirAsia Japan, the major airline partners are committed to persevering with these carriers because of the strategic benefits that can be had.
Qantas is regarded as one of the first major carriers to successfully establish a two-brand operation with premium and low-cost products, as a result of launching Jetstar in 2004.
While the Qantas mainline operation is struggling financially—particularly on international routes—Jetstar has performed strongly. Increasingly, the Qantas group is channeling its fleet growth to the Jetstar unit. It placed an order for 110 Airbus A320-family aircraft for Jetstar in 2011, and the LCC has begun receiving the first of 14-8 orders. In contrast, the Qantas mainline operation has canceled its 787-9 orders and retained options for the aircraft instead, and it also has deferred its remaining Airbus orders (see page 48).
Jetstar has extended its reach into Asia by setting up joint venture franchises in Japan, Singapore and Vietnam. Its next target is Hong Kong, although it has so far been thwarted in its efforts to secure government approval to help launch a Jetstar affiliate there.has lobbied hard to block Jetstar Hong Kong, arguing that it would contravene laws that prohibit a foreign-controlled airline from basing itself in Hong Kong.
This will be an interesting test case of whether the big LCCs can continue to avoid cross-border ownership restrictions by forming joint ventures with local interests. However, the precedent has been well-established in other markets, so a reversal in Hong Kong would probably not derail the spread of LCC franchises in the region.
Cathay is one of the few large Asian premium airlines that has not created a low-cost carrier subsidiary or joint venture. The airline's current strategy is to appeal to both ends of the market using its existing brands. It puts a lot of focus on the premium product, but also tries to compete for low-fare demand with a range of fares in its economy cabin.
In its argument against Jetstar Hong Kong, Cathay maintains that it is not afraid of low-cost competition, and it notes that 17 LCCs already serve Hong Kong. However, none of those carriers were actually based there until Hong Kong Express Airways relaunched itself as an LCC in late October. It will be joined by the Jetstar affiliate this year if it manages to win regulatory approval.
Growing LCC penetration may put more pressure on Cathay to take defensive measures with a startup of its own. However, the carrier's current position is that it has no plans to establish an LCC. Cathay's CEO-designate Ivan Chu, who will take the reins in March, has previously said that though the airline is assessing the LCC segment it is “not jumping into the water yet.”
Singapore Airlines, which in many other respects has an operating model similar to Cathay, is taking a markedly different approach to LCC ownership. It has a wholly owned long-haul LCC subsidiary, Scoot, and also holds a major stake in budget carrier Tigerair. Its latest moves with both carriers indicate that it is expanding its presence in the LCC arena.
In December, Scoot announced it is forming a joint venture long-haul LCC in Thailand in partnership with local airline Nok Air—which itself is part-owned by. The resulting carrier will be called NokScoot. The partners plan to launch it this year, and are expected to use -200ERs.
For Singapore-based Scoot, the deal marks its first attempt to set up an offshore base, echoing the development of other Asian LCCs.
The growth of Scoot—and other similar carriers—also affirms that the long-haul low-cost model can succeed in Asia, whereas it has struggled in other parts of the world. As LCCs move beyond narrowbodies on short- and mid-range routes to widebodies on intercontinental flights, they intrude on markets that previously have been the exclusive domain of the premium carriers.
Like Qantas, Singapore Airlines has proved it is willing to divert resources to grow the LCC segment. In October 2012 the airline announced that it would transfer 20 787 orders previously earmarked for the full-service carrier to Scoot. These will replace Scoot's 777-200ERs and provide capacity for growth.
Meanwhile, there has been a lot of activity on the Tigerair side. Last December, Singapore Airlines lifted its ownership in this carrier to 40% through the purchase of an additional 7.3% stake from other owners.
Tigerair is a Singapore-based LCC that also has joint venture affiliates in Australia, Indonesia and the Philippines—although it is in the process of selling the Philippine entity. At about the same time that Singapore Airlines tightened its grip on the carrier, Tigerair announced its partnership with China Airlines in their proposed Taiwan-based LCC.
So far, Tigerair has not been able to make its affiliates pay off, and the offshore ventures have dragged down its earnings. The Tigerair group is much smaller than the big three Asian LCC groups—AirAsia, Lion and Jetstar—and has a modest narrowbody orderbook compared to the others.
Tigerair has also been working to expand its network via alliances with other Asian LCCs. As part of Tigerair's deal to sell its struggling Philippine unit to Philippines-based LCC Cebu Pacific, the two former rivals are entering an extensive interline agreement. Tigerair has recently reached a comparable interline deal with Indian low-cost SpiceJet.
The airline states that its new focus on strategic partnerships is part of an “asset-light strategy.” If Tigerair continues with such an approach, it would certainly be in contrast to the other LCC groups. Lion Air and AirAsia—the region's two largest groups—have approximately 900 narrowbody orders between them. And, the group's long-haul affiliate, is pushing further into the widebody market with an order for 25 more Airbus -300s.
The aggressive growth rates of these independent LCCs has clearly provoked defensive reactions from the region's major carriers. But they have also opened the legacies' eyes to the huge potential of the low-cost segment in Asia.
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