Asia’s LCCs thriving, but should they practice some restraint?
There is no doubt that the low-cost business model has become a transformative force in Asia. The demand for low-cost air transportation is huge, but the development of budget carriers tends to lag behind the region's overall aviation development. The operating environment is increasingly complex, competitive and interconnected, particularly in Southeast Asia. But how is the surge of low-cost carriers (LCCs) affecting individual Asian markets? We take a look at their prospects, focusing on a particular LCC market – South Korea and its leading budget carrier – Jeju Air.
The surge of LCCs in Southeast and Northeast Asia
Let us break down the numbers of what the expanding Asian LCC market should anticipate in the near future. The International Air Transport Association’s (IATA) 2036 forecast indicates not only that passengers traveling by air will nearly double to 7.8 billion by 2036, but also that the biggest driver of demand will be the Asia-Pacific region. According to IATA, it will be the source of more than half the new passengers over the next two decades. Boeing’s market outlook for 2017-2036 estimates are similar: Asia is to be the biggest travel market in the world, growing at 5.7% annually. By 2036, passenger traffic throughout the continent is expected to constitute nearly 40% of global passenger traffic.
According to Boeing, the rapid expansion of LCCs in Asia has driven the growth in the short-haul market. As a result, currently, the LCC penetration rate in some regions is over 50% of their home markets, with other regions progressively growing their LCC capacity annually. Southeast Asia is the region where budget carriers have the biggest, 53% share of the home market. South Asia follows with a 46% share and Northeast Asia with 22%, Boeing’s data indicates. There are currently 20 budget carriers in Southeast Asia. According to estimates by the Centre of Aviation (CAPA), only about 11% of seats within North Asia are operated by LCCs compared with 56% in Southeast Asia.
Hence the verdict is in: the LCC sector in Asia has seen phenomenal growth during the past decade. For instance, according to Airline Network News and Analysis data, the region’s one-way seat availability in this part of the market rose from 70 million in 2007 to 455 million in 2017. In other words, in 2007, Asian LCCs accounted for 8.1% of annual seats in the continent, a market share which increased to around 26% in 2017. This means that 26% of all seats flown in Asia in 2017 were operated by an Asian budget carrier. During the decade, these LCCs have increased their combined market share of all Asian seats on average by 1.8% per year.
For a more detailed look, OAG Schedules Analyzer data indicates Asia’s top 12 low-cost country markets as of 2017, including India, China, Indonesia, Malaysia, Singapore, Japan and others. The data shows the increase in departing LCC seats between S17 and S16. When analyzing these individual country markets, India is leading in terms of LCC capacity, seeing close to 62 million departing low-cost seats in S17, which is an increase of 17% compared to S16. However, the best growth has come from South Korea, where low-cost seats have increased by 28% since S16. In total, the top 12 country markets in the continent account for 97% of all seats operated by Asian LCCs.
OAG Schedules Analyzer also determined Asia’s top 12 low-cost carriers as of 2017, showing the increase in departing seats between S17 and S16. The data indicates that all of Asia’s top LCCs have produced capacity increases, with the most impressive growth exhibited by the Chinese budget carrier Lucky Air, posting a 43% increase in seat capacity in S17. Right behind with a 25% increase was India’s GoAir. Next in line – South Korea’s Jeju Airlines with up to 22% increase. Meanwhile, the Malaysian carrier AirAsia posted just over 9% increase, Indonesia’s Lion Air showed 9% increase, and the Philippine carrier Cebu Pacific Air showed an increase of only 4%.
Overview of LCCs in South Korea
A late-comer to the low-cost business, South Korea now has six budget carriers operating both domestic and regional flights: Air Busan, Air Seoul (both subsidiaries of Asiana Airlines), Eastar Jet (of KIC Group), Jeju Air (of AK Holdings), Jin Air (of Hanjin Group), and T’way Air (of T’way Holdings). On some main domestic routes, the LCC market share is already over 50%. International services, on the other hand, are just taking off, nevertheless a double-digit growth there is also expected in the coming years, Advito consultancy estimates.
Looking at the first quarter financial results of each company released on May 23, 2018, the combined operating profits from these six LCCs jumped by roughly 131% year-on-year to $171.96 million (W186.1 billion). Revenue grew by 34.2% to $1.1 billion (W1.18 trillion). This growth was boosted by the rapidly increasing demand for both international and domestic travel. These carriers are currently in the process of expanding and diversifying their travel routes. For instance, South Korea’s largest LCC – Jeju Air – stated that its focus on Japan and Southeast Asia destinations, favored by domestic travelers, was a big driver for growth, together with flight service diversification.
Jeju Air latest quarter results show profits soaring on the back of strong international growth and favorable market conditions. For the quarter ended March 31, 2018, Jeju Air’s operating profit increased by 70% to $42.8 million (W46.2 billion). Revenue increased by 28% over the same period last year to $223344 (W240 million). Net profit more than doubled from $15.8 million (W17 billion) to $33.5 million (W36 billion). The carrier attributes this growth to high demand in its Japan and Southeast Asian markets: passenger revenue from Japan increased 47% year-on-year, while revenue from Southeast Asia was up by 25%. Also exhibited in Jeju Air's financial report: load factor at 91.9%, ASKs increased 20.9% and RPKs by 22.3%. Most of this increased capacity was deployed on international routes.
The success story – Jeju Air
Jeju Air is the third largest airline and the largest, most profitable LCC in South Korea. And while most budget carriers in Asia are increasingly focusing on long-haul markets for growth, Jeju Air remains a short-haul, all-narrow-body operator. Taking a broader look, for instance, since 2007, Asian LCCs’ short-haul services grew at an average rate of 21% year-on-year, whereas the long-haul market grew by 26%. Both long- and short-haul markets have seen double-digit growth every year in the period of 2007-2017. In addition, since 2013, LCCs in Asia have seen greater growth in seat capacity on long-haul services than short-haul, Airline Network News and Analysis reports.
So why is Jeju Air reluctant to expand into long-haul services? According to the carrier, its “existing short haul business has demonstrated success,” as the company’s financial results seem to prove. Moreover, given the competitive environment, the airline maintains that the threat of possible new entrants into the market provides little room for risky actions and deviations from the approved strategy. While there is a strong local reception, Jeju Air admits it could also improve its passenger mix to protect itself from sudden shifts in the market (internationally, the carrier’s passengers are mostly Korean).
Passengers boarding a Jeju Air flight at the Jeju Airport in South Korea. (Image by J. Patrick Fischer)
In fact, Jeju Air emphasizes that “the aviation framework in Korea is not yet ready for long haul, low cost operations”. South Korea’s short-haul LCCs have been successful in providing quick holiday trips to particular favorable areas. But long-haul services naturally mean that passengers are taking longer trips, and there is a smaller market of passengers available to take those trips. “While a market does exist, it may not be large enough to fill a wide-body in the high-density configuration needed to deliver economics,” the company explains. For instance, another South Korean LCC – Jin Air – struggled to mount a wide-body operation with Boeing 777-200s (inherited from sister airline Korean Air).
And as for attempting to gradually venture into new markets, Jeju Air explains that South Korea has open skies agreements with Japan and other Asian markets, but not with mainland China, where Korean LCCs would have a significant opportunity to capture the rapidly increasing air travel demand by the Chinese. Jeju Air says it has scheduled services to China as well as a large charter network, however China has introduced tighter restrictions on charter services. Overall, it is difficult to foresee the scale of growth, if South Korea and China agreed on open skies.
Another opportunity would come from expanding traffic rights with Taiwan, the airline points out. Flights between South Korea and Taiwan are still very limited, unlike those with Japan, which shares open skies with Taiwan. Taiwan is willing to have an open skies agreement with South Korea, but there is concern on the Korean side that this would anger China. Meanwhile, as Jeju Air observes, Europe could be very worthwhile destination for South Korean LCCs venturing into the long-haul markets, but the lack of Russian overflight rights prohibits these operations. Which is why Jeju Air maintains that although South Korean aviation is in flux, it “is still far from reaching its potential”.
On June 11-12, 2018 CAPA is organizing a Conference on LCCs in North Asia. More information can be found here: https://lcc18.capaevents.com/
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