Latest Activities and Future Prospects of Asian Low-Cost Carriers
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LatestLatest ActivitiesActivities andand FutureFuture ProspectsProspects ofof AsianAsian LowLow--costcost CarriersCarriers Anming Zhang University of British Columbia September 2009 * Based, partly, on Zhang, Anming, Hanaoka, Shinya, Inamura, Hajime and Ishikura, Tomoki (2009), “Low-cost carriers in Asia: Deregulation, regional liberalization and secondary airports,” Research in Transport Economics, Vol. 24, pp. 36-50. 1 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 BusinessBusiness modelmodel ofof lowlow--costcost carrierscarriers ((LCCsLCCs)) KeepKeep planesplanes inin thethe air:air: aircraftaircraft utilizationutilization ““PointPoint--toto--pointpoint”” ratherrather thanthan ““hubhub--andand-- spokespoke””:: fastfast turnaroundturnaround timetime atat airportairport (about(about 2020--3030 minutes)minutes) ShortShort--distancedistance routesroutes SameSame aircraftaircraft typetype (e.g.(e.g. B737,B737, A320)A320) SecondarySecondary airportsairports DirectDirect salessales viavia InternetInternet ““NoNo frillsfrills”” servicesservices 2 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 z LCCsLCCs targettarget z CustomersCustomers sensitivesensitive toto priceprice (vs.(vs. serviceservice quality):quality): e.g.e.g. students,students, budgetbudget-- consciousconscious travelerstravelers z ‘ z ““FirstFirst timerstimers””:: e.g.e.g. peoplepeople switchedswitched fromfrom otherother transporttransport modesmodes z BusinessBusiness travelerstravelers whowho likelike frequencyfrequency andand traveltravel shortshort distancedistance 3 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 LCCLCC modelmodel inin NorthNorth AmericaAmerica andand EuropeEurope •• PioneeredPioneered byby SouthwestSouthwest AirlinesAirlines inin 1970s,1970s, andand evolvedevolved inin USUS sincesince thethe deregulationderegulation •• InIn Canada,Canada, WestJetWestJet beganbegan flyingflying inin 19961996 andand grewgrew atat 50%50% perper yearyear inin earlyearly 2000s2000s •• RepeatedRepeated inin EuropeEurope sincesince midmid--1990s1990s (after(after EUEU liberalization):liberalization): RyanairRyanair,, etc.etc. 4 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 •• LCCs:LCCs: 25%25% ofof airair passengerpassenger marketmarket inin NorthNorth AmericaAmerica (US,(US, Canada),Canada), andand overover 20%20% inin EuropeEurope •• Southwest:Southwest: largestlargest domesticdomestic carriercarrier inin USUS sincesince 20042004 (carried(carried nearlynearly 100100 millionmillion passengerspassengers inin 2006)2006) •• RyanairRyanair:: largestlargest intraintra--EuropeanEuropean carriercarrier 5 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 ImpactImpact ofof LCCsLCCs ““SouthwestSouthwest EffectEffect”” becomesbecomes widelywidely knownknown • A rapid increase in traffic and a simultaneous fall in fares on routes where, or close to where, Southwest operates • Europe also has a similar “Ryanair Effect” Southwest,Southwest, RyanairRyanair andand severalseveral otherother LCCsLCCs hadhad beenbeen veryvery profitableprofitable LCCLCC operationsoperations representrepresent aa newnew businessbusiness modelmodel 6 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 LCCLCC model:model: ProcessProcess InnovationInnovation High Trade-off New operations frontier Innovation Service quality Trade-off Improvement Low Low Process efficiency High 7 7 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 ImpactImpact ofof LCCsLCCs (cont.)(cont.) •• LCCsLCCs havehave imposedimposed significantsignificant competitivecompetitive pressurespressures onon thethe largelarge networknetwork carrierscarriers ((““fullfull serviceservice airlines,airlines,”” oror FSAsFSAs)),, especiallyespecially onon thethe lowerlower--endend ofof thethe farefare spectrumspectrum •• FSAsFSAs setset upup theirtheir ownown LCCLCC offshoots,offshoots, oror modifymodify thethe FSAFSA businessbusiness modelmodel toto bebe moremore LCCLCC--likelike 8 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 LCCsLCCs inin SoutheastSoutheast AsiaAsia AirAsiaAirAsia (Malaysia),(Malaysia), 20012001 •• LeadingLeading LCCLCC inin AsiaAsia •• ItIt followsfollows thethe SouthwestSouthwest LCCLCC modelmodel •• JointJoint--venturesventures (JVs):(JVs): ThaiThai AirAsiaAirAsia;; IndonesiaIndonesia AirAsiaAirAsia •• AirAsiaAirAsia XX 9 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 OneOne--TwoTwo--Go:Go: firstfirst LCCLCC inin ThailandThailand (2003)(2003) NokNok Air:Air: aa jointjoint--ventureventure LCCLCC setset byby ThaiThai InternationalInternational (2004)(2004) TigerTiger Airways:Airways: anan LCCLCC offshootoffshoot ofof SingaporeSingapore AirlinesAirlines (2004)(2004) JetstarJetstar:: establishedestablished byby QantasQantas (2004)(2004) LionLion Air,Air, IndonesiaIndonesia (2000)(2000) CebuCebu Pacific,Pacific, PhilippinesPhilippines (1996)(1996) 10 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 Major LCCs in Southeast Asia 11 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 ““LCCsLCCs”” ((““LowLow farefare”” carriers?)carriers?) inin NortheastNortheast AsiaAsia AA moremore recentrecent phenomenonphenomenon Japan:Japan: SkymarkSkymark AirlinesAirlines andand AirAir DoDo inin 19981998 HansungHansung AirlinesAirlines (2005)(2005) andand JejuJeju AirAir (2006)(2006) inin SouthSouth KoreaKorea OKayOKay (2004)(2004) andand SpringSpring AirlinesAirlines (2005)(2005) inin MainlandMainland ChinaChina OasisOasis HongHong KongKong (2006);(2006); VivaViva MacauMacau (2006)(2006) 12 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 LCCsLCCs inin NortheastNortheast AsiaAsia 13 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 PerformancePerformance ofof AsianAsian LCCsLCCs AirAsiaAirAsia • More cost efficient than Singapore Airlines, Thai Airways and Malaysia Airlines – three FSAs • Has the highest return on fixed assets among the four airlines • Cost per ASK (available seat km) the lowest among world’s LCCs 14 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 CostsCosts perper ASKASK (in(in USUS cents,cents, 2002)2002) FSAs • American Airlines: 11.3 • British Airways: 12.7 • JAL: 14.3 • Cathay Pacific: 9.1 • Singapore Airlines: 8.2 LCCs • Southwest: 7.3 • Ryanair: 7.1 • AirAsia: 6.1 On average, LCCs’ unit cost is 30% below that of FSAs 15 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 SpringSpring AirlinesAirlines • Highest load factor and aircraft utilization rate in China • Operational cost 18% lower than domestic industry average • In 2007, highest profit per aircraft in the domestic market • Achievements due largely to its travel agency background 16 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 Spring Airlines’ Cost and Performance (in million RMB) Spring Airlines Domestic industry average Airport charge as % of total cost 10-20% 15-20% Landing/taking off fee 12% Fuel cost as % of total cost 40% 25-30% Security investment (2006) 60 - Annual savings 50 - Annual fuel savings 30 - Load factor 95% 70% Airfare vs. FSAs 36% lower - No. of flights operated (2007) 14 206 - No. of passengers (2007) 2 350 000 - Revenue (2007) 1 230 - Profit (2007) 70 - Profit (2005+2006) 67 - 17 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 However, many Asian LCCs have not been very successful so far Japan: Air Do and Skynet Asia operated at a loss while Skymark made a profit only in 2004 (Murakami, 2008) South Korea: Hansung Airlines and Jeju Air operated at a loss (Lee, 2008); Hansung exited in Oct 2008 China: very small LCC sector; Bankruptcy of East-star airline Æ “Low fare” carriers, rather than LCCs 18 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 ProspectsProspects ofof AsianAsian LCCsLCCs DependDepend on:on: 1)1) FurtherFurther domesticdomestic regulatoryregulatory reformsreforms 2)2) RegionalRegional regulatoryregulatory environmentenvironment andand liberalizationliberalization 3)3) SecondarySecondary airportsairports andand lowlow--costcost terminalterminalss 4)4) ContinuedContinued economiceconomic growthgrowth 19 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 1)1) FurtherFurther ddomesticomestic regulatoryregulatory reformsreforms In Southeast Asia, entry of LCCs was facilitated by domestic deregulations A major motivation is to boost tourism and business travel after the Asian financial crisis E.g. in Thailand: domestic deregulation started in early 2000s • Thai AirAsia, Nok Air, and One-Two-Go started domestic operation as LCCs • Immediate reduction in airfares • … and dramatic increase in market share by LCCs 20 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 China Chinese civil aviation has grown at 17% annually The market is dominated by “Big Three”: Air China, China Southern, China Eastern Significant regulatory barriers for LCC start-ups • Aircraft purchase and fleet buildup • Pilot recruitment • Fuel purchase • Airport charges • Route entry • Pricing Problem: competitors (state airlines) are also the regulator Æ distort the level-playing-field 21 (C)Prof. Anming Zhang, Institute for Transport Policy Studies, 2009 China (cont.) AA returnreturn to:to: statestate ownership?ownership? ••e.g.e.g. UnitedUnited EagleEagle AirlineAirline acquiredacquired SiSi--ChuanChuan AirlinesAirlines consolidation?consolidation?