The Potential for Low-Cost Airlines in Asia Philipp Dietlin

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The Potential for Low-Cost Airlines in Asia Philipp Dietlin The Potential for Low-Cost Airlines in Asia by Philipp Dietlin Bachelor's Degree in Economics and Business Administration University of St Gallen, Switzerland, 2001 Submitted to the Department of Civil and Environmental Engineering in Partial Fulfillment of the Requirements for the Degree of Master of Science in Transportation MASSAcHusETTS INS E at the OFTECHNOLOGY Massachusetts Institute of Technology February 2004 FEB 19 2004 LIBRARIES @ 2004 Philipp Dietlin. All rights reserved. The author hereby grants to MIT permission to reproduce and distribute publicly paper and electronic copies of this thesis document in whole or in part. S ignature of A uthor .......................................... .. ....................... Department of Civil a'd Environmental Engineering 16 January, 2004 Certified by ................................................. Peter P. Belobaba Principal Research Scientist hesis Advisor C e rtified by ......................................... Amedeo R. Odoni Prof essor of Aeronautics and Astronautics and of Civil and Environmental Engineering /17hesis Re1er A ccepted by ........................................ H-dI NfMpf Chairman, Departmental Committee on Graduate Stu ies BARKER The Potential for Low-Cost Airlines in Asia by Philipp Dietlin Submitted to the Department of Civil and Environmental Engineering on 16 January, 2004, in Partial Fulfillment of the Requirements for the Degree of Master of Science in Transportation Abstract The purpose of this thesis is to assess the potential for low-cost airlines in Asia. Low- cost airlines have been very successful in North America and Europe and have significantly impacted the airline industry and its stakeholders. In what ways and to what extent this might be repeatable in Asia is the underlying question of this thesis. An investigation of the low-cost airline business model reveals that there are a number of key elements that make it so successful on both sides of the Atlantic. But what works in North America and Europe may not be feasible in Asia. An analysis of the Asian airline industry shows that it differs from the rest of the world in several important dimensions, which will substantially affect prospective low-cost airlines. On the one hand, the rigid regulatory frameworks in most parts of Asia and the fact that many traditional Asian airlines have some of the world's lowest unit costs may not allow Asian low-cost airlines to thrive in the same way as they have in other parts of the world. On the other hand, a breakdown of Asia's socioeconomic indicators shows that the continent is bound to experience significant growth in intra-Asia air travel over the coming years. The low-cost airline business in Asia is therefore challenging in several ways but potentially very lucrative. The possible impacts that an increasing presence of low-cost airlines in Asia would have on the various stakeholders in the region are substantial. While some of these stakeholders will likely benefit from a growing presence of low-cost airlines in Asia, others might have a lot to lose. This thesis analyses several stakeholder groups and suggests potential response options. Thesis Supervisor: Peter B. Belobaba Title: Principal Research Scientist 3 Acknowledgements I would like to thank Prof. Peter Belobaba, my thesis advisor, for many hours of helpful guidance and advice. He identified the potential in this project early on and helped me with formulating many of the ideas and concepts. Many thanks to Prof. Amedeo Odoni for being my thesis reader and a great academic advisor. Without him, I would have felt pretty lost during my first few weeks at MIT. My special thanks go to Mister Kanok Abhiradee, President Thai Airways International, for his generous support and for providing me with a great research opportunity in his company. I gratefully acknowledge the support of Mister Chartsiri Sophonpanich, President Bangkok Bank. His personal efforts opened a lot of doors. I would like to thank my dear friends Khun Piya and Khun Nattapote as well as everyone else from Thai Airways' Long Term Planning Department. Thank you for a wonderful time in Bangkok and for the many spicy but incredibly delicious Thai lunches. Thank you to my classmates, roommates, teammates and all other mates at MIT for their words of encouragement and for providing me with as much distraction as was necessary to keep my perspective. I would also like to thank the following persons who contributed their time to share their experiences and insights with me. I truly enjoyed the discussions and I hope that I have accurately reflected their thinking in this thesis. Patrick Folley, Statistical Analyst, IATA Tony Fernandes, CEO, AirAsia Pornchai Eua-Aree, Vice President, Airports of Thailand Mark Webb, Aviation Analyst, HSBC Securities Rudy Setyopurnomo, CEO, Indonesian Airlines Amphonesavath Kingsada, Deputy Director, Lao Airlines Rolando V. Nuhez, Vice President, Cebu Pacific Air Tomas T. Mahalac, Executive Director, Philippines Civil Aeronautics Board Richard Stirland, Director General, Association of Asia-Pacific Airlines Finally, I would like to thank my parents, Joe and Pia Dietlin, for the unconditional love and support they give me throughout all my endeavors. 4 Table of Contents 1. Introduction................................................................................................................... 11 1.1 Motivation................................................................................................................ 11 1.2 W hy LCA ................................................................................................................ 12 1.3 Structure and Purpose of this Thesis................................................................. 13 1.4 Key Findings ........................................................................................................... 14 2. The Low-Cost Airline M odel..................................................................................... 17 2.1 Introduction ............................................................................................................. 17 2.2 W hy Low-Cost" ..................................................................................................... 18 2.3 Defining Low-Cost Airlines................................................................................... 19 2.4 Key Elem ents .......................................................................................................... 21 2.4.1 Network .............................................................................................................. 21 2.4.1.1 Short Stage Lengths................................................................................. 21 2.4.1.2 Focus on Services Within a Single Coherent Economic Region ................ 23 2.4.1.3 Focus City .................................................................................................. 23 2.4.1.4 Primary vs. Secondary Airports ................................................................. 24 2.4.1.5 In the Future: Long-Haul LCAs ................................................................ 25 2.4.2 Scheduling.......................................................................................................... 26 2.4.2.1 Short Turnaround Times ............................................................................ 26 2.4.2.2 High Frequencies. ............................................ ............................. .... ...... 27 2.4.2.3 Disregard Connecting Passengers ............................................................. 27 2 .4 .3 F le e t ................................................................................................................... 2 8 2.4.3.1 Industry Standards ..................................................................................... 28 2.4.3.2 Fleet Commonality ..................................................................................... 29 2.4.4 Marketing............................................................................................................ 30 2.4.4.1 Fare Products............................................................................................ 30 2.4.4.2 Yield vs. Load Factor................................................................................. 31 2.4.4.3 Revenue Management .............................................................................. 32 2.4.4.2 Distribution ................................................................................................ 32 2.4.5 Finances............................................................................................................. 33 2.4.5.1 Revenues.................................................................................................. 33 2.4.5.2 Expenditures ............................................................................................. 34 5 2.4.5.3 Profitability ............................................................................................... 34 2.4.5.4 Ownership.................................................................................................. 35 2.4.6 Labor.................................................................................................................. 36 2.4.6.1 Labor Productivity .................................................................................... 36 2.4.6.2 Cost of Labor ............................................................................................. 36 2.4.6.3 Corporate
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