LCC Subsidiaries Become a Common Strategy in Asia
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LCC Subsidiaries of Legacy Carriers Brendan Sobie Chief Analyst, CAPA – Centre for Aviation LCC subsidiaries become a common strategy in Asia 1. Of the approximately 50 LCCs in Asia Pacific about 20 are now subsidiaries or affiliates of FSC groups 2. Several LCCs in Asia are owned by more than one FSC 3. In 2004 Jetstar became the first FSC in Asia Pacific with an LCC subsidiary or affiliate. There are now 19 4. Of the top 12 markets/countries in Asia, 10 now have FSC groups that include LCC subsidiaries or affiliates LCC subsidiaries/affiliates of Asian full- service airline groups The multi- New addition: West brand Air strategy: An Asian phenomenon and success story Notes: indirect stakes not included Tigerair Singapore to become subsidiary of SIA; Tigerair Australia to become 100% subsidiary of Virgin Australia West Air: CAPA Asia Pacific Start-up of the Year West Air chairman Zhu Tao with CAPA Executive Chairman Peter Harbison, 14 October 2014 New LCCs in Asia-Pacific launched or aiming to launch in 2014 Two of the record 10 LCCs launching in Asia this year are Chinese. More new LCCs in China are expected in 2015 Source: CAPA – Centre for Aviation LCC subsidiaries: pros 1. Enables an airline group to participate in the fastest growing segment of the market 2. Multi-brand strategy can be an effective and critical response to independent LCCs, which have been expanding faster and in some cases are now larger than their full-service competitors 3. Several markets in Asia have huge opportunities that can only be tapped if fares are low enough to stimulate demand among the fast expanding middle class Global LCC orders by region Source: CAPA Fleet Database (as of 9‐Oct‐2014) Note: orders include lease commitments for new aircraft Independent LCCs are driving the growth % ASK growth: 2013 vs 2012 Independent LCCs now control SE Asia Southeast Asia capacity share % of seats by airline group: Oct-2014 Source: CAPA – Centre for Aviation & OAG Note: Group figures include subsidiaries and affiliates LCC capacity share(% of seats) within Southeast Asia Source: CAPA – Centre for Aviation and OAG LCC capacity share (% of seats) within Northeast Asia Source: CAPA – Centre for Aviation and OAG LCC subsidiaries: cons 1. There is always a risk of cannibalizing the full-service brand 2. Cost structure is often not low enough to compete effectively with independent LCCs 3. Establishing and expanding LCC brands while strategically important requires resources 4. LCC subsidiaries and affiliates often struggle to achieve profitability LCC subsidiaries: the risk of losses Of the over 20 LCC subsidiaries and affiliates in Asia- Pacific only one or two have been profitable this year Independent LCC have been doing better but on a whole have also been unprofitable this year Asia is where the biggest growth is but has become a highly competitive and at times irrational market LCC subsidiaries in Southeast Asia were unprofitable in 1H2014 Source: CAPA, 15‐Sep‐2014 Notes: *All figures are for individual airline except MAS and Thai, which only reports figures at the group level # Mandala ceased operations in Jul‐2014 Rapid rise of long-haul low-cost • Jetstar (2006) • Indonesia AirAsia X • AirAsia X (2007) (2014) • Scoot (2012) • NokScoot (2014) • Cebu Pacific (2013) • Jin Air (2015) • Thai AirAsia X (2014) • VietJet (?) Earlier failures – Oasis Hong Kong and Viva Macau but very different business models SIA Group Multi- Brand Strategy SIA brand matrix: Singapore Airlines’ share of its home market has slipped but its group share is still above 50% Multi-brand strategy also can include regional full-service subsidiaries Singapore Airlines and SilkAir Cathay Pacific and Dragonair Thai Airways and Thai Smile Philippine Airlines and PAL Express Malaysia Airlines and Firefly Garuda and Garuda Explore LCC subsidiaries: conclusions 1. LCC subsidiaries have proven to be effective weapons when the right model is pursued 2. North Asia including China will inevitably see more LCC subsidiaries as the LCC penetration rate increases 3. Long-haul LCC subsidiaries are also starting to emerge but for now the opportunities in North Asia are primarily in the short-haul market 4. What we are now seeing in China with the Hainan and China Eastern groups is just a start Thank you! Brendan Sobie Chief Analyst, CAPA - Centre for Aviation [email protected].