Low-cost carriers in Southeast Asia-

The market for low-cost carriers (LCCs) in Southeast Asia is booming. Once dominated by large airlines like Cathay Pacific and Singapore Airlines, the region has seen an explosion of LCCs: they now cater to over half the traffic demand in the region. According to the Center for Aviation, a provider of independent aviation market intelligence, LCCs account for 52 per cent of the seat capacity in Southeast Asia. While most of these carriers operate within their jurisdictions, some big players like  Malaysia-based AirAsia, Singapore-based Tiger Airways, Philippines-based Cebu Pacific Air, and  Indonesia-based Lion Air are catering to markets outside their home countries.

Most of the LCCs in the region have outperformed their legacy carriers in terms of profitability and captured a significant portion of their respective countries’ market. In Indonesia, Lion Air has outsized national carrier Garuda’s market share by a ratio that exceeds 2:1, while Malaysia’s AirAsia has overtaken Malaysia Airways, in terms of passenger traffic and profitability. The good performance of the LCCs has also helped to resurrect some of the old brands. For instance, Indonesia-based LCC Mandala Airlines that had suspended operations in early 2011 will recommence its operations in April 2013 with Airbus A320s provided by Singapore-based Tiger Airways – its new shareholder.

Weaving the web of connectivity

In terms of connectivity, AirAsia is indisputably the leader in Southeast Asia’s LCC segment. Operating through five subsidiaries, the airline group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. The airline’s popularity among passengers is increasing: year-on-year traffic has grown at more than 9 per cent for the past three years. Between April and June 2012, AirAsia and its subsidiaries carried 8.29 million passengers, which constitutes a 10 per cent increase over the same period last year. By comparison, the number of passengers served by Malaysia’s legacy carrier, Malaysia Airlines, decreased by 7 per cent year on year to 3.3 million passengers in April–June 2012.

However, Lion Air is fast emerging as a strong competitor. As of December 2012, the airline served 60 destinations including four international cities. Lion Air’s primary focus has been primarily domestic: intra-Asian routes constitute just 6 per cent of its capacity. Its expansion over the next decade will be partially targeted at regional routes in Indonesia, which will make it a direct competitor of AirAsia.

Singapore-based Tiger Airways also has a pan-ASEAN presence: it serves 28 destinations in 10 countries within an approximately five-hour radius from Singapore. Meanwhile, Cebu Pacific Air operates an extensive route network that comprises 60 domestic routes and 31 international routes with 2,288 scheduled flights per week.

Opening up the skies

Thus far, LCCs have been limited by unilateral, bilateral, and multilateral air services agreements among the governments of the region. This situation is expected to change starting from 2015 when the ASEAN Single Aviation Market (ASEAN-SAM) policy comes into effect, which will unite the fragmented airline market. Specifically, ASEAN-SAM will introduce an open sky arrangement in the region. It is expected to fully liberalise air travel between its member states, thus enabling ASEAN to benefit from the growth in air travel around the world, while promoting the flow of tourism, trade, investment, and services between member states.

This move will help not only the LCCs, but also air travellers in general, by offering an increased number of destinations and routes. According to Paul Ng, Global Head of Aviation of Stephenson Harwood, “ASEAN-SAM will allow the LCCs to enter the comparatively virgin markets of the countries in the Indo-China region, especially Myanmar, which had previously been under US embargo.” At the same time, with the open sky policy, LCCs will face greater competition from mature foreign players who may end up squeezing out smaller local players from the evolving aviation industry.

Nonetheless, the current version of the policy has some limitations. Unlike the EU’s open sky policy, ASEAN-SAM is contemplating allowing only third, fourth, and fifth freedom relaxations among member states. Seventh freedom access that will allow, for instance, a Singapore carrier to connect Jakarta and Manila without the flight originating or terminating in Singapore, is not included. Neither is the sensitive right of cabotage – the ability of a foreign airline to connect two domestic points in a country. However, once these kinks and issues are ironed out, ASEAN and LCCs can look to benefit significantly from its implementation.

Confidence growing in tandem with fleet

Notwithstanding these concerns, LCCs are very optimistic about the future and have rolled out ambitious fleet expansion plans. The three big players – AirAsia, Tiger Airways and Lion Air – have placed orders for more than 900 aircraft in total, which are to be delivered over the next decade. Other carriers like Cebu Pacific Air, Nok Air (Thailand), and Jetstar Pacific (Vietnam) have also formulated fleet augmentation plans. Overall, sector experts believe that most Southeast Asian LCCs are likely to double their fleet size over the next five years.

In March 2013, Lion Air ordered 234 A320 jets from Airbus. The contract, valued at $24 billion, is the largest single order the European aircraft manufacturer has ever received. Based on the number of aircraft ordered, this deal overtakes the previous aviation record set in 2012: Lion Air placed an order for 230 Boeing 737 aircraft (including Boeing’s new 737 MAX aircraft) valued at $21.7 billion. Moreover, the deal includes an option for another 150 aircraft, which would bring the total value of the order to $35 billion.

It is important to point out that, prior to Lion Air’s record-breaking order, it was AirAsia that had held the record when it ordered 200 A32neo aircraft from Airbus at the Paris Airshow in June 2011, which amounted to $18 billion at list prices. Subsequently, in December 2012, AirAsia placed an order for an additional 100 Airbus A320 jets – 64 A320neo and 36 A320ceo aircraft. Therefore, the total numbers of A320s that AirAsia has ordered from Airbus is currently 475.

Earlier, in June 2007, Tiger Airways placed an order with Airbus for 30 aircraft worth $2.2 billion, with another 20 on option that was confirmed in December. The aircraft are expected to be delivered by 2014.

Meanwhile, in January this year, Jetstar Pacific successfully completed its transition to an all-A320 fleet. The airline that currently operates five A320s is expected to expand its fleet to 15 aircraft within the next few years. Cebu Pacific Air also plans to add 14 aircraft to its fleet by 2015, while Nok Air intends to increase its fleet size by 2 aircraft.

Moreover, airlines and leasing companies will be taking delivery of about 175 aircraft in Southeast Asia over the next two years, which account for one-third of all deliveries in the Asia-Pacific region, according to aviation data provider Ascend Online Fleets. The bulk of the deliveries will be to Indonesia, Malaysia, and Singapore.

The rosy future of the region’s aviation industry is supported by market demand forecasts. Passenger traffic to, from, and within the region is projected to grow at an average annual rate of 6.5 per cent over the next 20 years. More specifically, traffic within Southeast Asia is expected to rise at a rate of 7.6 per cent per year. Based on these figures, Boeing forecasts that, to meet this demand, Southeast Asia will need 2,970 jet aircraft by 2030 at a combined list price of $410 billion. Nearly two-thirds of the aircraft will be single-aisle planes like the Boeing 737 typically used by the LCCs.

The orders that have currently been placed already add up to a staggering amount; and it remains to be seen if they will all materialise as planned. However, as most of the LCCs in the region are financially stable, the risks will mostly be external, as pointed out by Paul Ng: “The airlines’ fleet augmentation plans may run into hurdles due to the regulatory policies of the nations, limited rights to fly, and lack of sufficient slots at airports.”

In fact, capacity constraints, in terms of the lack of dedicated low-cost terminals in the region, constitute the chief obstacle to the LCCs’ expansion plans. However, plans are afoot to augment capacities at airports to match the growing demand for LCCs. In a move to cater to budget travellers that constitute one-third of its total footfalls, Singapore’s Changi Airport is constructing a fourth and larger terminal to cater to LCCs, after closing its no-frills terminal in September 2012, which had previously hosted some LCCs. Terminal 4, which is estimated to cost $1 billion, should be completed by 2017. In addition, the Kuala Lumpur International Airport is also shifting gears by positioning itself as a hub for low-cost airlines – its key market – with a new terminal dedicated to LCCs. It is slated to become operational later this year.

Flying into the unknown 

The outlook for LCCs in Southeast Asia over the next five years remains challenging to predict, as the market is significantly different from its mature counterparts in the US and Europe. According to Paul Ng, in mature markets, LCCs are assumed to have peaked once they have acquired 30–35 per cent of the market. Based on this reference point, none of the LCCs has reached this level across Southeast Asia. However, within some countries, a few LCCs have already surpassed this level: in Malaysia, AirAsia has a market share of more than 50 per cent, while Lion Air has taken over 60 per cent of Indonesia’s market. Moreover, the implementation of ASEAN-SAM is certain to be a game changer.