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SQUEEZE PLAY
IT HARDLY IS NEWS THAT THE EMERGENCE IN THE ASIA/PACIFIC REGION of multinational low-cost carriers modeled on the leading LCCs in North America and Europe has transformed and reinvigorated the inter-Asia travel market. But while most of the attention is focused on the impact these upstarts are having on major network/flag carriers, a less public battle is going on as Asia’s niche airlines – SilkAir, Nok Air and Bangkok Airways, for example – find their space being challenged by the low-fare wave as well.
Neither full-service nor LCC, this band of carriers has fulfilled a role somewhat analogous to the holiday and charter airline segment in Europe, albeit on a much smaller scale. Some are standalone entities plying short-haul routes with turboprop and small jet aircraft. Others exist as part of a major airline organization, flying the last leg of a transcontinental journey into an Asia/Pacific vacation destination. The question is how long they can continue in their role in the face of changing travel patterns and consumer behavior brought on by LCCs, the Internet and rising GDPs.
A key year for them is 2015, when Southeast Asia’s Open Sky Agreement comes into effect, allowing unlimited flights to all 10 ASEAN members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Any protections they enjoy from restrictive bilaterals will disappear and they will be fully exposed to aggressive competition from today’s batch of LCCs and future new entrants.
Perhaps Thailand presents the best microcosm of the wider challenges facing niche airlines. When Thai AirAsia was launched in 2004 with the political support of the government, Thai International Airways, itself government-owned, responded by establishing Nok Air, in which it holds a controlling 39% stake. But as so often happens in such situations (think British Airways and Go or Continental Airlines and CALite), Nok Air and its parent were more at war with each other than with the new entrant. While Thai AirAsia has come from nothing to operate a fleet of 19 new Airbus A320s serving 24 domestic and international destinations, Nok Air has just 10 aging Boeing 737-400s and two ATR 72s serving 17 domestic points.
The future for Nok may be a bit rosier. CEO Patee Sarasin told eTN in 2009 that the airline, which at the time was carrying fewer than 2 million passengers a year, had “buried the hatchet” with its owner and the two now had common goals. “It is true that we had difficulties in the past to cooperate as we lacked a common vision,” he said. “We are now ready to cooperate again.”
Prior to the makeup, Thai was considering selling its interest in Nok or assuming 100% control to make it a more effective competitor to Thai AirAsia, although in actuality a takeover might not have been possible owing to the refusal of other shareholders to sell. Part of the new agreement was a realignment of missions, with Nok shrinking its route network to only serve domestic destinations along with cooperation on schedules, distribution, marketing and loyalty programs.
The impact was immediate: Nok Air’s 2010 passenger count was 3.1 million, with $128 million in revenue yielding a $20 million profit, according to data from the Centre for Asia Pacific Aviation. Although these figures are well behind Thai AirAsia, which carried 5.7 million passengers, generating revenues of $402 million and a $92.4 million net profit, they are improved significantly from Nok’s 2009 results. For 2011 it is forecasting a further lift of 22% in passengers to 3.8 million and a 47% jump in revenue to $175 million. Growth and fleet renewal are now front and center.
The airline, which operates from Bangkok’s old Don Muang Airport, added four new destinations in April. Last year it took over three routes from Thai. Also on the agenda is expansion later this year of the secondary regional network with the addition of four ATR 72-500s leased from Nordic Aviation Capital. It is discussing the lease of seven 737-800s from 2012 as part of a conversion program to phase out its -400 Classics.
With Nok Air and Thai at peace and the former looking after domestic destinations, the parent did a deal last August with Tiger Airways to form Thai Tiger Airways to compete head-to-head with Thai AirAsia on international routes.
Supply Chain
Bangkok Airways’ niche strategy is to control as much as possible of the journeys of high-yield tourists brought in via partnerships with Air France, Air Berlin, Etihad Airways and EVA Air. International tourists make up 80% of the airline’s business, and while it has shelved plans for long-haul international operations, it is looking at Australia along with a return to Japan and China in the near term. Closer to home, flights to Malaysia are on the agenda for 2012.
BW, whose origin dates back to 1968, has nine A320s and eight ATR 72-500s serving eight domestic and eight regional international destinations. India has become a near-term focus after ASEAN’s free trade area agreement with that country in 2010. Operations to Bangalore started in April and Chennai will follow in 2012. Services have been increased to daily to Mumbai, and New Delhi is on the radar.
Interestingly, the carrier has built three airports in Thailand – Samui, opened in 1989, Sukhothai (1996) and Trat (2002). Its hubs are Bangkok and the exotic resort of Koh Samui. A private airline, it carried 2.6 million passengers in 2010 and posted a profit of $23.3 million on revenues of $276.6 million. This year it expects a far more bullish outcome with passenger numbers up 19% to 3.1 million and revenues growing 28.2% to $352 million.
With some upbeat results under its belt, an IPO is on the radar. Late last year, President Puttipong Prasarttong-Osoth told the Bangkok Post that “next year should be an exceptionally good one for us barring any detrimental events such as renewed political turmoil. There’s no set timeframe for an IPO, but we’re thinking maybe in three years, as we must show continued profitability to meet set prerequisites.”
Another Thai carrier, Orient Thai Airlines, which has had mixed fortunes over the years, ordered 12 98-seat Sukhoi Superjets last November, apparently on extremely favorable terms, to better position itself to compete with LCCs and carve out a stronger niche for itself. The small airline has been in the spotlight over alleged safety deficiencies yet has managed to stay aloft. In September 2007 an MD-82 of subsidiary One-Two-Go crashed at Phuket in a storm, killing 89. In July 2008 Orient Thai and its subsidiaries were suspended from flying for 30 days owing to an alleged poor maintenance record, while the EU banned One-Two-Go from flying to Europe (the ban later was lifted). Its 10-aircraft fleet is made up of MD-80s and MD-90s along with 747-300s and -400s that perform domestic services and one international route to Hong Kong plus mainly Hajj charters.
Delivery of the first two Superjets will occur in November with all 12 in service by 2014. They will both replace older types and enable expansion, although that will not involve One-Two-Go, which was shut down by the parent last year.
The flightpath for SilkAir, a wholly owned subsidiary of Singapore Airlines, is brighter, according to Peter Harbison, executive chairman of Sydney-based CAPA. “SilkAir is doing very well as a regional feeder for Singapore Airlines with a premium product,” he says. It has 18 A320s and will receive three more this year and a further three by the end of 2013. It serves 31 of 50 short-haul destinations for SIA Group and its average sector length is just 955 km. While this may be short, it does stretch its legs to Chengdu, Chongqing and Kunming in central China as well as Xiamen and Shenzhen north of Hong Kong. India is also a big destination with services to six southern cities.
Harbison believes that SilkAir, which operates from the same terminals as its parent at Changi rather than the LCC terminal, plays a vital role for the overall network as SIA has no single-aisle equipment. It flies to holiday destinations such as Phuket, Penang and Langkawi but also largely has replaced SIA on services to Kuala Lumpur since AirAsia entered the route.
Less clear is whether the dividing line between SilkAir and LCC Tiger Airways, in which SIA Group holds a 34.4% stake, can be maintained. Whether or not SIA has kept the cat on a short leash – both sides deny it – the fact is that Tiger operates just 15 A320s out of Singapore and a further 11 in Australia, although it has 43 on order. Its JV with Thai Airways and its purchase of a 33% stake in Philippines-based SEAir suggests it may be ready to roar.
Back Where It Started
In the birthplace of Asia’s LCC movement, Kuala Lumpur, Malaysia Airlines finally is reacting by turning its niche regional airline Firefly into an aggressive low-cost competitor to AirAsia. Firefly, which launched in 2007, operates seven ATR 72s and three 737s and is based at Sultan Abdul Aziz Shah Airport in Subang just 30 min. from downtown Kuala Lumpur as well as having a series of secondary hubs such as Penang. Late last year it announced that it would acquire 30 737-800s over five years and concentrate more on services from Kuala Lumpur International to take on AirAsia. Nonetheless, it has used its downtown location well and operates flights to Singapore seven times daily with ATR 72s and to Penang 11 times daily. In all it serves 19 destinations in Malaysia, Indonesia, Thailand and Singapore.
Is it possible that niche airlines in the region can find a peaceful coexistence with LCCs? Possibly, but the experience in North America, Australia and Europe suggests it will be difficult. Following deregulation, most US charter carriers folded as travelers and tour organizers found fares just as low on the major network airlines. Wardair, a popular Canadian charter carrier, tried to address the problem after Canadian deregulation by entering the scheduled market but could not make the transition. Australia’s East West Airlines did not survive deregulation in the 1990s, caught as it was between Ansett and Australian/Qantas and without a clearly defined market.
The steady growth of US LCCs contributed greatly to the demise of Midwest Express (now part of Republic Airways Holdings’ Frontier subsidiary). In Europe, the holiday/charter segment has taken its knocks from the likes of Ryanair and easyJet but continues to hold a large share of the market, although nothing like it enjoyed 20 years ago.
The answer, if one exists, is to identify a new market or find a fresh way to serve an existing one, as Allegiant Air has done in the US. With a route network focused on flying from smaller cites to major vacation destinations with very limited frequency and rock-bottom costs, Allegiant avoids the pitfalls of trying to compete head-on with either the network or LCC segment. Time will tell if such opportunities exist in Asia.
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