In 1998, as per the Centre for Aviation (CAPA), low cost carriers (LCCs) in Asia had “virtually zero” of the markets seat capacity. There were just two small LCCs in the whole of the Asia Pacific region. By 2018 LCCs accounted for 29% of seat capacity in the region and now have more than 50% of domestic capacity in seven Asian markets.
AirAsia began offering flights in 1996, heavily in debt, it was bought by Tony Fernandes and Kamarudin Meranun’s company Tune Air for one ringgit, around 26 US cents, in 2001. By 2002 AirAsia went from debts of $11 million to producing a profit. By 2013 AirAsia’s profits hit 168% year-on-year growth. The company is now an icon in the Asian low-cost carrier market and has been named the world’s best LCC for the past 11 years. Competition, however, is also growing and AirAsia and its market peers are increasingly discovering new business models.
Rapid growth fuelled by new middle-classes and a desire to travel
By early 2019, CAPA declared Asia Pacific the world’s largest LCC market and pointed to the rapid growth in the region. In 2009 there were still only 400 LCC aircraft, there are now 1,900 with a further 2,400 aircraft on order for Asia’s low cost carriers. The Asia Pacific region made up 35% of global LCC seats in 2018.
The Organisation for Economic Co-operation and Development (OECD) predicts the world’s middle-class population will reach 4.9 billion by 2030 and 66% of this population will reside in Asian countries. Bain & Company estimates 50 million new middle-class consumers from Indonesia, Malaysia, the Philippines, Thailand and Vietnam will add to Southeast Asia’s predicted $300 billion middle-class disposable income by 2022. China is now the world’s most powerful outbound tourist market, according to The Telegraph, increasing 10.5 million overseas trips in 2001 to 149.7 million by 2018.
Asia’s growing populations, growing wealth, new middle class, and hunger to travel is fuelling the success and emergence of low-cost carriers.
Intense competition and diversification
It’s not all easy flying across Asia’s aviation industry though. Competition is intense and internal economic pressures within some Asian countries as well as the US-China trade war and tariffs and tensions within the region have an impact.
A weaker South Korean economy, as per Nikkei Asian Review, as well as “excessive competition” is contributing to problems for South Korean carrier Asiana Airlines which is now looking for a buyer. Eight of South Korea’s carriers posted losses for the second quarter of 2019 and three new companies Air Premia, Aero K, and Fly Gangwon are set to enter the market.
AirAsia also saw its net profits plummet 95% in Q2 but the LCC pins this to prior-year losses connected to AirAsia India. The company says, “for the airline business, load factors for the rest of 2019 is expected to remain strong whilst fares are expected to hold following the first half trends.” It’s “positive” that overall financial results for 2019 will still be stronger than 2018.
AirAsia soon with own currency
AirAsia is looking to diversify, driving its digital and ancillary businesses which group CEO Tony Fernandes says has “the right foundations” and he expects the segments to eventually contribute “up to 70% to earnings,” as per Nikkei. The company hopes to become a one-stop travel and lifestyle platform including adding a payment platform, BigPay, which it hopes to roll out across Asia when it obtains its e-money license in Singapore.
Fernandes said AirAsia “can’t be a lifestyle brand without food,” speaking at the launch of its first fast food outlet. After success with its airline food it now aims to become the “first airline ever to commercialize food.” Under its RedBeat Ventures brand AirAsia will open five restaurants and franchise 100 cafes over the next five years. RedBeat Ventures is eyeing both the Southeast Asian market and looking to expand its restaurant business to London and New York.
New conglomerates, geographic markets, and consumer segments
Finance professor and ISTAT Aviation Appraiser David Yu, writing for Forbes in September, says Asia’s carriers “have been transforming themselves into conglomerates by adopting an expansive array of brands, strategies, operations and shareholding structures.” Instead of a single strategy, such as LCC or traditional full-service airline operation, many of Asia’s airlines are “turning themselves into groups” as they expand into new geographic markets and consumer segments.
As well as AirAsia, Asia’s leading airlines include Qantas, Singapore Airlines, Cathay Pacific, Lion Air, Air China, China Eastern, China Southern and HNA Group. AirAsia has developed a low-cost long-haul brand too; AirAsia X and it has a substantial presence in the aircraft leasing market.
Low Cost Carriers Asia: cautious forecasts for 2020
Lion Air has developed full-service or hybrid subsidiaries, Batik Air and Malindo Air. Qantas, traditionally full service, expanded with LCC brand Jetstar. Singapore Airlines founded LCC Scoot for medium and long-haul routes. Cathay Pacific has recently acquired LCC HK Express. China’s airlines, all traditionally full-service, are beginning to create low-cost brands such as China Eastern’s China United Airlines. And, HNA Group has interests in a number of smaller local LCCs.
Reuters, in November, warned Asian airlines were somewhat cautious over forecasts for 2020 as airline passenger growth fell in the first nine months of 2019 from 7.7% to 4.4% compared to the same period in 2018.
A drop in passengers could well fuel more diversification and new market moves amongst Asia’s carriers as well as a continuing price-war amongst the many LCCs vying for their share of the low-cost carrier market in Asia.