Asia’s Budget Airline Invasion

15-Feb-2014 Intellasia | Businessweek | 6:00 AM Print This Post

Cathay Pacific Airways (293:HK) is preparing for war. No, it’s not a battle over first-class lounges or lie-flat beds. Such skirmishes over creature comforts to woo business travellers have long consumed high-service Asian airlines such as Cathay. This time the Hong Kong-based airline faces a potentially more daunting challenge: budget carriers. As incomes rise among tens of millions of consumers across Asia, air travel is becoming a reality for the masses. That’s given rise to a breed of low-fare rivals with names such as Scoot (SIA:SP), Peach Aviation, Jetstar Airways (QAN:AU), and AirAsia, all competing wing-to-wing against traditional airlines.

Nowhere will this battle be more intense than at Hong Kong’s Chek Lap Kok Airport. Almost 59 million international passengers passed through its gates in the 12 months through October, according to Airports Council International data, making it the busiest hub in the world after London’s Heathrow and Dubai International Airport. Cathay now accounts for almost half the seats departing from Chek Lap Kok. But all those passengers are simply too enticing for low-cost rivals to ignore. “The bottom line is that Hong Kong is one of the most desirable, if not the most desirable, airports in the region,” says Nawal Taneja, an aviation professor emeritus at Ohio State University.

As low-fare carriers arrive, Cathay will not only face fare pressure, but it will also increasingly have to fight with the upstarts for takeoff and landing slots and gate space in Hong Kong and at Asia’s other crowded airports. “At the end of the day, Cathay is extremely worried,” says Will Horton, a Hong Kong-based analyst at research and advisory group Capa Centre for Aviation.

Video: Asia’s New Budget Carrier

There are now 47 budget airlines in the Asia-Pacific region, according to Capa, flying a combined fleet of almost 1,000 aircraft. Those low-cost carriers have more than 1,500 planes on order, about 50 percent of the region’s total aircraft purchases. So far, the advance of discounters across the continent has been skewed geographically. While at the end of last year budget airlines commanded 30 percent of the Southeast Asian market and 27 percent of South Asia’s, the share in North Asia – including Japan, Greater China, and South Korea – was just 10 percent, Capa reports. At Chek Lap Kok, discounters have made even fewer inroads, snatching only 5 percent of the market – a stark contrast to Singapore, where low-fare carriers hold more than five times that share.

That could change. Jetstar Hong Kong, part of the Jetstar budget airline division of Australia’s Qantas Airways, is awaiting approval on its two-year-old application to set up a low-cost carrier at Cathay’s home base. Since 2003, Jetstar has built a network of discount operations in Australia, Singapore, Vietnam, and Japan, in part to offset an erosion of Qantas’s full-fare business. Adding Hong Kong would let Jetstar tap Chinese cities beyond the range of its other Asian bases. It also could help feed passengers into Qantas’s international routes. “Hong Kong is one of the bigger pieces of the puzzle that’s been missing,” says Tony Webber, managing director of Webber Quantitative Consulting and a former Qantas chief economist.

Jetstar’s plans have been stalled while local officials consider a legal challenge by Cathay to its license application. Local laws require domestic airlines to be locally controlled and to have Hong Kong as their primary place of business. Still, a few discounters have been able to win mostly unpopular early-morning or late-night departure slots at Chek Lap Kok Airport. Peach Aviation of Izumisano, Japan, began Hong Kong flights in July 2012 – four months after Jetstar disclosed its plans for the city. Scoot, the budget arm of Singapore Airlines, started Hong Kong flights last November; South Korea’s low-cost Eastar Jet joined them in December.

Story: Why Discount Airlines Draw Fewer Complaints (Hint: It’s Not Better Service)

Cathay contends its legal challenge to Jetstar Hong Kong’s license application is not an effort to stifle competition and protect its high-fare hub. Cathay “successfully competes with low-cost carriers and other types of carriers in Hong Kong and internationally each and every day,” it said in an e-mail. Instead, the company says it’s opposed to Jetstar Hong Kong’s ownership model.

Qantas teamed up with China Eastern Airlines (CEA), a state-owned carrier based in Shanghai, to set up Jetstar Hong Kong. Last year the duo sold one-third of the venture to gambling tycoon Stanley Ho’s Hong Kong-based Shun Tak Holdings, and Pansy Ho, his eldest daughter, was made chair. Cathay says the arrangement is a smokescreen intended to sidestep the local laws. “Jetstar Hong Kong is a franchise of a foreign airline, which is also controlled by that foreign airline,” Cathay said in a September 5 statement challenging the upstart’s license application.

Jetstar Hong Kong in a statement issued in response to Cathay’s challenge rejected any suggestion that it’s controlled by a foreign airline. Five of its seven board members are Hong Kong residents, the company said. Chief Executive Officer Edward Lau said the company is managed locally and is confident it will satisfy regulators’ requirements.

Low-cost airlines got a warmer welcome in Singapore. In 2004 local officials let Jetstar in as part of a plan to attract more tourists and boost the city as a transport hub. Changi Airport handled 53.7 million passengers last year, 44 percent more than five years ago, even as state-owned Singapore Air’s market share shrank. Budget airlines had 25 percent of the seat capacity in Singapore in 2013.

However Hong Kong rules on Jetstar, the future for budget airlines there may largely depend on runway concerns. The two runways at Chek Lap Kok will reach full capacity next year. Construction on a third won’t start until late 2015 at the earliest. Any delay could benefit the incumbent. “Cathay is a big elephant in the room,” says Andrew Cowen, deputy chief executive officer of Hong Kong Express Airways. “There’s not too much space around that elephant.”


Category: Regional

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