Budget airlines cruise in crisis
Cheaper carriers are grabbing slices of the global aviation pie despite the downturn
August 6, 2009
By Sapa-AP
Budget airlines have found a silver lining in the global recession.
As travellers pinch pennies and opt for cheaper alternatives, AirAsia, Europe's Ryanair and other low-cost carriers are adding routes and buying new planes to grab a larger slice of global aviation at the expense of more established rivals.
Major players such as British Airways and Hong Kong's Cathay Pacific have reported full-year losses for the first time in years despite cutting costs and flights to cope with a drop in premium air travel.
Full-service carriers that once dominated the skies are banking on an economic recovery to restore their fortunes, but they may find it tough to return to the growth levels they enjoyed before the crisis.
"Full-service airlines have a bit of a conundrum on their hands," said Derek Sadubin of the Centre of Asia Pacific Aviation. "We think low-cost carriers will become so entrenched in airports and corporate travel that it will be hard for them to claw their business back" when the economy recovers, he said.
All airlines have struggled as oil prices soared in the past two years. Oil prices have since tumbled and despite a rally early this year, are still half the level of a year earlier.
But industrialised economies continue to contract and economic conditions will remain tough even when a recovery is under way. The International Air Transport Association in June predicted airline losses worldwide to swell to $9 billion (R70bn) this year, nearly double its previous forecast.
Full-service carriers are the worst hit as the crisis hammers first-class travel, which makes up a small percentage of seats but accounts for 40 percent of revenues.
Their smaller, no-frills rivals are weathering the recession better with a low-cost model that relies on high passenger volumes, stripping out costs through strategies such as taking the cheapest landing slots at airports and turning full-service features into profit-making extras.
In Asia, budget aviation had seen exponential growth since the start of the decade and had a 16 percent market share now, Sadubin said.
The market share of low-cost carriers could cross the 20 percent mark in the next two years as they open up new routes across the region and give travellers an option to fly at a fraction of the cost charged by full-service airlines.
Malaysian-based AirAsia, the top low-cost carrier in the region, posted a record profit of 203.2 million ringgit (R455m) for the quarter to March, up 26 percent from a year earlier. Passengers soared 21 percent to 3.15 million during the period while falling at regular airlines.
It has ordered new planes, debuted in Europe with flights to London and may enter the US market.
"We are in the McDonald's and Wal-Mart tier. Business is booming as people look for value," said Tony Fernandes, the chief executive.
AirAsia's success has generated rivals, the best known of which are Singapore-based Tiger Airways and Qantas Airways-owned Jetstar.
Tiger, 49 percent owned by Singapore Airlines, is rapidly expanding and has a total 56 new aircraft on order for delivery through to 2016. Tiger expects business travel to account for 15 percent of its total traffic by March next year, more than triple the current levels.
Budget aviation has put down even stronger roots in the US and Europe, with a one-third market share in both regions, analysts say.
In Europe, Irish discount airline Ryanair remains on an expansionary course and forecasts a net profit of up to e250m (R2.8bn) for its 2010 fiscal year. It may order up to 300 more aircraft in a deal that would make the carrier more than double the size of British Airways.
In the Middle East, analysts said budget aviation penetration was still less than 5 percent, but new carriers had sprung up recently. FlyDubai, based in the United Arab Emirates, was launched last month and has unveiled huge expansion plans after ordering 50 Boeing 737 aircraft.
The competition from budget carriers has changed the game rules for top airlines. Many full-service carriers are churning up promotional offers, with tickets at a discount of 80 percent in an effort to protect their market share.
India's Jet Airways, Korean Air, and Malaysian Airlines have set up low-cost offshoots, relying on a two-brand strategy to cushion profit. Some carriers have taken more drastic steps to focus on lower-fare volume business.
British Airways announced it would not configure new planes to offer first-class cabins. Qantas has scrapped first-class service on several long-haul routes and is considering reducing the 72 business seats in its Airbus A380 superjumbo jets.
But Singapore Airlines, one of Asia's top carriers, remains confident of a recovery in the premium market. It has cut fares and capacity this year but will not crop the 60 business seats in its A380 planes.
"It's a cyclical business - positive growth will return. We are not going to fundamentally change our business focus overnight just because of the downturn," said spokesman Nicholas Ionides. - Sapa-AP
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