Budget Airlines and Open Skies: Double Trouble or Lucky Pair?

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The impending full implementation of the ASEAN Open Skies Pact is expected to have reverberating effects on the aviation industry in general, and emerging airports in particular. Add to that, the rapid ascent of ‘budget airlines’ to market domination creates exuberance, or alarm, depending on how you look at it. Find out the real score in this special report.

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Budget Airlines and Open Skies: Double Trouble or Lucky Pair?

  1. 1. ‘BUDGET AIRLINES’ AND OPEN SKIES:D O U B L E T R O U B L EO R L U C K Y P A I R ? Contributor: Darwin Jayson Mariano, IQPC Singapore hen Cebu Pacific, one of Asia’s largest airlines, first announced its 1 Peso fare (USD 0.20) a couple of years back, it caught everyone’s attention. Not because of the absurdity of such claim – after all budget fares are already making some headway in Asian air travel at that time – but because everybody knows that it is absolutely, mind-bogglingly possible. It’s just a matter of when and who will be bold enough to start such a trend. Indeed, Cebu Pacific’s slogan, “It’s time everyone flies” took a whole new dimension from that day onwards. Fast forward to 2012 and we can see that the very soon. Once fully implemented, this will create landscape of Asian air travel has undergone unprecedented opportunities – and challenges a dramatic shift. There has been a consistent – among the different industry stakeholders increase in passenger and cargo traffic in the including passengers, airlines and airport region and we see no signs of slowing down management and authorities. anytime soon. This is due in large part to the rise of low cost carriers (LCC’s), the so-called ‘budget Of particular interest are the emerging airports airlines’ that have permeated the skies of the Asian that serve a specific community or geographical region lately. From domestic to regional to full- niche. These airports typically don’t have the same blown international flight, Asian LCC’s are picking scale of resources that a major airport would up a considerable share of the market, enough for normally have. However, they possess some full-service airlines to relook at their strategy and unique advantages which, when used smartly, revisit their respective pricing schemes. puts them in the best position to generate growth and drive value over a long term. This paper looks In addition, the ASEAN Open Skies agreement, at the two biggest trends – ‘Budget Air’ and Open a concept that calls for the liberalization of the Skies – in Asia and the kind of impact it will create rules and regulations of the international aviation to the emerging airports in the region. industry within ASEAN countries, is set to kick in www.emergingairportsasiapacific.com
  2. 2. ‘Budget Air’ TAKES OFF A low cost carrier or ‘budget airline’ is a no-frills airline that generally has lower fares and fewer comforts. As such, other extras like food, priority boarding, seat allocation and baggage allocation may not come as a standard. In Asia, the strong demand for low cost airfare has fuelled the increase in the number of LCC’s operating in the region. Some of the biggest LCC’s in Asia Pacific include:AIRASIA JETSTAR Destinations Fleet Size Destinations Fleet Size 79 (incl. subsidiaries) 54 (excl. subsidiaries) 34 65TIGER AIRWAYS CEBU PACIFIC Destinations Fleet Size Destinations Fleet Size 28 21 52 39 HONG KONG EXPRESS SPRING AIRLINES Destinations Fleet Size Destinations Fleet Size 13 5 34 28BANGKOK AIRWAYS JEJU AIR Destinations Fleet Size Destinations Fleet Size 20 18 14 10 +6 ordersMANDALA AIRLINES SCOOT Destinations Fleet Size Destinations Fleet Size 5 (2 Domestic, 3 International) 3 4 3www.emergingairportsasiapacific.com
  3. 3. I think the economic growth of the airport relatesto the economic growth of the region it serves.I think all airlines will continue to come as thepassengers come s expected of a dynamic industry, a “I think the economic growth of the airport relates slew of mergers and consolidations to the economic growth of the region it serves. are happening lately. In the early part I think all airlines will continue to come as the of the year, Tiger Airways acquired 33% stake in passengers come,” says Bill Burke, CEO of Mildura Mandala Airlines. A couple of months thereafter, Airport in Australia. AirAsia acquires Indonesian domestic carrier Batavia Air for US$80 million. Through the new As airports primarily generate revenue from the partnership, AirAsia and Batavia’s market share in airlines, which in turn, depends highly on the Indonesia will stand at 20% and by the end of the volume of air travellers, it is clear that all the year both companies aim to transport 14 million ingredients for a virtuous cycle of growth and domestic passengers. opportunities are in order. Tiger Airways, a Singapore-based budget carrier, In fact, one of the important ways for an emerging has also completed the purchase of a 40-percent airport to sustain growth and development is stake in Philippines firm, Southeast Asian Airlines, having a keen understanding of the key drivers of for US$2.5 million, a deal which is expected to the region (the rise of LCC’s, for example). bolster both airlines’ growth and job-creation potentials. Karl Valentin, Airport Manager at Paraburdoo Airport, an emerging regional airport that has Joining the fray, new Hong Kong budget airline, generated 10 years of consecutive growth in Jetstar Hong Kong recently applied for a license to revenue passengers from 2001-2011, has this to operate air services; and in Singapore, new kid on say: the block, Scoot, a no-frills offshoot of the high- end Singapore Airlines took its first flight in June “Knowing what is happening in your region, this year. and ensuring capacity for projected growth is critical. Not doing this will result in an airport With renewed vitality in the aviation sector, that continues to struggle with the demands on particularly among the LCC’s operating in the terminal capacity to handle passenger numbers as region, it is no wonder that recent data revealed well as airside limitations to deal with larger and a year-on-year increase of 7.1%* in passenger more frequent aircraft operations.” traffic. This trend is expected to induce further consolidation in the sector and in turn, spur And if knowing what’s happening around is regional economic growth, a fact that many believe important, one would certainly not miss the is tied to the airport’s economic growth, impending full implementation of the ASEAN Open Skies Agreement. www.emergingairportsasiapacific.com
  4. 4. WILLThe skywill EmergingOpen Airports‘Open skies’ is an internationalpolicy concept that calls for theliberalization of the rules andregulations of the international Soar?aviation industry—especiallycommercial aviation—in order to he Asian aviation industry is now at thecreate a free-market environmentfor the airline industry. For open forefront of change. With the tectonic shiftsskies to become effective, a in trends in air travel and the strong pushbilateral/multilateral agreement by ASEAN governments for increased economicmust be concluded between two growth through tourism, today’s emerging airportsor more nations.** are at the center of this development.On 20 May 2009, the ASEANMultilateral Agreement onAir Services and the ASEANMultilateral Agreement on the The challenges are real. In the words of Leon Burger,Full Liberalization of Air Freight an airport services luminary, the challenges that theServices were simultaneously emerging airports face are extremely unique.approved in Manila, Philippines.The two agreements, which took “Because emerging airports do not share the broadeffect January 1, 2010, essentially revenue base of capital airports, they must ensure thatallow a gradual implementation of they can continue operations in the face of reducedthe open skies pact. aviation revenue. Most community-owned airports have a business plan approach in managing their airport,The ten countries that are part through which the airport should be self-sustainable;of this agreement are Singapore, i.e., it should generate its own operating and capitalMalaysia, Thailand, Brunei, development funds and not be a financial burden on theIndonesia, Vietnam, Philippines, local rate payers.Laos, Myanmar and Cambodia. “This is where the catch becomes apparent. If theWhile each member countries international and/or local economy takes a knock,are at different stages of the ripple effect could mean a significant reductionliberalization, there is no denying in aviation-based revenue for an airport. In turn, thisthat the increased wave of reduces capital development reserve. It places airportcompetition is starting to impact operators between a rock and a hard place.”the respective airports in thesecountries in a big way. Whether itis generally positive or negative isyet to be seen.www.emergingairportsasiapacific.com
  5. 5. Many believe that the trick for emerging airports to secure economic growth and sustainability is to meet thesechallenges in a similarly unique fashion. Some industry experts pointed a couple of ways:Understand your Airport and Region Beware of Over-expansion Get Community SupportThis may sound straightforward, but Keeping expectations in place An emerging airport can be ato truly develop the economic growth is important when it comes to significant economic driver forof emerging airport, it is important expanding your airport services. Don’t regional growth, and vice versa. So itto understand your airport inside expect major airlines to jump at the makes any plans for expansion muchout. This means not only its internal thought of a new service to a different easier if your regional community ischallenges, operations and staff, but destination, many major airlines by your side and supporting you.also how the airport fits with other have stringent planning processesexternal factors and overall regional to ensure capacity and therefore As a whole, the recent developmentsdevelopment, which include the rise profitability. in ‘budget airlines’ and the inevitableof low cost carriers and open skies. full implementation of open skies Honest and Open Communication policy will have a tremendous impactPlan for the Unexpected The days of being smart and tiptoeing on the region’s emerging airports.Whilst ‘planning for the unexpected’ around real issues are gone. Whether these will be an onslaughtmay seem like an impossible task, People need to be frank and open. or a windfall can best be determinedif you understand your region well, Maintaining close relationships with by the airport operators themselves.this is an achievable act. Successfully regulatory authorities as well as key If anything, ‘budget air’ and openplanning means foresight and truly stakeholders on and off the airport skies are like twin opportunitiesunderstanding the demographics of are essential elements in running a where full benefits can be achievedyour community. successful operation. but some amount of effort needs to be exerted. “It’s time everyone flies” so the Cebu The Emerging Airports Asia Pacific 2012 Pacific slogan says. Indeed, it’s time will bring together senior level regional airport operators, airport the emerging airports fly and reach authorities and other influential executives to discuss strategies to greater heights. meet the challenges of passenger growth as well as innovative ways to raise capital and revenue. To attend this event, email enquiry@iqpc.com.sg or call +65 6722 9388References:*ACI Passenger and Freight Flash Reports http://en.wikipedia.org/wiki/Cebu_Pacific**Wikipedia http://en.wikipedia.org/wiki/Hong_Kong_Express_AirwaysCombined AAPA + non-AAPA airlines GMT+7 to GMT+12 http://en.wikipedia.org/wiki/Spring_AirlinesBoeing Current Market Outlook 2011-2030 http://en.wikipedia.org/wiki/Bangkok_AirwaysAirbus Global Market Forecast 2011-2030 http://en.wikipedia.org/wiki/Jeju_Airhttp://en.wikipedia.org/wiki/Low-cost_carrier http://en.wikipedia.org/wiki/Scoothttp://www.hotelclub.com/blog/top-10-low-cost-airlines-in-asia/ http://en.wikipedia.org/wiki/Paraburdoo_Airporthttp://en.wikipedia.org/wiki/AirAsia http://www.thejakartapost.com/news/2012/07/27/airasia-deal-stirs-budget-aviation-rivalries.htmlhttp://en.wikipedia.org/wiki/Jetstar_Airways http://www.abs-cbnnews.com/business/08/14/12/tiger-airways-completes-purchase-40-seairhttp://en.wikipedia.org/wiki/Tiger_Airways#Financial_performance http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1214754/1/.html www.emergingairportsasiapacific.com

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