SQUEEZE PLAY false Thomas, Geoffrey . Air Transport World 48.6 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 realignmen.

1. SQUEEZE PLAY
false
Thomas, Geoffrey
.
Air Transport World
48.6
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

2. 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%

3. 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

4. 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

5. 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

6. 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.